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Wednesday, January 24, 2007

Pretend You Own The Place

Whenever I have a difficult decision, I always take the perspective of the owner. If you're not the owner, pretend you are the owner.

In my early food service management courses at SUNY Cobleskill, we were taught food cost should be 32 or 33% and labor cost should hit between 25 and 27%. If a business could keep consumables at 8 to 10%, their gross profit percentage would be around 32%. The 32% could cover marketing, advertisements, garbage pickup, phones, office supplies, snow removal, licenses, property taxes, mortgage, rent, equipment rental, leasehold improvements, repairs and maintenance, smallwares, pots and pans, linen, interest expenses, accounting, any number of emergencies and a decent net profit.

If you're working in a profitable operation, the team has figured out a way to cover all the expenses and have something left over at weeks end. Perhaps the food cost is 29% and your labor is a little high to prep fresh produce. Maybe your bar operation makes a huge contribution or a busy season bails out a very lean off season. Very few places hit the targets students learn about each year but it's good to keep these targets in mind.

In every complex restaurant, the kitchen uses cooking wine and the bar uses lemons, limes, oranges, onions, olives, celery and other food. The wait staff works slicing cakes and pouring coffee and the kitchen staff produces food for the wait staff to eat each shift. Accountants pour over all the documents and create reports to keep the operation in line with the budget.

When the targets are hit, people calculate bonuses and all is good. Unfortunately, many operations miss their targets and begin a slicing and dicing process on their financial reports. Suddenly critical operating costs become hidden in an allocation jungle. Certain departments falsely believe they are winning some internal game while the overall unit is in decline.

Investors often assign a value to a going concern based on the operating cash flow times a factor. If you have an operation producing $200,000 positive cash flow each year, you'd try to get at least $2,000,000 (ten times) for the business. A failing business is treated like yard sale. Assets are often reduced to their salvage value. Auctioneers sell POS systems, ovens, tables and chairs at pennies on the dollar.

After missing the targets for three straight months, most operators should face the facts. Inventory valuation, allocation of lemons and cooking wine, extra-departmental labor cost credits won't hold the answer to the dilemma. Pretend your the owner and look for the real issues. Don't hide behind allocations.

3 comments:

Ken Burgin said...

Right on. These days, and coffee should also be part of beverage costs, not food (as it was last century). And the real issue in the bar is the way staff use and eat those punnets of large, luscious strawberries.

Ed Reif said...

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normal people said...
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