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Tuesday, November 05, 2013

Food Cost Control CBA

Any food cost control project or organization should be designed to produce a positive outcome.  You want your cost savings to be greater than your control costs.  Cost benefit analysis (CBA) is the name given to the simple formula.  We can see our actual net benefit by subtracting the expenses we incur in tracking food costs against the improvement in food costs.

CBA has some assumptions which can be tightened or relaxed depending on your organization.  The first assumption is the cost control environment from the previous period would produce the same results in the future period if there are no changes.  Any marginal changes in the cost control system, including investment in technology, measurement equipment, security cameras, increases or decreases in staff allocated to the tasks and management efforts, should be budgeted and closely tracked.  These marginal expenses will be compared to the food cost results.

My preference is to use dollars of investment in cost saving resources vs. dollar savings in food cost.

If an operation with $2,000,000 in food sales experienced a food cost percentage of 36% in the previous year, their food cost is $720,000. 

This same operation invests in a cost control system with interfaces to the POS system and their top supplier's online ordering system.  The investment includes equipment, software, implementation costs and a cost accountant.  If the turn key system costs are $30,000 and the useful life is 5 years, we have a marginal technology cost of $6,000 per year.  Most systems need support and 20% or $6,000 should be budgeted to handle this need. 

Our cost accountant has a cost of $60,000 which includes a base salary, health care insurance, workers compensation insurance, employer's share of social security and medicare, holiday and vacation pay, etc.  If you already employ a cost accountant and you are arming this person with the new tool, you can eliminate this expense from your marginal analysis.

Assuming we need to hire a new person, our total annual cost for this increase in control is $72,000.  We would need to buy 10% less food for the same revenue level to break even.  On the other hand, the cost to provide an ill equipped accountant is only $12,000 per year.  We start providing a net benefit once our costs decline by the same $12,000 or 1.67%.

I recommend investing the necessary money in this type of cost control system if your operation enjoys at least $2,000,000 in annual food sales.  For operations with no cost control at the present time, you will reap the biggest reward.  Routine savings average over 10%.  I have seen declines of 25% in food purchases in out of control restaurants.

For operations with a hit or miss spreadsheet cost analysis, you will find the total cost to provide a professional cost control system will be repaid in a fraction of a year.  The entire investment of $30,000 and the annual support will be covered by the expected savings.  From experience, I would conservatively estimate an annual savings between $60,000 and $90,000 in an operation of this size.

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