What Should My Food Cost Be?

Every month, I receive emails asking for benchmark information in every segment of our industry.  Benchmarking food cost is a meaningless pursuit.  Every menu has a unique set of criteria which have an impact on the gross margin.  Rather than looking for a target number outside your organization, I would suggest a simpler and much more accurate way to answer the question:  What should my food cost be?

People really want a method to bring their gross profit back to previous levels.  

The first step in finding the answer lies in your current sales mix, food purchases and the resulting gross margin.  Nobody offering a diverse, a la carte menu to their guests can expect to have a food cost % close to a utopian figure.  Also, this means your competition is far from perfect.  Don't focus on an unobtainable goal.

Review your purchasing data thoroughly including a month by month analysis of all key items (typically your top 25 items ranked by purchase volume in monetary terms).  I would go so far as to construct a matrix to track the purchase cost of these key items on a monthly chart.  Look for sharp shifts (inflection points) on the chart.  Can you find the logic behind these shifts?  Perhaps you have significant seasonal price changes.

You will definitely see a major shift higher in any items which require consumption of grains in their production.  This is not just baked goods but also the protein items.  Our animals consume the same grains we now see used in the production of the fuel we consume at the gas stations (ethanol is anywhere from 10% to 85% of the fuel at most service stations).

Find the top trends in these key items.  Apply the findings to your food cost formula.  If the top 25 items account for 40% of your purchases, a 10% shift higher in the cost of these items will produce a 4% increase in your purchases.  If your purchases have actually increased 5.5%, the 1.5% implies the other 60% of your purchases have increased 2.5%.  Every operation will have a unique profile.

Start with your top 25 items and try to cover the 4% increase in purchases.  Can you lower the figure through tighter controls?  Weigh the cost of tighter control against the potential gain.  Implement these controls whenever the benefit outweighs the cost.

Carefully monitor waste, spoilage, theft, portion size and purchasing trends.

In the example above, a sales increase of 1.65% would cover the 5.5% increase in purchase costs if your target food cost % was 30%.  You don't need to raise menu prices 5.5% to cover the increase if your goal is to maintain gross margin.  A food cost % of 31.14% would produce the same gross profit as before if your cover count  is stable and your check average increase hits your 1.65% target.

Putting Excel to Use in Food Cost Control

I mentioned my love of Excel in last week's post about software. Excel is ideal for 3 aspects of the food cost control environment: organization, complex calculations, and custom reports.

ORGANIZATION:
Most of the food cost control software assumes you have your entire database conceptualized and you simply need to tap enough keys to create the ideal starting point.

Newbies will find plenty of challenges ahead.

Inventory locations, vendors, item categories and inventory sequence are database requirements for phase one. You initially build the item database to aid you in purchase order and invoice entry (the areas requiring 80% of the time once you go live). At the same time, inventory count sheets need to flow from the item database (along with any batch recipe production items).

Excel is a great tool for getting organized. Build columns for the item description, primary vendor, vendor codes, bar codes, category (produce, meat, fish, etc.), storage method (frozen, refrigerated, dry), primary inventory location (where you look to decide when and how much to order), unit of measure data with conversion factors to allow purchases, storage and recipe usage, par levels, alternate item codes (the vendor code for the item you would purchase if there was a stock out).

COMPLEX CALCULATIONS:
Food cost control involves using scalable recipes to forecast production requirements, purchase requirements, and line setup requirements. In addition, plate recipes help you forecast profits, calculate usage variances, and price menu items. The top software will provide plenty of excellent information. Excel can provide you with customer profiles, sensitivity analysis (what-if?), and many other advanced concepts.

CUSTOM REPORTS:
I use a data mining tool to create custom reports for my clients. Typically, the client will send me their favorite report and ask a question: "Can we get all this exactly the way it is AND add a column on the end which....?"

The data mining software creates the calculation field missing in the source report. Mining software always offers several output options including text, CSV, PDF and Excel formats. I often choose Excel since the analyst can take the analysis further if necessary. Excel offers all of the formats mentioned for the final presentation.

Historic Costs vs. Future Costs

The role of a food cost controller is much different from the menu analyst. Cost control relies entirely on historic data to prepare reports which quantify results and alert management to possible problems or opportunities. On the other hand, the menu analyst needs to look to the future.

When a menu price revision takes place, the prices need to cover the future costs and provide a reasonable profit. Knowledge of commodity trends, economic forecasts, unique events in the coming year and other future oriented information is helpful. The costs used to arrive at theoretical menu item costs should use these expected prices.

The food cost controller studies purchase data to understand the previous period. Use of theoretical food cost data may help the controller discover a usage problem. Usage problems involve units rather than dollars. There is concern regarding missing steaks or shrimp or perhaps an entire case is gone. Purchase costs are important only when there is a big swing in price on one or more high volume items.

Using the same price data for both menu planning and food cost control is a mistake. The portion sizes for all key items should be 100% exact. It is the prices which need to vary. Many operators simply take an educated guess on overall inflation and raise menu prices across the board with the same % increase.

Ideally, the menu analyst benefits from the ongoing work of the food cost controller. Portion control tests, relative price volatility and other information the controller has at their fingertips is valuable to their counterpart. They should work together to discover how the current menu has performed.

In a highly collaborative organization, the cost control team could utilize information from the menu analysis team (e.g. future menu price revision strategy) to create better budgets.

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.

A Bigger Divisor Helps Your FC %

Don't overlook sales when reviewing your food cost results. There are several important reasons to scrutinize the divisor in the formula as much as the net purchases total. Your sales figure depends on covers, check average, promotions, coupons, discounts and lost revenue.

Lost revenue is related to menu items your service staff can serve a guest with no order entered in your POS system. Typical examples include slices of cake or pie, small pastries, coffee, tea, cocoa, soup, rolls and ice cream. Less common items include modifiers normally ordered through the POS system which have a small charge to the guest.

A second source of lost revenue involves unauthorized voids and price adjustments. I remember working with a family restaurant with a special price for ice cream sundaes for dinner patrons. Anyone visiting the restaurant for dinner was offered a sundae for 99 cents. After reviewing several POS data tables, I noticed late shift changes on many $3.99 items to $0.99. These patrons did not have dinner. They all paid cash. Their orders were changed from the full charge for the sundae to the dinner special price.

My annual estimate for this activity was $10,000. As you can imagine, these changes had to be made by a manager. The wait staff did not have the authority to amend closed checks. If the managers on shift were pocketing cash, you can be 100% confident the wait staff felt comfortable serving items not ordered through the POS system.

Chronic lost revenue won't show up in check averages. If this theft has been going on for years, the check averages will be consistent.

Impact of Beverages

Most of my clients love to see the cost of their entrees, appetizers and sides come to light as we build the database. After completing the entrees, it is common to hear the managers state: "So our food cost % is in line."

The ideal cost of the entrees tend to be equal or slightly higher than the actual food cost %. Actual food cost % should be higher than ideal food cost % since no operation is perfect. If your actual food cost is below your ideal cost, your recipes need work.

Before answering the benchmark question, I like to ask whether non-alcoholic beverages are included in food sales or beverage sales. If the coffee, tea and soft drinks are included in the calculation of food cost %, the ideal food cost % will be much lower. As an example, a steak house with an overall food cost of 38% actually had an ideal entree food cost of 41%. The wait staff did a terrific job selling a low cost dessert course with pastries and hot beverages.

The overall ideal food cost was 35%.

Entrees tend to have a much higher ideal food cost % since they bear the cost of complimentary items like rolls and butter and they use large portions of the expensive protein items. Non-alcoholic beverages typically produce a favorable impact on food cost % when they are included in the calculation.

The answer to the "in line" question in the example was NO. Their 38% actual was lower than the 41% ideal entree cost. They should have been closer to the overall 35% target. Any number above 36.4% would mean a 4% variance or higher.

Should you eliminate non-alcoholic beverage sales from the calculation of food cost % each period? This will require some extra time evaluating use of milk, cream, sweeteners, lemons, etc. I find it is worth the effort. There are 2 benefits. You'll find some lost revenue in the non-alcoholic beverages category due to unauthorized comps. Food cost variances in the critical entrees won't be hidden by the impact of non-alcoholic beverages.

Basic Food Cost Analysis

An investment of time and money in any recipe costing model has a payoff in food cost analysis. Most operators lack sufficient information to conduct a meaningful food cost analysis. Many operators receive a simple percentage which they are told is either too high or too low(occasionally, just right).

If the company's accounts payable system charges all cost of goods sold to the same account, there is no additional information available. So what do these companies focus on when trying to explain their food cost results? Their food cost analysis typically consists of a review of the ending inventory.

This food cost analysis works like this in most cases: 1. Scan the Excel file looking for large inventory totals. 2. Check these high impact numbers for unit cost information. 3. Once a major item is found with some price volatility, the entire analysis ends and management works on "solving the problem". Occasionally, this team may get around to using a top 10 analysis. This is a small step in the right direction.

Often, the food cost analysis completely ignores the true issue. Many food cost "problems" stem from an incorrect inventory value the previous period. No one remembers the over valuation from the previous period. The simple reason this is ignored is the euphoria caused by a great food cost percentage eliminated the need for any proper food cost analysis. This incorrect valuation went completely unnoticed until now.

When I'm called in to help with inconsistent food cost percentages, I find the top 10 items in terms of purchase volume. My work includes tests of everything involving these items. A thorough analysis of the top 10 items is the best place to start any meaningful food cost analysis. Eventually, you will want to increase the list to the Top 25.

Advanced recipe models automatically focus on 10 to 25 items (depending on the menu scope). Knowing the eventual solution will be found in these high impact items can be useful to the operator with limited information.

Treat each item like a stock in a portfolio. Each food cost component has an impact relative to the unit volume, price volatility and risk of spoilage. Focus on perishable, high volume items with volatile market prices. You'll find many solutions in this key item food cost analysis.

Food Cost Techniques - Receiving

The second biggest opportunity for saving money in a restaurant is available at the loading dock. Receiving controls can save you a bundle. The amount of savings is directly proportional with the number of miles from the supplier. If you are the last stop on the delivery route, the morning's rejects may find their way onto your doorstep.

We once followed a rejected case of salmon all over New York when I was working with a local chain. The driver tried to unload the case at each and every location. Good noses and lots of phone calls kept the spoiled fish from our walkin coolers. Do you let the delivery man load the goods on your shelves? I recommend you end this practice. Especially in operations with limited deliveries and long lead times, drivers often bring the stock up to the order quantity using items already on the shelf.

Imagine you order 20 cases at the order point which is 5 cases. By the time the driver makes the delivery, you have 3 cases left. You let him put the cases in your storage. He delivers 17 cases and calls you in to check off the delivery and sign the invoice. You count 20 cases and sign. You just paid for 3 cases you never received. This is just slightly better than a phantom delivery.

One site I was sent to audit for an out of control food cost had several assistant managers. I was in charge of the inventory and I assigned everyone a location. Keeping the refrigerators for myself, I began looking for a truckload of eggs. Looking everywhere, I could not locate the eggs. The managers started complaining about not finishing in time. I persisted and increased the heat.

Eventually we located the truckload of eggs at our competitor's project five miles away. The invoice had been rubber stamped with one of the manager's signature. We threw out all the rubber stamps and got a credit for the eggs. The driver and our purchasing manager were in collusion.

In general, try to treat your inventory delivery with the same seriousness shown to the armored delivery of cash. You probably lose more cash in food not received than the miscounted cash delivered.

Hot Food Cost Topic

I just received a phone call yesterday from a reader of my blog regarding employee meals. She asked me how employee meals should be handled with respect to food cost calculations. I eventually gave her my answer. Before I directly answered the question, I mentioned my concerns about emphasis on allocation issues.

Generally, I believe there should be a clear policy for each company. There is no absolute method for accounting for employee meals. In the long run, you will have a lower overall food cost result if your focus is on popular menu items and the raw ingredients used in their preparation.

To clarify her position, I asked if she was the owner or a manager. She is a manager and is trying to help with the food cost calculations. Once an organization decides to reward employees based on their performance, it is very important for the performance monitor (in this case food cost %) to be well understood. If the kitchen gets credit for each employee meal served, this credit should be known in advance and applied consistently each month. Bringing up employee meals in a review of a poor monthly performance is a big mistake.

In most operations, the impact of fluctuations in the cost of employee meals should be minor. We used an example in our call to illustrate the point. This operation has weekly sales of $17,000 and 3 employees are offered free meals. I said the impact of feeding these 3 employees each week is at most $50. Many operators use a figure of between $3 and $4 per employee per shift for meals. If we have a bad week, maybe the cost would go up $50 over a normal week.

For every 1% of sales, we have $170 in this company. It is unlikely the employee meal results would help much in explaining a food cost % which is 3% over budget. Look elsewhere for your solution.

In general, all one-time discussions of cost allocations have very little long run impact. Employee meals will tend to have a higher impact during slower periods. If you run a seasonal operation, you can expect the food consumed by your staff to account for a bigger share of all food consumed. Regardless, I believe a combined food and direct labor cost over 65% is indicative of danger in our industry. Any operation with over 2/3 of their sales consumed by prime costs should work hard to lower these costs.

My answer to the caller: Your allocation for employee meals should be clear and should not have a major impact on results. If the same factor is used every period, the employee meal issue will no longer be a hot topic. Consistency is the key to success.

Some Good Books For Food Cost Control

Josh asked some great questions about yields and shrink this month. I recommend two books for more detailed information on standards. Francis Lynch has a new edition of his great reference tool The Book of Yields: Accuracy in Food Costing and Purchasing and I prefer the paperback book over the CD.

Mary Molt's classic catering book Food for Fifty (12th Edition) has excellent yield and standard portion information.

You can also get yield information on meat from the must have industry standard. The NAMP's The Meat Buyers Guide : Meat, Lamb, Veal, Pork and Poultry has zero fluff. I love the tables at the beginning of each section.

Squeezing The Lemon

Operators are working the monthly income statements searching for ways to generate more profit. Many operations are running just above or just below the break even point. Profit improvement efforts produce a huge impact at the break even point. A 1% drop in costs may be the difference between profit and loss.

Sales are tougher to come by this year. If you find you continue to break even once sales volume improves, its time to implement an aggressive cost cutting campaign. You can't afford to miss these opportunities to put money in the bank. A 1% rise in sales won't equal the profit produced by a 1% drop in costs. Every dollar of sales requires food and beverage to be served to guests. This cost of sales reduces the income produced by the gain in sales volume.

With guest counts down and average checks off, there may be a huge temptation to fill seats through huge discounts. This strategy risks losing profitable seats on a busy night. Discount lovers take seats which could have produced superior profits. Rather than offering discounts at every meal, you could offer busy night patrons a discount for a slow early week meal period.

Cost cutting efforts produce profits faster than incremental sales improvements at the break even point. Many managers have already cut their cost of sales to the bone just to stay afloat. If you have squeezed all the juice from the lemon, try some new ideas. I'd start with direct operating expenses. Check on linen usage, sewage bills, utilities, garbage pickup, paper and disposable usage, and other costs which do not help produce additional sales.

You may be able to reduce your costs by closing earlier on many slower nights. Late night hours on slow nights are very unprofitable. Late night sales potential may not justify the labor costs. Compare your final hour's sales less the cost of goods sold to the labor costs for the same hour. If you can't cover labor, you'll save by closing earlier.

By finding cost savings and improving the quality of sales volume, operators can gain an edge over the competition.

Food Cost Benefit

As we see oil prices beginning to drift lower (after threatening to go above $200 per barrel this summer), corn just hit a one month low. Prices of certain commodities are still near historic highs but this decline is a positive for restaurant operators.

On the micro-economic front, the industry has focused intensely on food cost control. Restaurants are buying less expensive ingredients and watching their storage areas closely. I hear lots of stories about tight cost control each week. The energy is moving beyond cost of sales. Operators are looking at power bills, sewage usage and garbage pickups. No expense category is ignored.

In the long run, the macro-economic conditions will improve and sales will rise. Smart operators will continue to control costs tightly. Future operating margins will be better than before the current downturn.

The coupon fever in our region has cooled a bit. Beverage sales are still off from the peak but a greater % of patrons are ordering drinks. Budget conscious guests are loosening up a little and splitting a dessert item again.

I was in the field last week and flights seem fuller. Airport restaurants were doing a brisk business in Washington and Miami. Fellow travellers seemed to be willing to pay for a meal before going to their gates rather than purchasing a sandwich on board. Portion control can be seen everywhere as kitchens carefully monitor the center of the plate ingredients.

Investments in cost control systems and tighter policies will payoff for years to come. Lower commodity costs and a drop in energy prices could accelerate the speed of the profit improvement in 2008.

Restaurant Prime Cost Savings

With the government now announcing a recession (vs. slow growth scenario), we can officially start looking for more ways to cut costs. Will the consumer continue to spend 48% of their food dollar in restaurants? Maybe. But a slip to 40% would mean a 17% cut in volume for the industry.

Our mailbox is loaded with coupons here in metro Washington DC. Anywhere from a $1 off to free sandwiches, entrees and desserts. Lots of 10% off coupons.

If you are experiencing a 20% drop in food sales, your storage areas may have some newly freed capacity to take advantage of during the downturn. Try to schedule fewer production batches on your popular batch recipes. For example, an Italian concept could produce enough marinara sauce on Thursday to last through the entire week. Most places produce enough for the weekend. Since you would be making roughly the same amount as before, only the usage on the line would change. You could save an entire production run. This labor cost saving is significant.

Try to look for other activities which may reduce your fixed labor costs. You'll still need to clean everything each day so look elsewhere: napkin/silverware wraps could be handled 4 times a week by wait staff prior to meal service instead of daily. Shelf stable mixes and prep may be handled on busy days only.

Restaurant employees often yearn for the elusive two days in a row off. What's wrong with 3 in a row? In my college years, they scheduled me 10 hours a day every day. Good way to save for school but not much time for a social life. You may be able to cut down on overall pay, overtime, and the number of missed shifts (employee illness and emergencies). It never hurts to ask your employees directly.

Utility costs are going nuts all across the country. Try an extra degree on the thermostat during hot months and one less in cold months. Every little change adds up to more dollars. It's good for the environment too!



Click Here For More Information

Month End Surprises

When food cost percentages are in flux, its common to experience numerous month end surprises. Most of the good surprises will spark a round of high fives and optimistic conversations about bonus time. On the other hand, a bad surprise marks the start of a cost reduction campaign and lots of meetings to find out the cause of the problem.

Most surprises occur because communication is inadequate.

To prevent the majority of month end surprises, implement a simple weekly flash report. The flash report should be prepared at the operations level and communicated to general management via the accounting staff. At a minimum, the report should contain weekly statistics on sales, food and beverage purchases, other purchases, payroll recap, gross profit and management comments.

Once these reports become a reliable tool, the number of month end surprises will decline. As managers become aware of a bad week and take prompt action, profitability will become stable and fluctuations will be minor.

The key to implementing a flash report system is simplicity. Don't turn this into a production on the level of the month end close. The purpose of the flash report is to point out major issues in a timely fashion. Some reports will appear too good to be true. A lost invoice will stick out like a sore thumb in a weekly recap but go unnoticed in a monthly statement.


Click Here For More Information

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.


Click Here For More Information

Hotel F&B Reader Comment

The June articles on food cost control calculations were inspired by questions from 4 current students. My focus was on the classic restaurant approach. In late June, I posted a hotel oriented article on the Hotel Food and Beverage Executive Blog with the impact of transfers built into the formula.

Kudos to Wayne for pointing out the missing transfer info on the FCC Blog posts.

Hello Joe,
I found your article on Food Cost Basics interesting for a sole restaurant but in a larger scale property with more than one restaurant let's not forget to included FOOD TRANSFERS from one restaurant to another restaurant in your Food Cost Percentage Formula.

Inventory changes must be taken into account monthly as to either add/subtract the cost from your total cost prior to the final cost percentage. The difference is when an outlet/restaurant has their own stock (versus the commissary or storeroom) and the outlet/restaurant stock has decreased this month then the difference between last month's inventory and this month's decreased inventory presents a debit of the difference to be applied to the overall cost.
The same in respect to an increased inventory then a credit should be applied to the overall cost for the amount of the inventory difference since the cost remains with the stock in the outlet.

I have found that most of the time when food costs increase there is a specific reason whether a special menu for a holiday such as Easter or perhaps an increase is needed in pricing to offset the continual increasing costs of food/beverage or especially when an outlet/restaurant is stock piling unsold food which has no revenue against rather than store the product in the commissary/storeroom until needed provided a monthly food inventory is only completed on the commissary/storeroom itself and not the outlet(s).
In that case the outlets should keep food at a minimum at the end of the month.

Wayne

Click Here For More Information

Effective Food Cost Control

It is very important to use clear, properly prepared reports to analyse food cost results. Often, the reports become the focal point due to errors and omissions. Once the report has lost credibility, a meaningful discussion of operational issues is difficult.

A properly prepared food cost report should have a brief summary at the top of the page. Basic operating statistics should be highlighted. We need to know the period of time (week, month, quarter or year) and the ending date. Operating results should include the period sales and purchases, beginning and ending inventory values, food cost and the food cost percentage.

Supporting the summary information, you should include a recap of purchases, inventories and cost of sales by category (e.g. meat, seafood, produce, etc.). I prefer to show these category totals as a percentage of total food cost rather than as a percentage of sales. This report section should highlight how we spend our purchase dollar.



Finally, a comparison with previous periods is very helpful. Budget comparisons are useful as well if the budgets were thoughtfully prepared. Try to put the current period in context. Show how well the performance was compared to other benchmark periods (e.g. previous month, last year, current year budget, etc.). The comparison section should show in which direction the operation is headed.

Supporting the management summary page, insights and concerns regarding specific components need to be reported. For example, if there was significant waste due to spoilage of produce, the purchasing manager can concentrate on ordering fewer cases (or splitting cases if necessary). Rising prices of gas and corn has impacted the cost of many commodities. Calculate the impact of your meat and dairy price increases on net profits. Bring any other significant findings to management's attention.

More on Take-Out and Delivery Issue

I received an email from Wayne regarding my post on Take-Out service. He has a great point regarding delivery costs. When the food is not picked up by the customer, delivery costs (which can be substantial) need to added to my break even list.

Joe,
I have a quick question for you after reading your
monthly blog. I know you mentioned "as long as your take-out sales
cover the costs of food, production, packaging and order costs, your
overall profit will improve" but I question when one uses a delivery
service which charges 30% for pick-up and delivery and you add costs
(food & packaging) and labor charges to possibly break even.

How would your overall profit increase unless those
individuals return to dine in your restaurant where the profitability is
possibly higher due to dessert and beverage sales or those individuals
by word of mouth recommend your restaurant?

Thanks for your time.

Wayne

Estimating the Opportunity in Take-Out

Americans have less time for cooking hot meals mid-week and they are buying prepared foods from a variety of venues. Take-out dinners are available from restaurants, markets, delis, convenience stores, transit centers and company dining operations.

In New York, the offerings at both Grand Central Station and Penn Station are increasing from the traditional bakery items to include many gourmet dinner options. Union Station in Washington, DC has a complete food court with every popular cuisine represented. I often hit these spots on my Amtrak trips.

Here in my neighborhood, we discuss take-out and delivery options at poker games and parties. Our pool club lets the many local restaurants deliver to the tables around the pool each summer. More and more restaurants are building access lanes and special parking spots for customer pickups.

Does the proliferation of take-out dining help your food cost percentage? I'm not convinced the casual dining restaurants really sell as many appetizers and desserts to the take-out crowd. After dinner coffee and tea sales are zero. If you rely on strong sales of appetizers, desserts and non-alcoholic beverages to hit a decent food cost percentage, take-out activity may not help.

In theory, the take-out operation requires no wait staff. Production costs are comparable to those of meals consumed in the restaurant. Packaging materials, plastic utensils and condiments may raise cost of goods sold in a more visible manner. Very few restaurants treat cleaning chemicals (e.g. dishwasher soap), smallwares, china, flatware, glassware as a cost of sales.

Nevertheless, I strongly recommend promoting take-out sales. Careful accounting can help to isolate the activity and keep the numbers relevant.

Create a separate sales account for take-out activity. Set your POS systems to track this activity in a Take-Out revenue center. Service labor should be charged to all other revenue centers. Likewise, packaging materials and plastic utensils should be charged to the take-out revenue center. Food cost can be allocated based on sales. If your operation has theoretical cost accounting capability, this allocation can be very sophisticated. For example, coffee and tea could be entirely charged to in house food sales.

The best practices for take-out restaurant operations include restricting sales to menu items which travel well and can be easily reheated. Carefully test your side dishes using the travel test. One of my clients found his famous onion loaf was a greasy mess after a five minute car ride in an expensive container.

Pizzas, sandwiches, chinese food, salads, stews, sauces, rice, pasta, mashed potatoes, burritos, samosas, crudites, sliced meats, cheese plates, ribs, fried chicken and many more menu items travel well. Fresh baked items can travel successfully if the container prevents tipping over and damage due to pressure. Even cakes with frosting and pies with meringue may be taken home. Push the dessert sales when your take-out orders come in each night.

As long as your take-out sales cover the costs of food, production, packaging and order costs, your overall profit will improve. Don't rely on your traditional income statement to track this opportunity. Track the operation in a separate revenue center with separate budget targets. These new targets will provide answers for future decisions regarding new take-out windows and counters.

Benefits of Proper Accounting

I realize most operations today have rigid accounting standards and excellent cash controls in place. In my corporate days, we tracked all cash daily from every unit. Using budgets and an automated accounting system, we closely tracked all changes in expected revenue and expenses. When I left this environment and started my consulting business, I sent out marketing materials to over 500 restaurant owners in the New York metro area. Some of my earliest clients had archaic accounting systems.

In these early consulting projects, I helped restaurant owners setup a chart of accounts, general ledger, balance sheet and income statement on several low cost accounting programs. I suspected some of these clients had "off the books" activities. I encouraged each of the operators to declare all revenue to the local and federal governments.

One of the owners asked me to help him out with a complete accounting makeover. He was breaking even and his cash flow was erratic. The restaurant was busy on weekends and weekday business was improving slightly. He had hoped to be saving a little for retirement as the business improved. Unfortunately, he continued to draw on his savings each month. I decided to review the entire control system for all working capital accounts.

Cash was not being deposited each day on a routine basis. Daily revenue and cash reports were not completed 20% of the time. Employees received a payroll check for their regular earnings but they were paid for overtime in cash. Certain suppliers were paid in cash. The owner also went to the produce markets early in the morning to save money. The cash used to pay the overtime pay and food supplies was deducted from revenue. I explained the serious risk he was taking with this approach. Further, I told him I suspected he had a thief in his operation. His poor accounting records served as a mask for the thief.

He believed he was saving a huge tax bill. I explained the total saved on each unreported dollar was 20% (sales tax, employers FICA, FUTA and SUTA) since he was breaking even. The total of this activity was 10% of his volume. Taking his view, I explained "the benefit" was 2% of sales. He actually believed it was 10%. I convinced him to rework his records, report the revenue, payroll and expenses properly and setup a system of cash management.

In the first 45 days, we discovered the thief and the owner was in shock. His "most loyal employee" was ripping him off for $5,000 per month (cash).

There are many issues involved in this project. The owner was jeopardizing a growing business with first year revenue of $1,200,000. He wrongly believed he was saving $120,000 by hiding revenue and expenses. In reality, he was losing $60,000 a year in cash (or 5% of volume). The $24,000 in unpaid sales tax, FICA, FUTA and SUTA payments represented a paltry return for this monumental risk.

He took my advice and paid all government agencies their proper fees. His business began producing a steady and growing cash flow. Since he now was showing a profit, the bankers loaned him money at rates far below the 15% his credit card company charges. His cash flow turned positive and he started saving $10,000 per month.