Every business is different and defines success in its own way. But there are certain financial realities that will ring true across an entire sector – particular rules of thumb that you should bear in mind when assessing the financial health of your business.
I’m going to take a look at restaurant businesses and talk about some of the most valuable financial indicators you should track. These are separate from what you look at in monthly management reports, which will break down all the costs and revenues of the business and are much more comprehensive.
What financial information matters most to restaurants?
For a restaurant business to be profitable, there are three key metrics to follow:
- Labour costs as a percentage of revenue
- Food costs as a percentage of revenue
- Revenue breakdowns
When you decide to start tracking a metric, you’ll need to consider what you can do to influence it. There’s absolutely no point in passively measuring data, the whole point of this exercise is that you identify areas that can be improved, take steps to improve them, measure again, and watch your bottom line improve.
Tracking labour costs in a restaurant
Labour costs should fall between 25% – 35% of revenue. If yours are in the 25% – 30% bracket, you are doing well, if they are more towards the 30% – 35% range, you should look at making improvements. What I’m talking about here are the direct labour costs of the business – the people who are on the floor making things happen. Don’t include indirect labour costs here.
So, in the case of labour costs, you need to look carefully at who is working each shift and assess whether that decision is correct. You may be the person making the work schedule, or you may have a manager doing this work. Either way, there’s no point having four front of house staff on a particular day if only two are needed.
Pitfalls to avoid:
- Make sure you are comparing like with like. If your payroll runs weekly and it’s a five-week month, this will affect your calculations.
- Make sure you are including the right costs. Don’t include people who work in administration or the director of the company, for example.
Tracking food costs in a restaurant
Food costs will typically be between 25% and 30% of your revenue. It’s probably not a good idea to lump delivery costs in with food costs if you have an online revenue stream. So separate those out and consider separating your eating-in revenue from your takeaway revenue as well. By doing this, you can bring together the labour costs directly associated with running the restaurant – kitchen staff and floor staff – and the food costs of that eating-in side of the business.
Once you know what your food costs are as a percentage of revenue, you can look at ways to improve that figure if it is on the high side. Obviously, you are looking to buy good quality ingredients and provide a great product while still making a profit, but that doesn’t mean there aren’t efficiencies to be made here as well. One of these that you can easily target is wastage.
Pitfalls to avoid:
- Make sure you are measuring food costs and not associated costs as well. You don’t need to be an accountant to make these decisions, just use your common sense.
- Be consistent in the language you use to describe your costs across all your reporting. Again, it’s all about comparing like with like.
Tracking revenues in a restaurant
You won’t be surprised to know that the third key metric I would measure is revenue. It’s an obvious metric that you will already be tracking. The key here is to track revenue accurately.
Typically, a restaurant will track food sales, beverage sales, and other sales (for example, deliveries, vouchers, room hire). It’s also important to measure what division of your establishment the revenue is coming from (restaurant, bar, takeaway service, catering, etc.). Having accurate breakdowns in real-time is much more important than looking at a global number.
Some restaurants get quite complex in their tracking, separating out revenues by day or by sitting (lunch, early bird, dinner, etc.). I’m not a fan of this approach unless there is a solid business reason for it as it takes a lot of effort. However, where automation is possible restaurants can get some interesting aggregated data that will help them make sound decisions. We have seen results from connecting the cloud workforce management application and cloud point of sale system with a data analysis platform, which allows the owner to manage by exception. For example, the aggregated data could show that staff costs are as high as 40% on Sunday, so action can be taken in staff scheduling to bring it down.
Getting started with tracking metrics for your restaurant
So how do you implement all this? My advice is to start with a business plan for the year in which you set out your goals. If you don’t have a target to aim for, this measuring process is going to feel pointless. Make your strategic decisions here about what you will and won’t do in terms of your service offering (will we do deliveries, will we have an early-bird menu, etc.).
Once this is done, start tracking the three key metrics above. You would typically track them on a weekly basis and this will allow you to flag any poor performance, anomalies, or trends, with everyone getting instant feedback about what is working and what isn’t, which is great for keeping a team motivated.
More in-depth monthly reporting for your restaurant
You may also produce management accounts on a monthly basis. These reports will look at all the finances, not just the key metrics. You’ll see both direct and indirect costs here and be able to judge the overall financial health of the business via your Profit & Loss account, balance sheet, and cash flow statement. While your three key metrics are important, a restaurant has myriad other costs to contend with – cleaning, linen, maintenance, utilities, rent, uniforms, crockery, the list goes on! You need to have good oversight over these too, and monthly is an ideal interval.
On a quarterly basis, you might want to check in with the goals you established when you created your plan for the year and see if you are on track for achieving them. This is the time to take strategic decisions and shake up operations if things aren’t going to plan.
The importance of real-time financial data
None of this will be possible unless you are keeping your financial data up to date. There’s no point finding out in September that you had a bad month in April. If the intervening months were bad too, it may be too late to right the ship by the time you find out. You should aim to do the books daily, or at the very least weekly, so that you have your past week’s metrics available on the Monday and your management reports can be produced within the first few days of the following month. Real-time data is the only way to work if you plan to effect real change in your business.