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Tuesday, July 10, 2007

Volatile Food Cost Results

Some operators experience wide swings from month to month in their food cost percentage. Trying to analyze a moving target can be a rough task. One month, everyone agrees the rising costs of raw ingredients are the reason food cost is way high. The next month, the cost plummets to a number far less than just 30 days ago.

So why did the cost go down so dramatically? Its possible the bad month wasn't quite as bad as we thought and the good month simply balanced the ledger.

To test this theory you should check purchases as a percentage of sales. To illustrate, let's use a seafood restaurant with monthly sales of $250,000 and a target food cost percentage of 34%. During a two month test, the food cost % went from 42% to 31% (sales were steady). We look at the purchases in month 1 and find they total $90,000. Month 2 purchases drop to $80,000. Taking these numbers as a percentage of the $250,000 sales figure, we get 36% and 32%. For the period, our average purchases came in at the 34% target food cost.

Period 1 must have had a $15,000 drop in the inventory value (6% of sales). The inventory must have increased $2,500 in period 2 (1% of sales). So what happened? Did high cost of ingredients hurt our period 1 results? I doubt it.

My guess is the period 1 beginning inventory was too high causing the huge variance. The high inventory went unchallenged because management wanted to believe the good news the previous month (caused by the overstatement). When the party ended in period 1, food cost came under a microscope and purchases dropped by $10,000 or 4% of sales.

Let's stop right there! This is a drop in purchase volume of over 11% from the prior month. Sales were steady. Ingredient prices probably did not provide the drop. Most likely, greater management attention and tighter control provided the drop in purchases.

This volatile pattern is referred to as the good-bad-good curve. In reality, we only had one good month - Period 2. If you run numbers like these, you'll be mediocre 2/3 of the time and on your game about 4 months a year.

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