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Thursday, May 27, 2010

Spotting A Problem Early

We had a rather difficult winter here in the Washington, DC metro area. With a mild winter snow removal budget, we got hit with a severe winter snow fall during the key month of February. Just as the New Year's resolutions relaxed for Super Bowl Sunday, the snow took away the weekend. Local super markets were out-of-stock on milk, bread, orange juice, bacon, ground beef, and many other staples. Restaurant parking lots were empty.

This rough weekend repeated itself for Valentine's Day and President's Day weekends. I spoke with one operator who said his February food cost percentage hit 45%. This is a common trend - high cost of goods sold % in a low volume month.

I like to chart a month like this vs. a high volume month. The key to using this type of analysis is dollars vs. percentages. If you have a bad month with $200,000 in sales and $90,000 in cost of sales, you'll be close to the person I spoke with in February. Contrast this poor performance with a busy month's $800,000 sales figure and a cost of sales equal to $240,000 or 30%.

The change in sales volume is $600,000 ($800,000 - $200,000). Cost of goods sold had a change of $150,000 ($240,000 - $90,000). The slope is 25%. This is the variable component of the food cost. The fixed component is $40,000.

We'd expect a food cost of 29% if we hit $1,000,000 in monthly sales. On the other hand, we would expect to see a $65,000 cost of goods sold if we only manage a sales figure of $100,000. That's 65%!

If these numbers seem completely off the wall, they are not at all unusual for out-of-control operations. The bad months are explained away with stories of blizzards, rainy days, traffic jams, competitor discounts, etc.

Your cost of sales should be almost completely variable. Food should not be consumed if there is no sale. Why do you use more food when you're slow?

Employee meals have a bigger impact. The fixed staff eats the same meal whether you are slow or busy. This should be minimal and measurable. Chronic waste due to over-ordering is a bigger cause. Reduce your "safety factor" when ordering during slower periods. Sometimes the weekday counts are too low to absorb food left from the busy weekend. If the weekend is a complete bust, freeze everything you can and value any perishables which can't be saved.

You may have a major theft problem. If you're not finding many dollars in the research above, you may have discovered a persistent loss due to theft. If the 45% month had $10,000 in theft and you eliminated this problem, the result would be 40% in an otherwise terrible month. The bad month would have allowed you a chance to discover a $120,000 annual loss.

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