While running a restaurant, it is important to track your progress over time. By maintaining some of the metrics you can always be aware of the health of your business and identify areas of improvement. Here are some restaurant accounting formulas, every restaurant owner should keep track of in daily routine.
1. FOOD COST PERCENTAGE
It does not count if you have the best menu in city, best location and lovely décor if your restaurant charges Rs. 300 for a meal which costs you Rs. 350 to serve. A proper calculation is must to decide each item prices on the menu. Miscalculating that is an invitation to disaster in your business.
Food Cost Percentage is basically the percentage difference between the cost of production of a specific item and selling price of the item. If the cost of production of an item, also referred to as PRIME COST(as mentioned below), is Rs. 100 and the price for that item on your menu is 500, the food cost percentage is 20 %. Typically, restaurant industry has food cost percentage value between 20 to 35 %.
(Prime Cost / Sales Price) x 100 = Food cost percentage
2. COST OF GOODS SOLD (COGS)
Cost of Goods Sold is the accumulated total of all costs used to create each of the items served on your menu. COGS is the inventory for your restaurant during a specific time period. All purchase costs during the specific time period needs to be tracked.
COGS is the biggest expense for restaurant industry. So it is essential to keep a watch for it. COGS can be optimized by negotiating with raw material vendors and using local seasonal raw materials. In periodic inventory system, COGS is calculated as following:
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
3. PRIME COST
Prime cost refers to a fully prepared items cost. It calculates the use of raw materials and direct labor, but doesn’t factor in indirect expenses like the cost of company logo, or home delivery cost. Prime Cost is something where you can cut down on expenses and increase profit margins.
COGS + Direct Labor = Prime Cost
If for creating an item on the menu, COGS is Rs. 100 and labour is Rs. 50, the prime cost will become 100 + 50 = 150 Rs. Thus, this item cannot be priced less than 150 Rs. for certain at any given point in time.
4. GROSS PROFIT and NET PROFIT
Gross profit of your restaurant is the total sales minus COGS to produce the items. It is calculated as
Total Sales – COGS = Gross Profit
If your restaurant’s monthly sales is Rs. 40,000 and your monthly COGS is Rs. 25,000, the Gross Profit is 40,000-25,000=15,000 Rs.
Net profit is a more accurate measure to know your restaurant’s profitability. It is gross profit minus all extra expenses (taxes, operating expense, etc.).
Total Sales – COGS – all extra expenses incurred- Net Profit
In order to achieve deeper business insights, the above metrics should be maintained on a regular basis (say weekly or monthly) by all restaurant owners. Maintaining this will help to study and analyze the progress of your restaurant over time to know the areas of improvement. Analyzing these figures will help you in understanding your clients better and in turn which will affect your profits significantly.