Forecasting, tracking, and managing food costs, labor costs, and operation costs helps foster strong financial management during the best of times. These actions take on a whole other level of importance during the uncertain times we’re navigating today.
With food prices up 25% since 2020 and labor costs up an estimated 25% due to the tight talent market and mandatory wage increases, restaurant owners are being challenged like never before. Keeping a close eye on key numbers can help restaurant owners make informed decisions to help protect profits and drive success.
While there are numerous metrics to track financial performance, for restaurants the top three focus on food, labor, and operations.
Food cost is the total expense incurred for the ingredients used in preparing a dish. It is a significant factor affecting a restaurant’s profitability as it directly influences the pricing of menu items. For example, if a dish costs $5 to prepare and sells for $15, the food cost percentage is 33%.
Ways to manage food costs include negotiating prices with suppliers, strengthening inventory management, recipe costing (down to the ingredient and portion size), joining a purchasing program, taking a more flexible approach to creating a menu, and regularly reviewing menu pricing based on market fluctuations.
A daily review of Cost of Goods Sold (CoGs) – the total cost of food and drinks served in a day – can help you spot rising costs, make adjustments, and prevent over-ordering and waste. Staff can help manage costs by avoiding over-portioning, preventing waste, and getting orders right the first time.
Labor cost, on the other hand, encompasses all expenses related to staffing, including wages, benefits, payroll taxes, and training. In a labor-intensive industry, these costs can quickly escalate and impact profitability. You can manage these costs by optimizing scheduling to prevent overstaffing during quiet periods and understaffing during peak times, cross-training staff in multiple roles, retaining high-performing employees and implementing efficient processes to reduce the time taken to perform tasks.
You may also want to consider how technology can help boost productivity and lower labor costs, with self-service ordering options and kiosks; online reservation systems; dynamic menus linked to QR codes; pay-at-the-table tools; and more data to forecast more accurate scheduling.
Operating cost refers to the total expenses related to housing the restaurant. This includes rent or mortgage payments, property taxes, utilities, and maintenance. Ways to manage these costs include negotiating lease terms, improving energy efficiency to lower utility costs, and performing regular maintenance to prevent costly repairs.
Knowing your numbers provides several benefits. First, it aids in pricing decisions. By understanding the costs involved in creating a dish, restaurants can price menu items appropriately to ensure profitability. Second, it helps identify inefficiencies. High food costs may indicate waste or theft, high labor costs could point to overstaffing, and high operating costs might mean it’s time to renegotiate a lease. Finally, monitoring these costs allows for better budgeting and forecasting, enabling restaurant owners to plan for the future and make informed business decisions.
If you need assistance tracking, monitoring, and evaluating costs, RBT CPAs are available to help you manage the financial side of your business with accounting, audit, taxes, and advisory services. Let us know what you need so we can show you how we can be Remarkably Better Together.
RBT CPAs is proud to say 100% of its work is prepared in America. Our company does not offshore work, so you always know who is handling your confidential financial data.