Food Math is Still Overwhelming, Part IV
Fast casual operating involves a myriad of financial and operational metrics that need to be closely monitored to ensure profitability and efficiency.
Here are eight essential formulas that every fast-casual food operator should be familiar with, starting with the fundamentals of Cost of Goods Sold (COGS), margins, and markups, and extending to other critical calculations.
1. Cost of Goods Sold (COGS)
COGS is a fundamental metric that reflects the total value of the ingredients and food items used to prepare and serve meals to customers. It takes into account factors like waste and spoilage, providing a realistic view of the actual cost of goods sold.
Formula:
COGS=Beginning Inventory+Purchases−Ending Inventory
For example, if the beginning inventory is $11,000, purchases during the period are $4,000, and the ending inventory is $8,000, then: COGS=11,000+4,000−8,000=7,000
2. Food Cost Percentage
This formula helps determine the proportion of revenue spent on food costs, providing insight into the efficiency of food usage and potential areas for improvement.
Formula:
- Calculate COGS using the formula above.
- Divide COGS by Total Food Sales: Food Cost Percentage=(COGS/Total Food Sales)×100
For instance, if the COGS is $7,000 and the total food sales are $20,000: Food Cost Percentage=(7,000/20,000)×100=35%
3. Gross Margin
Gross margin is the difference between revenue and COGS, expressed as a percentage of revenue. It indicates the profitability of the restaurant's food sales before accounting for other expenses.
Formula:
Gross Margin Percentage=(Total Revenue−COGS/Total Revenue)×100
Using the previous example with $20,000 in total food sales and $7,000 in COGS: Gross Margin Percentage=(20,000−7,000/20,000)×100=65%
4. Markup
Markup is the amount added to the cost of goods to determine the selling price. It is crucial for setting menu prices that ensure profitability.
Formula:
Markup Percentage=(Selling Price−COGS/COGS)×100
For example, if a dish has a COGS of $5 and is sold for $10: Markup Percentage=(10−5/5)×100=100%
5. Prime Cost
Prime cost is the sum of COGS and total labor costs, providing a comprehensive view of the restaurant's primary expenses.
Formula:
Prime Cost=COGS+Total Labor Costs
Where total labor costs include salaries, wages, overtime, bonuses, payroll taxes, and other labor-related expenses. For example, if COGS is $10,000 and total labor costs are $18,000: Prime Cost=10,000+18,000=28,000
6. Total Operating Costs
Understanding total operating costs is essential for determining the breakeven point and overall financial health of the restaurant.
Formula:
Total Operating Costs=Prime Cost+Fixed Costs
Where fixed costs include rent, taxes, equipment, utilities, maintenance, and marketing expenses. For instance, if the prime cost is $28,000 and fixed costs are $15,000: Total Operating Costs=28,000+15,000=43,000
7. Maximum Allowable Food Cost Percentage (MFC)
This formula helps determine the maximum percentage of total sales that can be allocated to food costs while ensuring other expenses and profit goals are met.
Formula:
- Calculate Total Labor Costs and Overhead Expenses (excluding food costs).
- Convert Labor Costs, Overhead Expenses, and Profit Goals to a Percentage of Total Sales.
- Subtract These Percentages from 100.
For example, if labor costs are $15,000, monthly expenses are $10,000, profit goal is $7,000, and total sales are $45,000: MFC Percentage=100−(15,000+10,000+7,00045,000)×100≈29%
8. Labor Cost Percentage
This metric helps in managing labor expenses relative to total sales, ensuring that labor costs are within a sustainable range.
Formula:
Labor Cost Percentage=(Total Labor Costs/Total Sales)×100
For instance, if total labor costs are $25,000 and total sales are $60,000: Labor Cost Percentage=(25,000/60,000)×100≈41.67%
Practical Applications and Strategies
Inventory Management
Accurate calculation of COGS and food cost percentage relies heavily on effective inventory management. Regular inventory audits help in reducing waste, preventing theft, and avoiding over-ordering. Implementing practices like using trimmings in soups or specials and negotiating with suppliers for better prices can further optimize food costs.
Menu Engineering
Menu engineering involves evaluating the profitability and popularity of each menu item. By using food cost percentage data, operators can identify high-cost, low-profit items and adjust their prices or replace them with more profitable alternatives. This process helps in optimizing the menu to maximize revenue while keeping costs under control.
Portion Control
Ensuring consistent portion sizes is crucial for avoiding over-serving and unnecessary waste. This can be achieved through training staff and implementing standard portioning procedures.
Supplier Negotiation
Building strong relationships with suppliers can help in securing the best prices and quality for ingredients. Bulk purchasing, when managed carefully to avoid spoilage, can also reduce costs.
Conclusion
Mastering these eight essential formulas is vital for fast-casual food operators to maintain financial health, optimize operations, and ensure profitability. By accurately calculating COGS, food cost percentage, gross margin, markup, prime cost, total operating costs, maximum allowable food cost percentage, and labor cost percentage, operators can make informed decisions that drive their business forward. Additionally, implementing strategies such as effective inventory management, menu engineering, portion control, and supplier negotiation can further enhance the efficiency and profitability of the restaurant.
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