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Tuesday, May 02, 2006

The Food Cost Percentage-Decomposed

Too much attention is placed on inventory accuracy. Most people miss the finer points of determining their food cost percentage. Clearly, the sales figure which dominates the formula should take center stage. A very close second is the purchases figure. The inventory obsessed need to take a different view.

Many hotels and restaurants count monthly (or every four weeks) and I see too much emphasis on inventory valuation. The impact of inventory change depends on the time period. Monthly values should be reasonable given the day of week and time of year. The change in the inventory value (i.e. beginning minus ending) hardly matters once a period of 90 days is considered.

Inventory is very important in a weekly analysis and all important in a daily calculation. If you're researching a problem and perform daily calculations you need to be very exact.

The wonderful POS systems available today from the best companies provide a bundle of sales analysis. My favorites are check average and covers by meal period. I break down sales using a simple matrix with a row for each meal period and columns for covers, check average and sales.

On the purchases side, I break down the purchase data using a larger matrix with rows for each key item and grouped data for low impact items by category. The columns include units, average cost and total cost.

For the inventory, I prefer a simple inventory change figure. One number is fine. Simply subtract the current period's value from the previous period's value. The net value should be a reasonable and consistent estimate. Don't count WIP inventory one period and eliminate the figure the next period.

Some quick checks on inventory value by location and category will provide enough information to locate the flour extended by case price when the count team used pounds. Perform a simple analytical review and correct major errors.

Many operators give no credit for highly perishable items like bread, fresh fish and other items specific to the operation. This helps to avoid over buying since the items are expensed immediately.

Inventory valuation should not be the reason for a good or bad food cost percentage in any given period. Any operation which runs a hi-low pattern or a low-low-hi pattern has a far greater problem. These patterns typically point out cost control weaknesses. Someone is trying to hide the truth. I have seen plenty of inventory extensions with a spice valued at $1,000 plus. The people presenting these reports may be both incompetent and dishonest.

Look long and hard at sales trends by meal period. Some operations run lunch menus with higher implicit costs. If the lunch/dinner ratio changes, the food cost will be impacted. Extremely high or low counts will have a major impact as well.

Most of the real action will be in purchases since the money you spend with your suppliers is your cost. Highlight dramatic price changes on any key item. Look for flaws in your ordering strategy. Compare figures from one period to the next and over the long term.

If you focus on sales and purchases, food cost percentage surprises will be fewer and more positive.

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