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.
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Minggu, 01 Mei 2011
Minggu, 06 Maret 2011
Is My Food Cost Too High?
Some of this month's emails have questions regarding a food cost benchmark. Generally, you will meet many operators who have been trained to cost their menu items with all garnish, sides, and sauces. They then multiply the cost by a factor of 3 to achieve a 33% food cost. This method won't maximize profit.
If you use a 33% food cost target, how do you treat monthly price fluctuations, shifts in guest preferences, and a myriad of other variables which impact the food cost formula?
Use the food cost target as your projected food cost but take a hard look at the actual results. Your food cost is too high if you haven't implemented tight portion control. Maybe your garbage bags are loaded with spoiled food due to ordering too much product. Your cost is too high. Try to locate all the food cost issues in your restaurant. These are opportunities to improve.
Your food cost percentage does depend on your menu pricing strategy. Your pricing factor may not be 3 times the recipe cost. There are sophisticated menu pricing models which are designed to increase gross profit in dollar terms. Before the ink on the new menus is dry, the recipe costs used in your model will have changed.
Use your current food cost as the guide. Look for ways to improve. Create simple action plans. Improve by executing the plans.
If you use a 33% food cost target, how do you treat monthly price fluctuations, shifts in guest preferences, and a myriad of other variables which impact the food cost formula?
Use the food cost target as your projected food cost but take a hard look at the actual results. Your food cost is too high if you haven't implemented tight portion control. Maybe your garbage bags are loaded with spoiled food due to ordering too much product. Your cost is too high. Try to locate all the food cost issues in your restaurant. These are opportunities to improve.
Your food cost percentage does depend on your menu pricing strategy. Your pricing factor may not be 3 times the recipe cost. There are sophisticated menu pricing models which are designed to increase gross profit in dollar terms. Before the ink on the new menus is dry, the recipe costs used in your model will have changed.
Use your current food cost as the guide. Look for ways to improve. Create simple action plans. Improve by executing the plans.
10 Ways to Reduce Your Food Cost
I'd like to thank Ron and RoseAnne from ReedExpo for inviting me to speak at the International Restaurant Show in New York City this week. The show was well attended and there was excellent energy. This show is without question THE New York City restaurant show.
We had a great group attend the presentation "10 Ways to Reduce Your Food Cost Without Jeopardizing the Guest Experience" and I want to thank all the attendees.
In the New York tradition, the 10 slides are presented in reverse order, #10, #9, #8, #7, #6, #5, #4, #3, #2, and the Number 1 way to reduce your food cost:
It was tough to photograph the energetic crowd but the two photos below were taken in the middle of the floor. Every aisle had excellent traffic.
We had a great group attend the presentation "10 Ways to Reduce Your Food Cost Without Jeopardizing the Guest Experience" and I want to thank all the attendees.
In the New York tradition, the 10 slides are presented in reverse order, #10, #9, #8, #7, #6, #5, #4, #3, #2, and the Number 1 way to reduce your food cost:
It was tough to photograph the energetic crowd but the two photos below were taken in the middle of the floor. Every aisle had excellent traffic.
Selasa, 01 Februari 2011
Eliminate Fraud and Theft With Tight Food Cost Control
Thanks for your loyalty! This is the 300th post and I am happy to report annual readership has grown from 50,000 to over 70,000 readers. It takes a bad recession to get restaurateurs focused on cost control.
If you want to get down into the numbers, Paul Hewitt, CA has an excellent blog for Canadian Restaurant Owners. Paul's current post is the first in a series and the theme can help restaurateurs anywhere in the world. Check out Restaurant Fraud and Theft, Part I for a great look at ordering, purchasing, and my favorite, receiving issues. In my public speaking appearances, I frequently mention the missing truckload of eggs at the Syncrude operation in Northern Alberta. Locating this fraud was the key to my promotion at the time.
It is always possible for an individual to change from honest to dishonest if they stay too long in the same position. If you suspect a problem and you can't find a logical answer, you may have a thief or worse. I have argued over the years with owners who just could not be convinced a particular issue could only be explained by theft. Usually, there is a trusted employees with years of experience and a huge level of responsibility at the center of the theft ring.
Frequent unannounced inventories of specific items help isolate the problem. Check your POS data and invoices carefully. Look for major variations which can't be solved with minor portion control episodes and spoilage. Check the quality and sniff through protein stocks to eliminate the chance your operation is the garbage can for the delivery driver who has had a day of rejections on the way to your restaurant. This is a problem on long routes for the locations towards the end of the shift. It is a hidden form of fraud. You can be routinely sold food which has expired or will only last a day.
If you want to get down into the numbers, Paul Hewitt, CA has an excellent blog for Canadian Restaurant Owners. Paul's current post is the first in a series and the theme can help restaurateurs anywhere in the world. Check out Restaurant Fraud and Theft, Part I for a great look at ordering, purchasing, and my favorite, receiving issues. In my public speaking appearances, I frequently mention the missing truckload of eggs at the Syncrude operation in Northern Alberta. Locating this fraud was the key to my promotion at the time.
It is always possible for an individual to change from honest to dishonest if they stay too long in the same position. If you suspect a problem and you can't find a logical answer, you may have a thief or worse. I have argued over the years with owners who just could not be convinced a particular issue could only be explained by theft. Usually, there is a trusted employees with years of experience and a huge level of responsibility at the center of the theft ring.
Frequent unannounced inventories of specific items help isolate the problem. Check your POS data and invoices carefully. Look for major variations which can't be solved with minor portion control episodes and spoilage. Check the quality and sniff through protein stocks to eliminate the chance your operation is the garbage can for the delivery driver who has had a day of rejections on the way to your restaurant. This is a problem on long routes for the locations towards the end of the shift. It is a hidden form of fraud. You can be routinely sold food which has expired or will only last a day.
Kamis, 28 Oktober 2010
Using Mark Ups Instead of Food Cost Percentage
Hi Joe,
I like your site, excellent information.
I am looking for a resource that explains why operators would use ‘mark-ups’ of factors over FC%.
I teach food costing to our chef students and always use FC% to get a selling price, but now I have to explain the other options but can’t seem to find good definitions of why you would use the other options of obtaining selling price.
Could you offer any advice?
Kind regards
Mark Caves
Culinary Arts Tutor
School of Tourism and Hospitality
Faculty of Arts and Social Sciences
Eastern Institute of Technology
Hawkes Bay
New Zealand
Thanks for the question Mark.
During my corporate years, we never used food cost % since our billing method was per man per day. To get more current, it helps to use a destination resort for an illustration. Many resorts located in the mountains offer a complete package including room based on double occupancy, all meals and snacks, and optional activities.
We were big fans of these hotels and inns when we lived in Quebec. You can get a fantastic price for mid-week visits. Any operator who wants to offer a competitive all-inclusive price needs to know their costs to the penny.
Caterers should not use food cost percentage to control their costs if they offer packages. In my July 2008 post Profitable Special Events , there is a chart designed to show the impact of raising $200,000 of additional revenue. I included the % analysis to be complete but the focus was on the cost per guest for each cost component (including profit).
Many caterers and hotels negotiate a final price in a competitive environment. If the sales team does not have a hard deck figure, you may find yourself working very hard for free.
Why do percentages fail in these operations?
One of my early catering clients was barely breaking even. He was an attorney with a major investment in a catering hall. When we met the first time, he was shocked he couldn't break even although his 25% food cost number was well below the 32 or 33% figures mentioned in the book he used to put together his business plan.
I asked him what he used for the divisor.
He was dividing his net food purchases by total sales. Many of the events were cocktail receptions held in the evening hours. Guests were treated to a full bar with several stations and hors d'oeuvres served by wait staff. I asked him what his bar cost % was for the same period of time. Due to his belief in serving top shelf liquor and premium beers and wines, his bar cost percentage was 14% of total sales.
The combined cost of goods sold was almost 40%. I explained what he needed to do to cover his costs and produce a reasonable profit. He had 2 options: raise prices or reduce costs (or a combination).
Food cost percentage analysis is also mediocre for buffet management. Any all-you-can-eat buffet operation would get a better view by tracking layouts and components. There are strategies for controlling high cost proteins and promoting low cost desserts. A simple food cost % tells you very little about this type of meal service.
Senin, 18 Oktober 2010
Calculation of Food Cost Per Man Per Day (Man-Day)
Hi Joe,
I am really grateful for your prompt answer and the time you dedicated to answer my query. I apologize for not presenting full information as I had serious doubts I would receive an answer!
Allow me to present these facts:
1-My objective is to calculate the cost per man/ day ( breakfast, lunch, dinner and midnight)
2-The known facts every day are :
a) the number of meals presented to the client which you have inserted in the first matrix
b) the total cost of the food ingredients for all meals together.
3-If the 4 meals presented every day cost = 10 then the Company base its calculation on the following ratio: Breakfast = 1.5, Lunch = 3.5, dinner = 2.5 and midnight = 2.5
Once again, I thank you dearly and look forward receiving your feed back.
Best regards
HT
I worked in the remote site feeding and support services division of Sodexo for 9 years. We tracked all of our costs per man-day. If you carefully track your cost of all ingredients each day and divide this sum by your manday count, you'll arrive at an actual cost per man-day.
The other meal level information is your standard cost data. You need to hit 10 per man-day and you have targets for each meal period. I would recommend you divide the day into two parts - Midnight/Breakfast (target is 4) and Lunch/Dinner (target is 6). You can isolate most operational problems and focus on a solution if you get closer to the actual variance.
You may find the 1.5 breakfast target is too low but the lunch target of 2.5 is too high. Of course, you could look at each meal independently each day.
On our camps, we served large beefsteaks twice a week. Workers (our customers) consumed over 5,000 calories per day. They were working hard in the frigid regions of Northern Canada and Alaska. Steak Nights were a major component of our food cost results. We knew the cost of the steaks served and the average number of steaks consumed since the impact was high.
We served buffet style meals in an all-you-can-eat format. Our guests were served the entree and sides by one of the chefs or cooks. All salads, desserts, rolls, etc. were self-serve. Beverages were self-serve.
Our team knew the cost of the salad bar, the dessert station, the beverage station and average condiment usage. The cost of the items served by our main line varied based on a cycle menu.
If your operation is similar to the one I described, I recommend using a week as your report period. Most cycle menus will begin to track a tight cost range for each week of the cycle. You will find great variations on the dinner meal period based on the day in the cycle and the cost of the protein and produce items.
Calculating Average Food Cost for Multiple Meal Periods
Hi,
Thank you for your article "Food cost basics" which is published in foodservice resources.
I have an inquiry related to food costing and I hope you could help me figure it out:
If I am serving 20 Breakfast, 30 lunch, 50 Dinner and 10 midnight meals for the same customer , how could I calculate the average food cost per person knowing that the cost of the meals are as follows : breakfast =1.50, lunch and dinner = 3.00 and midnight meal is 2.50?
I hope you can help me on that.
Thank you and best regards,
Hesham
Let's take a look at the information you supplied. This information is essential to answering your question. To illustrate my first view, I have created a quick spreadsheet:
We have enough information to calculate the average cost per meal. The spreadsheet shows the process which involves 3 steps:
A. Multiply the cost of a meal by the meal count for each meal period.
B. Add the total meals and total costs.
C. Divide the total costs by the total meals to find your average cost per meal.
Food cost percentage involves relating the average cost per meal to a sales per meal. Since I don't have this data, I have used sales prices which would produce a food cost equal to one third (1/3) of my costs (33.3%). If I had the actual sales prices, I would have constructed a second spreadsheet:
Your food cost percentage depends on your sales and your costs. For each meal period, you need to multiply the price times the count to get your sales for each period. Add the sales and divide your total costs by your total sales.
Minggu, 22 Agustus 2010
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.
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.
Selasa, 17 Agustus 2010
Food Cost Control and Excel
Question:
Joe,
I'm looking into buying a menu costing program/software are there any you recommend?
Answer:
I can recommend 2 or 3 solutions. It depends on your long term objectives. Please email me at joe@joedunbar.com so we can pick your ideal solution.
Response from Erik:
From what i have come across, Excel should be the go-to costing program and you should use your own data.
Good point Erik!
I can't think of food cost control without Excel in the picture. The only issue I have is the term "Excel user" has a tremendous variation.
There are people who could model the Big Bang using Excel and other people who haven't discovered the SUM formula (use + sign).
Importing history into Excel is a pain if the files change (for example, a new menu item) for anyone who hasn't mastered Excel's terrific data functions.
Once the power users get everything done conceptually, many migrate the model over to Access so database updates go smoother.
Somewhere along this curve, the benefit of purchasing a software tool specifically designed to handle recipe costing, menu analysis and cost control turns positive.
Many of my clients had terrific Excel based recipe costing models which helped us in building a solution. They often find additional savings of 10% (i.e. if their current Excel control food cost was 30% they would find the new food cost would drop to 27%).
Overall, I believe Excel is the logical starting point for anyone who is serious about getting on top of their food cost. My advanced menu analysis tool - The Menu Map - is 100% Excel based. Since the model focuses on only 3 data points (selling price, food cost and number sold) at the core, Excel is ideal.
Once you want to filter purchase data, Excel loses the power a serious food cost controller needs for investigating problems.
For example, FoodTrak lets you filter invoices by date range, vendor, report group, invoice number, and specific items. There are exception reports to bring many issues to your attention and the terrific data entry alerts show major price variations in real time.
Resorts may need transfer cost reports. This report is a major pain in Excel. Cost updates from purchase data provide freshly costed transfer reports by profit center. Of course, many operations do not have this need. The answer really depends on the operation.
[This post is from comments on the Basic Recipe Costing post.]
Joe,
I'm looking into buying a menu costing program/software are there any you recommend?
Answer:
I can recommend 2 or 3 solutions. It depends on your long term objectives. Please email me at joe@joedunbar.com so we can pick your ideal solution.
Response from Erik:
From what i have come across, Excel should be the go-to costing program and you should use your own data.
Good point Erik!
I can't think of food cost control without Excel in the picture. The only issue I have is the term "Excel user" has a tremendous variation.
There are people who could model the Big Bang using Excel and other people who haven't discovered the SUM formula (use + sign).
Importing history into Excel is a pain if the files change (for example, a new menu item) for anyone who hasn't mastered Excel's terrific data functions.
Once the power users get everything done conceptually, many migrate the model over to Access so database updates go smoother.
Somewhere along this curve, the benefit of purchasing a software tool specifically designed to handle recipe costing, menu analysis and cost control turns positive.
Many of my clients had terrific Excel based recipe costing models which helped us in building a solution. They often find additional savings of 10% (i.e. if their current Excel control food cost was 30% they would find the new food cost would drop to 27%).
Overall, I believe Excel is the logical starting point for anyone who is serious about getting on top of their food cost. My advanced menu analysis tool - The Menu Map - is 100% Excel based. Since the model focuses on only 3 data points (selling price, food cost and number sold) at the core, Excel is ideal.
Once you want to filter purchase data, Excel loses the power a serious food cost controller needs for investigating problems.
For example, FoodTrak lets you filter invoices by date range, vendor, report group, invoice number, and specific items. There are exception reports to bring many issues to your attention and the terrific data entry alerts show major price variations in real time.
Resorts may need transfer cost reports. This report is a major pain in Excel. Cost updates from purchase data provide freshly costed transfer reports by profit center. Of course, many operations do not have this need. The answer really depends on the operation.
[This post is from comments on the Basic Recipe Costing post.]
Jumat, 23 Juli 2010
Question on Batch Recipe Costing
Hello Joe
My name is Tay. I just purchased a bakery in Minnesota and I would like to know if you can teach me how to estimate the cost of a croissant. Without knowing the formula, I'm afraid not to place the right price. Please give a example. Is there any software on the market?
Thank you very much!
Tay
Thanks for the question Tay.
Gather all the ingredients you need to make a batch of croissants. Write down the amounts of each ingredient required for the batch. This is your recipe.
Using purchase data (use invoices or go to a store if necessary), calculate the cost of each ingredient. You need the cost of the amount used in the recipe not the cost of the entire purchase unit (for example, pound vs. case). Add all the costs to find the batch cost. Once you complete this analysis, you are done with the cost of the batch.
[NOTE: The step above is the trickiest and the most important. For each ingredient, you are asking yourself how many batches you could produce from the common purchase unit of measure (for example, a bag of flour). In the long run, this data is used the most. Prices will change over time but the ingredient quantities will remain the same. Don't rush this exercise. Most recipe software programs call the answer to this question the "Conversion Factor" and it is very important.]
Carefully portion the croissants. Count the croissants. You now have the recipe yield. The formula follows:
Portion Cost = Batch Cost divided by Batch Yield. For example, if you had a batch cost of $45 and you were able to produce 100 croissants, your cost per croissant is $0.45. If you charge $1.50 per croissant, your cost % is 30%.
Minggu, 06 Juni 2010
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.
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.
Kamis, 27 Mei 2010
Spotting A Problem Early
We had a rather difficult winter here in the Washington, DC metro area. With a mild winter snow removal budget, we got hit with a severe winter snow fall during the key month of February. Just as the New Year's resolutions relaxed for Super Bowl Sunday, the snow took away the weekend. Local super markets were out-of-stock on milk, bread, orange juice, bacon, ground beef, and many other staples. Restaurant parking lots were empty.
This rough weekend repeated itself for Valentine's Day and President's Day weekends. I spoke with one operator who said his February food cost percentage hit 45%. This is a common trend - high cost of goods sold % in a low volume month.
I like to chart a month like this vs. a high volume month. The key to using this type of analysis is dollars vs. percentages. If you have a bad month with $200,000 in sales and $90,000 in cost of sales, you'll be close to the person I spoke with in February. Contrast this poor performance with a busy month's $800,000 sales figure and a cost of sales equal to $240,000 or 30%.
The change in sales volume is $600,000 ($800,000 - $200,000). Cost of goods sold had a change of $150,000 ($240,000 - $90,000). The slope is 25%. This is the variable component of the food cost. The fixed component is $40,000.
We'd expect a food cost of 29% if we hit $1,000,000 in monthly sales. On the other hand, we would expect to see a $65,000 cost of goods sold if we only manage a sales figure of $100,000. That's 65%!
If these numbers seem completely off the wall, they are not at all unusual for out-of-control operations. The bad months are explained away with stories of blizzards, rainy days, traffic jams, competitor discounts, etc.
Your cost of sales should be almost completely variable. Food should not be consumed if there is no sale. Why do you use more food when you're slow?
Employee meals have a bigger impact. The fixed staff eats the same meal whether you are slow or busy. This should be minimal and measurable. Chronic waste due to over-ordering is a bigger cause. Reduce your "safety factor" when ordering during slower periods. Sometimes the weekday counts are too low to absorb food left from the busy weekend. If the weekend is a complete bust, freeze everything you can and value any perishables which can't be saved.
You may have a major theft problem. If you're not finding many dollars in the research above, you may have discovered a persistent loss due to theft. If the 45% month had $10,000 in theft and you eliminated this problem, the result would be 40% in an otherwise terrible month. The bad month would have allowed you a chance to discover a $120,000 annual loss.
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.
Kamis, 13 Mei 2010
Accounting Question
Hi Joe,
I've been reading your FoodCostWhiz blog and have to say I really enjoy and find it very informative, particularly as the bulk of my experience is in QSR. I'm hoping you can settle a disagreement I am having.
A back of house software vendor that I have been dealing with for a long time has decided to rename their "Food Cost" calculations and reports as "Cost of Goods". They tell me that the two names are interchangeable, but I am not sure if I agree.
In my experience, Food Cost is based on working out the cost of a recipe, whereas Cost of Goods is simply the value of purchases. They go hand in hand, but are not the same. Am I off base here?
How would define the terms Food Cost and Cost of Goods?
Regards,
Brett
Thanks for the question Brett. Simply stated, Food Cost is part of Cost of Goods Sold. I consider the Cost of Goods Sold category as all items which go into the production of menu items and beverages. In a QSR operation, the Cost of Goods Sold would logically include paper used to wrap the menu items. All items on the table in a sit down restaurant would be included in Cost of Goods Sold.
To recap Cost of Goods Sold, I would include food, beverages, table supplies and packaging supplies for take out and delivery. I would exclude linen, cleaning supplies, and other supplies which do not vary directly with sales. The proper category for these items would be Direct Operating Expenses.
Food Cost is a part of Cost of Goods Sold but it is NOT the same as Cost of Goods Sold.
Jumat, 23 April 2010
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.
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.
Kamis, 01 April 2010
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.
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.
Sabtu, 20 Maret 2010
Accurate Food Costs Enable Menu Analysis
As many readers have noted over the years, we are working to put dollars in the bank. Frequent and consistent percentage analysis will help you identify consistency issues. Beyond percentage analysis, the ideal cost vs. actual cost report highlights specific ingredients ranked by dollars of variance. This analysis involves production and sales data, standard recipes and detailed purchase records.
If you are late to the theoretical cost movement, I urge you to start with the center of the plate ingredients. Get a handle on your high volume, perishable protein items first. Eventually, you will build a more comprehensive standard recipe file. When this day comes, I expect you will find most of the major variances will be center of the plate ingredients. My confidence comes from experience. Perishable, high volume protein items typically make up the major share of your controllable stock.
As you begin building your center of the plate recipe model, focus on entrees. Go ahead and carefully cost the portion for each protein item used in your entrees. If you have time, calculate the cost of your most popular accompaniments for these entrees. Include all complimentary items like rolls, butter, condiments, garnish, salads, etc. These complimentary items account for as much as $3 per dinner cover.
Click on the banner above for information about our next Menu Analysis Webinar.
Use the cost of the center of the plate ingredient along with your cost of complimentary items to find the gross margin for each entree. Simply subtract these costs from the selling price. This gross margin figure is the core of any useful menu analysis.
Menu analysis will take you beyond the food cost % report. You may currently use food cost % to trigger menu item price changes. Menu analysis techniques offer a different point of view. In the absence of menu price changes, purchasing results dominate your gross profit scorecard (as much as 80% of potential gross profit improvement vs. 20% due to tight portion control).
The portion cost data is much more useful when employed in menu analysis.
If you are late to the theoretical cost movement, I urge you to start with the center of the plate ingredients. Get a handle on your high volume, perishable protein items first. Eventually, you will build a more comprehensive standard recipe file. When this day comes, I expect you will find most of the major variances will be center of the plate ingredients. My confidence comes from experience. Perishable, high volume protein items typically make up the major share of your controllable stock.
As you begin building your center of the plate recipe model, focus on entrees. Go ahead and carefully cost the portion for each protein item used in your entrees. If you have time, calculate the cost of your most popular accompaniments for these entrees. Include all complimentary items like rolls, butter, condiments, garnish, salads, etc. These complimentary items account for as much as $3 per dinner cover.
Click on the banner above for information about our next Menu Analysis Webinar.
Use the cost of the center of the plate ingredient along with your cost of complimentary items to find the gross margin for each entree. Simply subtract these costs from the selling price. This gross margin figure is the core of any useful menu analysis.
Menu analysis will take you beyond the food cost % report. You may currently use food cost % to trigger menu item price changes. Menu analysis techniques offer a different point of view. In the absence of menu price changes, purchasing results dominate your gross profit scorecard (as much as 80% of potential gross profit improvement vs. 20% due to tight portion control).
The portion cost data is much more useful when employed in menu analysis.
Jumat, 20 November 2009
Restaurant Finished Goods Inventory Question
Hi Joe - I've had a recent question about counting stocktake and wonder if you could help me answer it. You're welcome to also use it on your blog if you wish.
In our discussion forum the question is:
My question has been playing on my mind since we opened. Where do products that we make and store eg. canneloni, lasagna etc. go in relation to the stocktake? At present, I am counting up all finished products and deducting that from my final costs of goods sold. ( My guess was that if you didn't then you would be counting the flour and the eggs used twice).
Regards,
Ken Burgin
______________________________________
Profitable Hospitality
Management Systems & Profit Strategies for Hotels, Clubs & Restaurants
Sydney Australia ph 1800-001353 (international +612 93401089)
fax +61 2 93692668 mob 0414-660550
Web: http://www.profitablehospitality.com
Twitter: http://twitter.com/KenBurgin
Thanks for the question Ken. I favor including the finished goods inventory in the ending inventory value for all batch recipe products. As long as the operation expects to receive revenue for the item as it was prepared, it should be included in inventory.
These stuffed pasta dishes are commonly sold for several days at the full menu price. Roasted meats are trickier. If the cooked item will not be sold in the primary manner (for example, leftover roast used in hash), they should consider including only 1/2 the value or completely eliminating this item from the ending inventory.
The accounting treatment should be consistent.
Sabtu, 26 September 2009
Suggestion from HFTP Annual Convention
My recent presentation at the HFTP Annual Convention in Las Vegas included 3 Q&A spots. In the first Q&A break, there was a suggestion by an audience member regarding purchases and sales.
This food cost professional suggested dividing each day's food purchases by the food sales. I'm a big fan of using sales as a compass for food purchases. At the end of each month, one of the most highly scrutinized statistics is the food cost percentage. This daily check will help to prevent surprises.
Since many operators have between 10 to 14 days of cost of sales in their inventory, I also recommend tracking the most recent 14 days of purchases and sales. You may stock up on a few shelf stable items if market prices warrant. Using a 14 day ratio of purchases to sales will help prevent surprises while allowing for an occasional long term buy.
Simply create a 7 column spreadsheet with DATE, PURCHASES, SALES, % DAY, PURCH 14, SALES 14, % 14DAY. You enter the date, purchases and sales each day. Calculate the 14 day sums once you have enough data. Then you can calculate the daily ratio and the 14 day ratio each day. These ratios will provide you with a compass for controlling food cost.
This food cost professional suggested dividing each day's food purchases by the food sales. I'm a big fan of using sales as a compass for food purchases. At the end of each month, one of the most highly scrutinized statistics is the food cost percentage. This daily check will help to prevent surprises.
Since many operators have between 10 to 14 days of cost of sales in their inventory, I also recommend tracking the most recent 14 days of purchases and sales. You may stock up on a few shelf stable items if market prices warrant. Using a 14 day ratio of purchases to sales will help prevent surprises while allowing for an occasional long term buy.
Simply create a 7 column spreadsheet with DATE, PURCHASES, SALES, % DAY, PURCH 14, SALES 14, % 14DAY. You enter the date, purchases and sales each day. Calculate the 14 day sums once you have enough data. Then you can calculate the daily ratio and the 14 day ratio each day. These ratios will provide you with a compass for controlling food cost.
Minggu, 19 Juli 2009
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.
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.
Rabu, 15 Juli 2009
Plate Cost Question
Hello,
I have a question and may-be you can help me. When doing a plate cost for your menu items would you include paper products in with the food cost or would it just be the food products to get an accurate food cost.
Thanks,
Food Service Manager
There is no hard and fast rule regarding inclusion of paper products in a plate cost. I'd recommend you build in all costs when calculating a true gross margin.
Cost of sales should include food, beverages and all supplies which vary directly with a sale of an item. An accurate food cost would include only food purchases and you should only divide the costs by sales of food items.
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