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Wednesday, November 28, 2012

Long Term Planning and EBITDA

At the depth of the Great Recession, I was approached by a client for assistance with refinancing his loan portfolio.  Today, the business is flourishing and cash flow is strong.  In any long term planning project (e.g. a five year plan), I recommend taking the viewpoint of the banker.

Successful long term planning for growth involves a clear corporate vision with respect to high level goals and the road map to achieve these objectives.  Investors and bankers are interested in the company’s track record, the economic conditions, local trends, competition and other factors which impact the success or failure of the venture.

Whether your growth plans begin with digging out of a hole or launching a new venture from scratch, you can benefit by thinking like a banker. A favorite metric used to evaluate a business plan is EBITDA (i.e. earnings before interest, taxes, depreciation and amortization).
The earnings figure used is typically Net Income (the bottom line). To arrive at EBITDA (see illustration below), any interest expenses, income taxes, depreciation expenses and amortization expenses are added back to net income.

EBITDA = E + I + T + D + A

E = Net Income

I = Interest Expense

T = Income Taxes

D = Depreciation Expense

A = Amortization Expense

A struggling business may need to refinance in order to weather tough economic times.  EBITDA analysis helps the bankers determine a business’s ability to meet loan payments.  Since the bank will replace current loans with the new facility, the interest expenses paid during the year are added back to net income.  A company reporting a net loss generally has no income tax so the impact in the formula is zero.  Neither depreciation or amortization expenses eat cash so adding back these two numbers shows the bank how much cash is available to make loan payments.

A losing company can have positive cash flow if they have significant net fixed assets. There are many issues involving the quality of fixed assets which have an impact on negotiations. Before approaching a bank for a new loan, it is wise to sell any fixed assets which do not have a positive impact on earnings potential. The cash raised in the sale of these non-essential assets will reduce the amount of the loan required.

Evaluating the sale of a fixed asset helps to understand how your profit and loss statement and balance sheet work together to produce cash. The sale price often is less than the book value of the asset. Let’s use the sale of a delivery truck as an example.

In our example, the company has decided to eliminate the unprofitable delivery service. The vehicle has no use. If the book value is $15,000 and we are offered $12,000, we would book a loss of $3,000. This produces $12,000 in positive cash flow and reduces earnings by $3,000.

Generally, the transaction will not be repeated since the truck is gone and we do not intend to replace the vehicle. The $3,000 loss should be noted so the bank may see the one time nature of the transaction. They will correctly eliminate these transactions from their analysis of future cash flow potential. We have reduced our cash required by $12,000 with no negative impact on our ability to borrow.

The key to success in making these decisions is the evaluation of the ability of any fixed asset to generate future cash flows.

Many companies delay closing an unprofitable unit because they worry about the impact on current earnings. This short sighted approach will impair future cash flow. The closing of a store which is bleeding cash will be treated as a non-reoccurring transaction. There may be additional expenses required such as penalties to break lease commitments and real estate commissions.

The depreciation and amortization expenses of any unit on the chopping block should be used to analyze the loss on the profit and loss statement. If the depreciation and amortization exceed the net loss, the store is still producing positive cash flow. Otherwise, the store is bleeding cash and is a candidate for closure.

Future earnings and cash flow will improve once any losing units are eliminated. These transactions are always shown as one time losses due to the closure of the store. In general, you go to a bank to finance the investment in fixed assets needed to achieve financial and operational objectives.

Clearing the dead wood is seen as a positive by anyone making a decision on your loan application.

In summary, cash flow is not the same as net income. The EBITDA formula helps to measure the cash flow available to meet loan payment obligations. Think like a banker. You can reduce the amount you need to borrow, improve your chance to make payments on a timely basis, and allow yourself to focus on positive activities by evaluating the quality of your fixed assets.

Sunday, November 18, 2012

Labor Cost Control Tips

Cost control in any restaurant or food service operation is highly focused on the two prime costs: cost of goods sold and direct labor.  While the control of perishable stock requires considerable analysis, labor costs can be kept in line with accurate forecasts and a bit of technology.

In my contract feeding career, I came in contact with many old school general managers with green columnar paper drawing manning charts for a bid response.  The goal of the manning chart was to forecast labor cost at incremental population levels.  Our contracts required a price chart based on the number of residents in the construction camp.  For example, the increments would be 0-100, 101 to 2001, 201 to 300, etc.

Our RFP response teams spent hours crunching numbers on their charts.  The hourly wages needed to be increased by burden factors.  Significant labor cost is included in the employer's share of pension investments, unemployment insurance, vacation and holiday pay, mandatory training, union dues and health care premiums.  The burden expenses can raise the base pay labor expense by 20% or more.

In the early 1980s, our ADP office in Denver offered a new management summary report.  The management summary report is a straight forward matrix.  Each row represents a summary by department.  For example, we would create rows for Kitchen/Production, Dining Room and Bar Service, Housekeeping, Maintenance and Management.  The columns recapped Regular Pay, Overtime Pay, FICA, LTD, Vacation Pay, Holiday Pay, Employer's FICA, FUTA and SUTA, Total Expense and Net Pay.

This report could be used to make a journal entry since each row was a debit and each column a credit.  More importantly, management could see the total cost for their department.  Supporting schedules for each department have the same columns and the rows show the cost of each employee in the department.

Since the report clearly showed the total hourly costs, our bid response team began to use the data and stripped their columnar sheets of all the payroll burden columns.  They began to use the total cost per hour in the manning charts.  This meant a lot less number crunching and we saved days previously spent in expensive hotels putting together our bid packages.

As time went on, I was able to demonstrate the direct labor cost estimates the large cumbersome sheets determined could be reduced to a simple straight line formula.  I used the increment midpoints and total column costs to construct a linear regression estimate.  Initially, my new approach was trashed but my calculations were always very close to the numbers on the large spools of calculator tape.

Eventually, I took over the bid team and we reduced the number of increments to 4.  After determining the labor cost for these 4 operation levels, the linear regression estimates were used to fill in the price chart.  We used the increments for the lowest increment (e.g. 0 to 100), the highest increment (e.g. 1,101 to 1,200) and the 2 increments which management believed would be the most active once the real job began.

In the early 1990s, I found a terrific tool for creating employee schedules.  The Scheduling Assistant from Guia International (, which is still available today, runs in Windows and is a easy to use once the setup is completed.  Every employee is setup in the database.  Key data includes all the identification information, the base pay rate, schedule constraints, position, department other data.  My preference is to use total hourly pay costs with all burden included (including vacation and holiday pay accrual).

Once the schedule loads, the forecaster simply draws lines with their mouse to create the schedule.  As the lines are drawn, the program fills in hours and costs in the left columns.  These individual numbers are recapped by day and week at the bottom of the chart.  The program can use one schedule to create a new day of the week.  Any adjustments are made and the whole week is saved.

The scheduling tool can also be used to develop incremental staffing charts.  The most important increments in many 7 day a week operations are Early Week (Monday and Tuesday), Mid-Week (Wednesday and Thursday), Weekend (Friday and Saturday) and Sunday/Holiday.  Seasonal resorts should complete separate staffing chart decks for peak season and off season.  Maximum staffing charts designed to handle major days like Mother's Day are helpful.

These staffing chart totals can feed a linear regression formula to handle any sales forecast level.

Proper use of labor scheduling charts makes direct cost control visual and precise.  Combined with accurate forecasts of covers and sales, management will see a consistent labor cost with specific answers to variances.


Thursday, November 08, 2012

Quality Control and the POS System

An excellent report for tracking quality control is available on the best POS systems.  Micros has an end of period report designed to highlight major issues with an emphasis on employees and adherence to company policies.  The Employee Variance Advisory Report * (see example below) shows discounts, voids, errors, returns, cancellations and transaction anomalies for a shift, day, week, or month.

Careful scrutiny of the discounts, returns and cancellations provides insight into your guest satisfaction performance.  Restaurants with abnormally high returns are serving customers meals which fail to meet customer expectations.  Perhaps the steak was over cooked or the soup was ice cold.  I have been in kitchen offices for many years and the arguments over "fussy guests" always pique my interest. 

Some real issues I recall include:  cole slaw left under heat lamps on a BBQ platter, a steak returned due to a green interior (badly spoiled - not an aging problem), burnt pizza, burnt toast, raw fish, a burger still frozen in the middle, chicken leg with blood in the joint, mushy pasta and rice, salty soup and many wrong orders.  These problems show up in the POS audit report.

Returns indicate customer dissatisfaction with a possible loss of future business, potentially higher food and beverage costs, and potential food poisoning issues.  Voids, discounts, cancellations and check edits impact revenue and profit.

Track the information included on these POS audit reports over time.  Closely monitor the each incident including a description of the problem, the employee responsible, the manager on shift and the solution offered to the guest.  Develop a comprehensive response to customer complaints.  A company can turn problems into opportunities with a top notch customer complaint response program.   

*Thanks to Dave Smelson, Senior District Sales Manager at Micros, for sharing the latest Micros reports with our readers.

Wednesday, October 31, 2012

Professional Recipe Model - POS System Review

The key to using a recipe model to control usage is the link to the POS System.  Menu item counts provide the volume information for calculating ideal usage and for menu analysis.  Advanced menu engineering requires menu item counts to determine popularity.

POS Systems are designed to handle the revenue cycle including sales (by category, item, day-part, revenue center and server), cash, credit card charges, house account charges, gift card transactions, sales tax collected and server tips.  A typical POS System will have many modifiers to handle customer preferences, extras, substitutes, add-ons, call liquor, take out orders, portion size and special requests.

Every PLU (Product Look Up) code in a POS System with a selling price is required in order to tie Z reading for actual sales to the calculated sales figure (sales price in the recipe model and imported menu item counts).  In addition, there are many other PLU codes of interest.

Guest orders may include a double shot of liquor, extra cheese, the special of the day and other important information for inventory usage calculations.

Make sure the POS System is properly setup to track inventory.  Many times the focus is on cash control.  For example, a PLU code with a description DOUBLE and a selling price of $4 is a red flag item.  Frequently, the POS System does not capture the counts by brand of liquor.  The DOUBLE code may include shots of vodka, gin, tequila, etc.  Many brands of liquor can be impossible to track due to the use of a generic DOUBLE key.

The special of the day may always be recorded using the same PLU code.  This would eliminate the ability to track food usage in any operation with a high volume of special sales.

POS Systems are often under-utilized.  Any operation with salad bar or buffet sales can benefit from tracking pans of prepared items.  Setup a PLU code for every possible pan of food in the system.  Many times, a restaurant spends the time needed to account for every slice of bacon sold in the a la carte menu and ignores the buffet control.  An entire pan of cooked bacon can leave the kitchen with a verbal request.

In general, a professional recipe model will require additional work for the POS System database team.  This exercise will also provide the operations team with valuable information.  The insight gained will pay for the costs to update the POS database.

Tuesday, October 23, 2012

Professional Recipe Model - Technology Considerations

The success of any professional recipe model project rests on the ability to match your data flows from the POS system and the vendor ordering systems to your cost control solution. Once you have the model complete, the systematic use includes imports of menu item counts from the POS system. In addition, you'll want to export purchase orders to your suppliers. Many suppliers allow imports from their order guide (with current price data), and ad hoc purchase orders (entered directly online).

Choose a software system with tight integration to your POS system and vendor ordering systems. In addition, many people use Excel spreadsheets to handle inventory, butcher yields, competitive bids, menu analysis and order guides. Excel integration is a major plus for any cost control software.

I have two deal breakers when selecting the best solution. The system needs to have the capability of negative quantities in recipes and invoices. You will need to handle substitutions, returns and other common items which require a negative quantity. In addition, flexible units of measure with unit conversion factors is essential. At a minimum, you will need units of measure for purchasing (e.g. case), production (e.g. can or gallon) and one or more recipe portion units. Try to purchase a system with the flexibility needed to handle your operating environment.

Once the essentials are checked off and you have a short list, there are capabilities which can save time in the routine use of the solution. Template management tools allow you to design shopping lists (order guides), inventory count forms, vendor bid lists, transfer forms and production worksheets. Handheld unit integration is also a plus. Rather than focusing on bar code scanning capability, give preference to units which handle the forms. These handheld units allow users to complete the forms on the spot. When the unit is synced or the file is emailed, no further data entry is needed.

Before you make your final decision, determine the level of support you will need. The main benefit in building a professional recipe model is the business intelligence gained during the database build phase. You will have many important questions. In addition, the technology issues which will surface often require a certified network technician.

Wednesday, October 10, 2012

Professional Recipe Model - Introduction to Sub-Recipes

Preliminary Work Required

Professional recipe models provide a positive return on investment in a short time and offer flexibility for future changes. Initially, the project team should spend time and effort gathering and organizing critical information. The focus is on key items (most popular menu items and options and the ingredients used in producing these items).

This project is data intensive. Gather a POS menu item sales recap report for a 90 day period, quarterly (90 day) tracking reports from all major vendors, hard copy menus, inventory count forms, kitchen prep work forms, line setup layouts and all batch recipes.

In addition to POS reports and tracking reports, a comprehensive list of all food and beverage suppliers, food and beverage category lists, menu item category lists (preferably from hard copy menus) are essential. Any reports which can be exported to a CSV or spreadsheet file will save time.

Sub-Recipes and Key Item Yields

Identify key items (both menu items and raw ingredients) and key activities (all butchering, trimming and prep work which impact yields). If you use ranking reports, the key menu items and raw ingredients will be found on the first page of the report. These key items will represent a high percentage of menu item sales or overall food cost. The meat, seafood, poultry and produce items require yield intensive prep work. All prep work used to convert untrimmed raw product into recipe ready ingredients falls in the key activity group.

Recipe costing depends on standard recipes calling specific ingredients with well tested standard yields. Building adequate flexibility into a professional recipe model requires a thorough knowledge of sub-recipes. These sub-recipes are used to handle prep work, mise en place, stocks, sauces, butchering, trimming, cleaning and mixes. The sub-recipes used for prepping key items (generally meat and seafood) have the greatest impact on the entire recipe model.

Ideally, a large sample should be used for determining standard yields. If you butcher a beef short loin for T-Bone steaks, a 80% yield may be achieved using 10 boxes of meat. Some of the boxes may only yield 76% and others may yield 84% (by weight). Tracking actual yields against standards is an excellent control feature. An operation could achieve an above average food cost result if the yield is poor in a given period.

A beef short loin is used to produce steaks. In this operation, we produce steaks for 2 people (40 ounces) and single person steaks (20 ounces). Typically, the short loin cut produces Porterhouse, T-Bone and Strip steaks. When building a recipe model, we require sub-recipes for each steak variety (Strip Steak, Porterhouse Steak and T-Bone Steak).

In our example (see table below), we will assume all steaks are 40 ounces each and the standard yield for the entire 25 pound short loin piece is 8 steaks (2-Porterhouse, 3-T-Bone, and 3-Strip). This assumption may be changed to fit any given operation. The sub-recipe for T-Bone Steak would reflect the standard 80% yield. If we produce 40-ounce steaks from a 25 pound short loin (80% yield), our expectation would be 8 steaks.

If the actual short loin yield was 85%, we would still produce 8 40-ounce steaks and the extra trim would be used in ground beef and stew meat. We could experience a poor yield when butchering a short loin. If the yield was 76% on a 25 pound piece, we would not be able to cut 8 40-ounce steaks. Our yield would only be 7 steaks plus extra trim. We want the sub-recipe to red flag these poor yield short loins.

Some recipe model architects decide to use below average yields in their sub-recipes. Their goal is to have near zero variances in future reports. For example, they could make the short loin yield a weak 76% in the sub-recipe. Using the poor yield will produce fewer unfavorable variances in future reports. Savvy operators should welcome these variances. We don't want a standard yield which would allow 4 of every 100 short loins to disappear without an alarm going off in the reporting system.

Standard yields will allow us to forecast purchase requirements, track portion control, identify poor yield pieces and expose theft. Determining the standard yields on key items is the most important work in building a solid professional recipe model.

Wednesday, August 29, 2012

Slammed! 2nd Oven Installed

This is the final post regarding a new rotisserie chicken specialist in my neighborhood. They purchased a slightly smaller second oven. In order to allow room for the oven, they traded their large flat top grill for a smaller unit. Everything fits under the original hood.

The purchase of the new oven has solved their peak period production problem. Recent lines measured at the peak dinner period on a Friday were moving steadily. It seems more people are ordering their meals to go now. The reconfigured dining room has fewer seats.

When the restaurant first opened the menu had many Peruvian specialties. The new kitchen is very focused on the chicken options. I have never seen anyone order any meals which did not include the chicken.

With a few months of operations experience, the owners have adjusted the hours to meet the needs of the community (and to allow themselves a few shorter days each week). I have no knowledge of the terms of their lease. As long as their rent is reasonable, they have a high probability of success.

Food Cost Calculation Question - Sales Tax

Good Morning Joe,

I had a quick question for you. When calculating FOOD COST %, do you want to use gross food sales or Net food sales? Obviously Gross will give you a better percentage but I am just curious as to what is the norm.

Thank you,


Full Charge Bookkeeper

Thanks for the question Amanda!

When a restaurant's POS system records a transaction, the amount needed to pay the local tax authorities is calculated and automatically added to the check total. When you look at the recap, the total tax liability is summarized daily. This tax collected increases cash and receivables from credit card processing but does not increase sales. It is a liability.

In fact, an increase in any liability is favorable to cash flow in the short run.

You should eliminate the tax in your food cost calculations.

More importantly, restaurants would be wise to set aside the cash collected for sales tax so they can meet their quarterly obligation. Often, the amount collected is not available when it is time to file the quarterly return.

Wednesday, July 25, 2012

Banquet Beverage Cost Question

Dear Joe,

Very good day to you.
I am writing you this mail, because I am facing a problem with the beverage cost calculation.

I am an F&B cost controller in a hotel of 176 Rooms, with a sports Bar, Lobby lounge Bar, Brasserie restaurant for Breakfast and all day dining, as well as the room service Bar outlet, and Mini Bar. Our hotel also offers Banquet Facilities and Functions.

My main question is how do we calculate the beverage Cost in all departments? Also, how do we calculate the consumption beverage in banquet and functions? Finally, how do we split food and beverage when we charge a flat price (for example 35$ per person for a banquet buffet)? The matter of splitting food and beverage is a real problem.

Is there a formula to solve this issue?

Thanking you in anticipation, kind regards,

Elie, Resort Cost Controller

Thanks for the question Elie!

Cost allocation for banquets is a snap if you avoid percentage analysis. This is best for all buffet and banquet operations. These events generally involve a single price per guest. The use of percentages won't help you in cost control. With every banquet, the goal is to make a specific amount of profit per guest.

Using your $35 example, I would develop a comprehensive profit and loss statement for the event. Let's say we wanted to make a net profit before overhead costs of $5. We would need to construct a simple P&L with all the main categories: Sales, Food Cost, Beverage Cost, Supplies Cost, Decorations, Entertainment, Kitchen Labor, Server Labor, Management Cost, etc. You could setup columns for both budget and actual costs.

Try to carefully isolate all beverage costs for each event. Draw lines on bottles, carefully monitor transfers and take an accurate inventory before and after each event.

In your venues, you need to monitor beginning inventory, transfers (net of in and out), and ending inventory for each major activity. Match your costs with sales. Since banquets are taken care of entirely with the event P&L system, this final control is the standard cost allocation by profit center. You can see how each venue contributes to your overall beverage cost and gross profit.

Tuesday, July 03, 2012

Follow Up on Slammed! Peak Period Woes

Management at the Peruvian chicken concept in my neighborhood have taken significant action during the month since we paid our first visit. For the most part, the excellent quality meals are still available to their patrons. Let's review the main points of the article and see if there has been a change in the operation.

The production team should be trained to stop fully stocking the oven late in the evening since very few guests will return to have dinner at 9:00 PM in this neighborhood.

The restaurant closes two hours earlier now. When the final batch of birds is removed from the oven, the workers start cleaning up (including turning chairs up on the tables.).

The number one constraint is the rotisserie oven. They purchased a 20 bird model. The entire space is tight with the dining area claiming 50% of the square footage. The oven is sandwiched between the range and the warming bin. Workers have very little space and frequently run into each other.

They still have the one oven and this production constraint will prevent the annual sales volume from reaching it's true potential. The dining area has a new ordering counter in the center of the store. Tables line the perimeter leaving the center floor space to handle the order line. Space freed on the side of the production area is now utilized by the production workers. They no longer run into each other as frequently.

How could they produce the chickens needed for the 7:30 PM shift and avoid cooking the unnecessary birds for the low after 9:00 PM volume?

Oven management has been improved tremendously and the team actually shuts the oven off late during the final batch of the day. They remove the chickens one rod at a time and use the residual heat in the oven as a warmer. With the earlier closing time, there is very little over production.
Someone should have been counting the lost revenue at 8:00 PM. Perhaps a person could be stationed at the door to explain the 100% fresh production policy and to offer a coupon for a future meal.

Lost revenue issues have evaporated along with the revenue potential. A fast casual Mexican concept opened recently and they are slammed. The current chicken crowd is very manageable and much less lucrative. Will they ever be able to recapture the people who left in frustration during the chaotic opening week? Only time will tell.

I would purchase a large digital time piece for the front window. Every time the chickens start their 1 hour journey from their raw marinated state to the fantastic mouth watering perfection, the clock could be reset. Patrons could drive by and check the clock.

No clock but they are communicating in a less direct manner. When the restaurant line gets long, they close the blinds in the front window. Anyone in the know avoids the place when the blinds are closed.

Friday, June 22, 2012

Impact of Waste and Spoilage on Food Cost

Is waste and spoilage included in food cost? How do you calculate it? What about the waste in fish? How is that worked out?


The food cost figure does include waste and spoilage Badal. Your food cost totals will include the cost of any unusable trim from cleaning and butchering protein items and vegetables. In addition, any waste from overproduction is included. All spoilage is included.

Regarding the calculation question, your food cost formula will not change. It is always the same basic model:


Waste, spoilage, trim, theft, over production waste and improper portion control are all major sources of variance. Your variance reports should be setup in a manner which will help management reduce food cost through lower unfavorable variances.

I prefer to handle yield data from butchering and cleaning processes with standard recipes. Every fish butchering batch would have a different actual yield which should be compared to the standard. The ideal cost would flow from the standard yield. Any over or under trim is a variance.

Spoilage and waste should be calculated differently depending on the production phase. Raw food stock variance may be calculated using the purchase price times the weight or volume. Work in progress and finished goods should be calculated using the standard recipes. For example, if you had a fish soup spoil you would calculate the variance using the volume of soup discarded times the cost from the standard recipe.

Portion control systems which use production data, sales data and standard recipes will help you reduce the impact of poor portion control and theft. The trick is to closely monitor the food placed in production. Once highly perishable stock is placed in production, it should be sold quickly or tracked on a waste sheet.

A comprehensive variance report would show the traditional food cost model followed by a recap of variance. Routine trim yields will not be a part of this report. The report should highlight excessive loss due to poor quality protein items (those with yields below the standard), spoilage, production waste, and missing portions.

Tuesday, June 19, 2012

Lower Your Food Cost By Joining Our Group

Thanks to Jeff Marshall of the Arizona Republic for his article this week regarding group purchasing organizations. Dynamic Chains has members in Massachusetts, Maryland, Virginia, District of Columbia, Michigan, Illinois, Indiana, New Jersey and Texas. Our members have between 5 and 50 units and have a master distribution agreement with a major distributor.

For more information, please call us at (800)949-3295.

Friday, May 25, 2012

Daily Food Cost Calculation Question

I'm in the hotel industry and to get an exact food cost every day, I have a point of sale system. From there I have the net cost of purchases, and the net income.

My question is: If I use those parameters (net cost divided by net revenue) is this the true food and beverage cost?

The reason I ask is because of tax, should I calculate the purchase price with tax? The revenue with tax. I think not.

Just want to ask someone else that seems to know allot about F&B cost control.



Pieter, I'm going to start with your term "net cost of purchases" since this is the key term. I would include the taxes paid on goods purchased in my cost of goods sold. If we hadn't purchased stock, we would not have been taxed. The tax is directly tied to your purchases. However, very few operations spread taxes paid over all items in an accurate manner. Most operators expense the tax immediately in the cost of goods sold total. Why is this the case?

If taxes were included in inventory calculations (item by item in the cost per unit used to extend the quantity), the tax would be allocated accurately to the cost of goods sold. By leaving tax out of the cost per item, operators are being conservative since they recognize the expense as soon as they book purchases in their accounts payable journal.

We all need to pay sales tax directly to the various governments. This tax is not available to cover other expenses or profit. Therefore, I would omit the tax on revenue and use net revenue in my calculation.

To get an exact food cost every day, you need to monitor goods leaving your inventory stocks. Closely monitoring purchases is an excellent idea but it won't provide you with the correct numerator in the formula. If you purchased a case of canned tomatoes and only used one can on the day of the purchase, your inventory of canned tomatoes would increase by 5 cans. These cans shouldn't be included in the food cost for the date of purchase.

Most operators do not monitor goods requisitioned from inventory. Many hotels do track transfers but it is very rare in restaurants. The daily transfer recap would provide you with the figure needed to do an exact daily food cost.

Tuesday, May 22, 2012

Slammed! Peak Period Woes

For months, a "Coming Soon" sign was in a store window at a busy strip mall. As time went on, the signs indicated a Peruvian chicken concept was coming to our neighborhood. Northern Virginia is blessed with many top quality rotisserie restaurants but they are located 10 miles or more from our village. As the paper came down off the front window, people were genuinely excited about the new addition.

The restaurant opened on May 11 to a throng of chicken afficianados. There was a line out the door when I drove by to check traffic. I decided to wait a few days to let the team work out the kinks. When I did go inside 3 days later, I just wanted a take-out menu. The manager said they had not yet received the menus from the printer but he gave me a website to visit.

We decided to try the chicken last Thursday evening at approximately 7:30 PM. There was a short line when we arrived and it seemed to be frozen. After I placed my order, I joined the family at the table. Around ten minutes later, a rack of chickens was removed from the oven and prepped. Workers quickly filled the orders and called out numbers. We were last to be served.

I noticed the cashier explaining to people in the order line there would be a delay of one hour. The oven was rapidly restocked by the production person. Every single person in the line left. It was now close to 8:00 PM and this is a military town where many workers wake up quite early. As we ate our meal, I noticed more people going to the cashier and receiving the bad news. Using a modest check average estimate, I watched as over $400 of revenue was lost.

We finished our meal and decided to take care of some shopping in the vicinity. At 8:50 PM, my curiosity drew me back to the restaurant at the time the chickens were ready for service. The perfectly cooked birds were transferred to the warming bin since there were no more patrons.

During my meal, I checked out the production capacity, the storage space, the dining room layout, the space devoted to walkways and I sketched out a optimum gross profit estimate. The number one constraint is the rotisserie oven. They purchased a 20 bird model. This is a family operation and I believe they are all in with respect to their personal funds. The entire space is tight with the dining area claiming 50% of the square footage. The oven is sandwiched between the range and the warming bin. Workers have very little space and frequently run into each other.

Since I wasn't around for the early dinner period, I can only project the oven limitations cost even more lost revenue.

So we have a family trying very hard to serve as many patrons as possible with the assets they were able to assemble with limited funds. This is a classic constrained optimization model. Cost accountants love these type of puzzles. How could they produce the chickens needed for the 7:30 PM shift and avoid cooking the unnecessary birds for the low after 9:00 PM volume?

Someone should have been counting the lost revenue at 8:00 PM. Perhaps a person could be stationed at the door to explain the 100% fresh production policy and to offer a coupon for a future meal. The production team should be trained to stop fully stocking the oven late in the evening since very few guests will return to have dinner at 9:00 PM in this neighborhood.

I would purchase a large digital time piece for the front window. Every time the chickens start their 1 hour journey from their raw marinated state to the fantastic mouth watering perfection, the clock could be reset. Patrons could drive by and check the clock. There are plenty of options for a would be patron. There is a large super market, a big box department store and lots of small shops. Orders could be taken ahead of time and the clock could be set to 2 hours if they completely sell the next round.

Communication is key. Many of the visitors were frustrated with the lack of chicken. At least they could avoid the wasted time parking their car and standing in line only to find they would not be able to purchase a meal for the family.

I intend to continue my observations this summer. In the long run, I believe the space can be reconfigured to create a higher volume take-out only operation.

Thursday, May 10, 2012

Include Disposables in Food Cost?

Respected sir,

Just wanted to know whether paper plates, plastic items, glasses and cups should be included in the food cost calculation. I am working as chef for a chain of restaurants with actual food cost around 26% to 28%. But after including plastic purchases, my cost goes beyond 36 to 37 percent. Is it correct to include this as part of my food cost? What can be done to reduce that cost?

Warm regards and many thanks,

Hiren, Chef, Lebmex Restaurants

Thanks for the question Chef. Accounting for cost of goods sold should definitely include all disposables, linen, dish washing chemicals and other items which vary with sales volume. In your operation, the impact of disposable paper and plastic items is very significant. Quick service operators have been closely tracking these costs for years. As the take out food sales increase steadily, many more operators will see the impact on cost of goods sold increase.

So should we include these costs as part of the food cost formula? No. My reasoning involves the natural tendency to allocate costs to major activities. Most operations separate food sales and beverage sales. It is common to spend considerable time and effort on the cross over items like lemons, limes, olives, cherries, juices, and wine and liquor used in the kitchen. Every company has a policy (either formal or informal) regarding inclusion of coffee and tea sales in either the food or beverage category. I believe any attempt to build disposables cost directly in the food cost figure is a mistake because of the potential for allocation confusion.

There is usually a profit and loss statement section to handle direct operating expenses. Are disposables a part of cost of goods sold or direct operating expenses? I favor the inclusion of these costs in the cost of goods sold section (used in the gross margin calculation). If a restaurant uses paper napkins, I would include the napkins in cost of goods sold as Disposables Cost.

Your second question is at the heart of this issue. "What can be done to reduce that cost?"

Disposable items may be related to a specific menu item (e.g. a sandwich wrapper), or per cover (e.g. napkins and utensils), or per table (e.g. disposable table covers). Take out bags are used to pack multiple items for any number of guests. Should these costs be included in standard recipes? Fortunately, the software available for our industry allows multiple recipes for the same menu item. You can use an all inclusive recipe model to control all your cost of goods sold items including food, beverages and disposables. Wrappers and other menu specific items can be included in individual menu item recipes.

Take out bags can be tagged to the take out count from your POS report. You can make recipes which track the costs to open each day including any napkins on the tables, paper table covers, plastic utensils used on the tables, etc. If you track table turns, these "recipes" can be built to track each turn. Use your vision of the operation to guide you in this process. Once you have a model built, you simply compare standard usage and actual usage. You may find napkins are over used. Proper training can significantly lower napkin usage.

Paper towels, toilet paper and other high volume items can be tracked by patron counts. The goal is to understand the consumption pattern and develop a system to monitor variances. In your company, a 10% drop in disposables usage represents 1% of sales. This is an achievable objective in most organizations.

Tuesday, April 10, 2012

International Fast Food Trends

Thanks to Suzanne for her recommendation on a interesting article on global fast food trends: 10 Examples of Fast Food in Other Countries

Wednesday, March 28, 2012

Impact of Service Style on Food Cost Percentage

Hi Joe:

I teach Quantity Food Production for a Dietetic Technician Program, and have a question about something I read on your blog.

You said that, within the commercial foodservice industry, generally, the faster the service, the lower the food cost %. Can you explain this a little more? If the food cost % is low, isn't the labor % higher, and for the faster service, wouldn't there generally be cheaper labor with the faster service? Or, is it because you're using "cheaper" food as input to begin with? Or, am I looking at it completely wrong?

Thanks--Cindy Pierce, MS, RD, CDN

Assistant Professor/Clinical Coordinator

Food & Nutrition Programs

LaGuardia Community College

Thanks for the question Cindy. This issue is important to many of our readers.

Let's start with the QSR service style. Take out orders dominate this industry segment. The high cost of disposables demands a low food cost percentage. When the cost of disposables is added to the food cost, the QSR segment has an overall cost of sales closer to a casual restaurant.

I'd like to go to the other end of the service style spectrum and focus on a fine dining restaurant with expensive raw ingredients, top level service and a professional chef. These operations run a high cost of sales percentage due to the relatively high cost per ounce of the center of the plate portion and a large gross profit per plate. The chefs are willing to accept a higher food cost % because they want the $15 to $20 gross profit per entree.

Buffet service often runs a high food cost percentage since there is no need for a large wait staff. The competition in the buffet segment is fierce in many regions.

Fast casual operators get to charge higher prices for their menu items. Customers like the fast service and are willing to pay for the quality. The menu prices need to cover the cost of disposables. Your "cheaper" food question is at the heart of the QSR/Fast Casual value proposition. There are many chains moving to a dual identity.

McDonald's has added improved coffee drinks, smoothies and Angus beef options. Service is a bit slower for the new cafe drinks and smoothies. Quality is definitely higher. Have you ordered a pizza from Domino's lately? They now offer artisanal pizzas. Wendy's uses sea salt on their fries and Burger King has improved the quality of their burgers and fries. The traditional fast food fare has now found it's way to a separate "value menu" with smaller portions and no Angus beef.

Casual dinner houses tend to be dominated by the 3X menu price model. These operators cost out the complimentary food, center of the plate entree portion and most popular sides. They multiply the total cost by 3 in hopes of achieving a 33% food cost. You will find lots of options around $19.95 at these restaurants. During the recession, there was a shift downward in the number of extras ordered by patrons. Some chains began to offer a split entree or dessert at a bargain price. With guests moving away from bottled water, casual dinner houses have to work hard to achieve their food cost % targets.

Hotels do run a relatively low cost of goods sold in their room service, cafes and bars. They run higher costs in the high volume buffets and in the fine dining operation. With over 50% of the volume in catering and buffets, the overall cost of sales is below most casual dinner houses due to the great gross profit % in the non-buffet venues. When events are scheduled mainly in the morning, food cost percentages tend to be lower.

Wednesday, March 21, 2012

Recipe Book Bible Question

Dear Joe,

My name is Koti, working as a Head of operations for a group of restaurants in India.

I read your blogs which were interesting, I would really love to make a RECIPE BOOK BIBLE for my Restaurants.

I do have knowledge of food costings and all. Please give some ideas and suggestions in this regard.

Thanks & Regards,

Koti, Head of Operations

I love the great recipe tools we have to work with Koti. I find many companies do the bare minimum with the available technology. In fact, the typical approach is often dangerous. Many companies use the recipe cost software to produce a "ideal food cost" which is anything but ideal.

To begin the project, I would divide recipes by the intended use. We would start with the classic recipe card project. Start with your current menu and get all the recipes for these items. After sorting the cards by category (soups, salads, entrees, etc.), make a list of all the menu items in a spreadsheet. Enter the category in the next column. Some menu items need to be prepared before the meal service and other items are made to order. In the next column, enter BATCH or PORTION to highlight the preparation method. The next column will have the number of portions the recipe yields. The BATCH recipes will have a number greater than 1 and the PORTION recipes will use 1.

Now go through all the cards and find any other batch recipes which need to be prepared in order to produce the menu item. You will produce a list of sauces, dressings, mixtures, cakes, pies, breads, casseroles, stews, etc. Add all these recipes to the spreadsheet. The category should reflect the process. For example, BAKERY would be used for cakes and pies and GARDE MANGER would be used for salad mixes and dressings. Most of these recipes will be BATCH oriented. Enter the yield data with a number and a unit of measure. For example, a soup may yield 5 gallons.

Go back to the expanded stack of recipe cards and search for any ingredient which requires preliminary prep work. All items which are butchered, trimmed, sliced, diced, ground, etc. would be added to our spreadsheet. These mise en place items can be categorized by their production process or simply use the category PREP. When you setup the BATCH yield, we are looking for the amount produced (not the amount required). You may have Steamed Rice which tends to expand. Enter the weight of the final steamed product not the raw rice required to produce the finished product. Conversely, your butcher and trim items will produce less than the raw ingredient weight required to produce the steaks and clean vegetables.

A 2.5 kilo beef tenderloin may produce 6 large steaks. The Beef Tenderloin is the raw ingredient purchased, stored and use in recipes by weight. The steaks would be in our PREP items and the yield data would be in PORTIONS. Filet Mignon with Sauce au Poivre may be a menu item in the ENTREE category with the focus on a single PORTION.

If you start with this design phase, you will have a strong foundation. Once the recipes are fleshed out, there are many unique and very helpful variations I like to build. Think in terms of the management tasks every chef or food and beverage director needs to perform: forecasts, par stock determination, line production, purchase orders, banquet event plans, etc. You will find many ingredients are not restocked based on the menu. Shelf stable items are typically ordered based on a par stock model. I like to make a separate set of recipes for ordering the menu driven items like high cost, perishable meats, seafood, produce and dairy. My second set of recipes could have a slightly different name. For example, the Filet Mignon recipe could have a copy with the name X Filet Mignon. The category could be FORECAST. The number of portions would be the same - one.

For my recipes used in forecasts, I strip them of all ingredients ordered using a par stock model. The survivor ingredients will all be your key items. Management can forecast the number of portions they expect to sell (or produce) and the model will produce a purchase requirements report.

If we take a look at the line cook position, the same base recipes need procedures, photos and possibly videos. Think of an operations manual designed to produce consistently prepared menu items. Make a gallery of photos and, if available, a gallery of videos. The menu procedures can be scanned from your recipe cards or entered into a word processing file. Most recipe software programs allow you to attach files and cut and paste (or import) text into the procedures box. This window dressing phase can be accomplished by a second team if you are in a hurry.

Monday, March 19, 2012

Food Cost Benchmark Question

Dear sir,

I found your website very interesting. Please, kindly could you explain the cost of current food from kitchen (also banquet & f&b). What's the percentage food cost target for each?

I got a little confused whether it's 32% or 33% or 35%. (and also is banquet 24% or 28%?)

Thank you,

The target food and beverage cost percentages differ depending on your specific company's budget. Generally, it is wise to run an overall cost of goods sold of 30% or lower. Take all costs of both food and beverage and divide by the total food and beverage revenue. I believe 35% would be too high.

Historically, many operators have set a food cost target of either 32 or 33% and a alcoholic beverage cost target of 18 or 20%. If 3/4 of your volume is food sales, you would achieve the 30% or lower objective.

The reason banquet food costs are often much lower is the inclusion of many non-food items in the contracted BEO revenue. Personally, I like to calculate a profit per guest on BEO reports. Ideally, the revenue for each event should be sufficient to cover all costs (including flowers, music, special decorations, etc.) and allow for a fair profit.

Wednesday, February 29, 2012

Impact of Discounts on Food Cost %

I am curious if you can shed some light on how to calculate how much food cost variance is attributed to Discounts.
Example below:
I know my discounts should be at 5% of Net sales but they are at 10% of Net Sales. My food cost should be running 30% but is running 33% instead.
Discount Variance 5%
Food Cost Variance 3%
Any numbers can be made up for the scenario to better explain how to calculate the effect. My first assumption was that all the 3% is attributed to the 5% increase in Discounts. But how do I know how much is associated with the discounts?

Thanks for the question Jon.

If we had a food cost of $30,000 and sales of $100,000, our food cost percentage of 30% would be on target for your budget.  You have a consistency issue in your question.

In this example, my $100,000 initial net sales figure would include the first 5% discount.  This reflects the expected 5% discount.  Our 30% is the expected % if the discounts were only 5% (as expected).  Let's call this level the "budgeted food cost %" for your operation.

A food cost of $31,350 would produce a 33% food cost percentage using a $95,000 net sales.  Our gross profit would be $63,650.  You need to look for other explanations of the $1,350 rise from $30,000 of food cost to $31,350.  This amount can not be attributed to the increase in discounts.

You are consuming 4.5% more food for the same gross sales. [$1,350 divided by $30,000]

Thursday, February 16, 2012

Zero Revenue Food Cost Control

Dear Joe,

How are you doing? Hope your are doing fine there. What a great articles you have. It's quite late for me to know but I read it and it helps me a lot at work. I almost read all your articles but still I need your guidance.

I am working onboard a cruise ship (more in casino ship) and I need to make F&B budget. (The ship is not opened yet, still preparing for opening).
I have learned from your articles how to make food cost etc. But there is one thing that makes me confused, do you have any idea how to make F&B Budget or deal with this matter:
1. If the buffet (Breakfast, Lunch, Dinner and Supper) in the Restaurant are free?
2. How to make Food Cost against revenue if its all free?
3. How to make food cost percentage from this buffet cost?
As far as i know when i was in the hotel, when the buffet breakfast is free, we get revenue from the room charge. for ex. USD 5/ room for breakfast.
Our restaurant is open 24 hours (Ala Carte menu available 24 hours). We have only one Main Kitchen to serve 3 outlets so to count food cost for 3 outlets, the main kitchen will make one food requisition then it will transfer to different chillers for different outlets so i can account for each outlet's food cost. According to your articles, if it is central kitchen so the central kitchen will make one food requisition and tranfer to other kitchen outlets. (That's what I understand from one of your articles) so I use different chillers to count the food cost in each outlet. Or do I need to make different food requisition for each outlet? If I'm wrong, please guide me.

Thank you very much for your kind assistance. Stay healthy and Have a nice day.

Kind regards,


Thanks for the question Yulisar.  I believe there are many readers who have the same issue.

How do we account for food cost when there is no revenue figure to divide?  In your operation, there will be a final, confirmed passenger count.  This count will provide a divisor.  As we discussed last month, the food cost calculation will be the same:  FC = BI + P - EI.  You will divide this result by your passenger count.

Since all passengers and crew can eat 24 hours a day, our main concern is over production by day part or for a specific recipe.  Tracking food movement by outlet is interesting after a main shift.  Look for too much or not enough food in stock for each outlet.  If the outlet is a buffet, track pans (by %) leftover.  You will begin to get a handle for the popularity of both the outlets and the specific menu items.  This data can be used in menu planning and production.

Spoilage can be quantified and tracked by passenger-days.  

Focus your initial efforts on the main buffets due to the large volume of consumption.  I like to analyze buffet layouts.  If you cost buffet components (by pan), you can begin to see how layout changes can impact overall food cost.  Ingredient costs change by season and a dynamic recipe model will pay for itself as your prices fluctuate.

There is a tendency in cost analysis to focus on grill items since they are easy to track.  In large volume buffet operations, I prefer to analyze the overall layout (by station) with cost and consumption data for each component (including condiment usage).

Thursday, January 19, 2012

Collusion and Food Cost Control

Dear Joe,

Its quite late for me to find your blog, I have been in the hotel industry for almost twenty years, and from your posts I found all the similar questions and basically I have answered similarly to any hotel management that I have worked for, about the importance of controlling the purchase, but there come problems when The Purchasing guys happened to be the best friend of Financial Controller or the Golden Boy of  The Hotel General Manager, then all those theories that any Cost Controllers in the world follow, suddenly dissappear in the broad daylights.

For Example I have made a kind of Price Changes Index Calculation ( by the daily purchase price update from the suppliers invoices data ) to obtain that the purchase prices for all the goods highly fluctuative to catch the culprits when they play with the purchase prices , of course by getting the help from the suppliers to play this kind of game, it will be useless for me to make this kind of calculation.

 My question is, Have you ever found this kind of situation, and if you have, what tools dou you use to bring this situation into attention.

Thank you very much, I am expecting your response.

 Best Regards,


Thanks for your email Zuhar!  You very clearly isolated a pervasive problem with the cost control function.  Lack of follow through on recommendations is the number one issue in many organizations.  Outright collusion is a problem with too many operations.

My gut tells me over half the operators just don't take action when profit killing problems are brought to their attention.  The tendency is to show "patience" and wait for the next period's report.  By reporting daily, you are forcing their hand.  This process of timely follow up will often expose a crooked executive.

As a food and beverage controller, you may find career survival forces you to soft sell your suggestions.  Often, the person in this position has no access to the people who could take action.  If they go up the chain of command without a by your leave, they risk a loss of their income.

In the long run, the numbers will tell the story for everyone to see when they recognize the dishonesty has put the organization in jeopardy of non-existence.

When I was young, I left a job at a hotel due to very poor cash controls and constant theft.  At the time, I simply landed another job in my off hours and left.  Many people in hotels do not have this luxury.

Ski resorts tend to have timely reporting systems in place since their season is relatively short and weather patterns can have a major impact on profits.  I once encountered a management team at a ski resort with major denial issues.  The food and beverage controller documented significant unexplained inventory losses at every meeting and no action was ever taken.  The top executives were lining their home stock with top bottles of wine.  The wine steward had a great resume with many accolades.  He was ordering terrific labels and the wine went straight to the parking lot where it filled the trunk of the manager's car.

Years ago, I read an article which stated 20% of workers are dishonest, 20% are completely honest and the other 60% tend to follow the lead of the dominant players.  You could find yourself on the outside looking in if your organization has turned 80% dishonest.

Tuesday, January 10, 2012

Outlook for 2012

It is a presidential election year and, unlike 2008, I expect a stronger economy in 2012.  Specifically, operators who are value customer focused will see increases in covers and sales.  These value oriented customers will pay a small premium for quality while avoiding extravagance.

Commodity markets will see continued volatility due to severe weather patterns, the linking of grain prices to oil prices, and a overall increase in consumption.

The constraints on menu item prices will ease to a greater degree than 2011.  Operators will begin to pass inflation increases along to customers.

I expect employment to improve as Americans become more pragmatic and fill positions they have shunned in the past.  Many industries are still breaking even or showing a loss.  The workforce will need to grow with a stronger economy.  I see a year end unemployment rate below 8%.

Food Cost Formula Questions

Regardless of your business model, the food cost calculation is the same:

Food Cost = Beginning Inventory + Purchases - Ending Inventory

If you look closely at the formula, you will find your cost is closely related to purchases.  The purchase cycle involves purchase orders, competitive bids, packing lists, invoices, par stock levels, shopping lists, etc.  Only invoices should be included in the purchases each month.

Finding the inventory value is simple and complex.  The simple part involves an accurate count.  We have two levels of complexity in our industry.  The perishable nature of food guarantees a declining value as product ages.  The most costly event in a kitchen involves freezing a protein item with a high cost per pound.  It's better to buy it frozen at the start if portion control is a challenge in your operation.

The second level of complexity involves the preliminary preparation of meat, seafood and produce.  Trimming and butchering activities need to be standardized.  Using a standard yield %, it is possible to assign the correct value to prepped items.  For example, a prime steak purchased for $10/pound may have a yield of 80%.  The cost per servable pound is $12.50.  This is the cost to use on the inventory sheet in calculating the extension.

Sunday, January 08, 2012

A Review of the Outlook for 2011

I missed the year end unemployment rate by a half percent:
I expect 2011 will usher in a new wave of job creation. This wave will take the unemployment rate down below 8% by year end. Some of the job growth will take place in the Rust Belt.
Dining does continue to favor casual (and fast casual) concepts:
Restaurant dining has become less formal in recent years. I expect this trend to continue with greater speed. Diners want to get out more often than the past few years and they want to be recognized by the management.
My prediction regarding the decline in non-alcoholic beverage spending was spot on:
McDonald's starts the year with $1 for all sizes of coffee and soft drinks. The price pressure on non-alcoholic drinks will continue. Expect your guests to scrutinize their checks looking for prices on specials and drinks. If you price your soft drinks modestly and include the pricing on your menus, the move to complimentary tap water may start to shift back to revenue generating drink options.
Oil prices did increase 14% and the markets were volatile:
With any economic uptick, we can expect market prices to increase. We ended 2010 with higher prices for gas and grains. These markets will be volatile with an upside bias.

 Source:  CNN Money

The sales at top concepts did increase in 2011.
I expect the comparable unit sales statistics to be positive in 2011. The strong concepts will see 5% plus growth.

Restaurant Data Pros

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