Nicholas Loguercio, CPA, CFE
09.27.2017 | Industry Insights
In the restaurant business, the line between success and failure may be thin. Fortunately, however, restaurant owners have some control over much of what drives their success. Typical low-profit margins, high employee turnover, opportunities for employee theft, managing costs, and keeping up with industry trends are just some of the challenges restaurant owners must face every day.
Utilization of profit and loss reports on a weekly, monthly, and annual basis, along with restaurant data analytics (metrics and ratios), may highlight unusual trends, help track the most and least profitable menu items, and send employees a clear message that management is carefully watching operations. Implementation of these tools can help owners overcome challenges and navigate their way to success.
A standard restaurant chart of accounts—a numbered list of accounts that comprise a restaurant’s general ledger—is a great starting point for proper financial reporting, budgeting and variance analysis. It is important to separate the components of sales and cost of sales for food and for each beverage category. It is equally vital to quantify prime costs (food, beverage, and labor costs), controllable expenses (e.g., occupancy and related expenses), general and administrative expenses, depreciation and amortization, and income taxes, if applicable.
Metrics and Ratios
Besides the typical liquidity and leverage ratios important to all businesses, there are other specific metrics and ratios for the restaurant industry. Such metrics and ratios can be compared to national averages, as well as to a restaurant’s historical results and its targeted results.
An analysis of these ratios and metrics may help an owner focus on pricing, theft prevention, food and bar inventory controls, food and beverage portion control, as well as establishing controls for purchases.
Selected Important Measures by Category
|Sales||Sales on a square-foot basis Sales on a per seat basis Average dollar/check amount per customer Daily customer count|
|Cost of Sales||Cost-of-sales percentages for food and beverages (liquor, wine, beer, nonalcoholic beverages should be calculated separately, and in total as well, over sales) Prime costs
|Occupancy||Rent as a percentage of sales Rent, insurance and property taxes as a percentage of sales|
|Payroll and Related Benefits||Total salaries as a percentage of sales Management salaries as a percentage of sales Benefits as a percentage of total salaries Benefits as a percentage of sales|
|Profitability Ratios||Profit percentage, which is net income over sales Payback period in years, which is the purchase price of the restaurant or investment in a restaurant over annual net cash flow
Prime costs are one of the most important benchmarks in determining cost efficiency and should be approximately 65% (30% for food and beverage and 35% for labor), or less, of sales for a full‑service restaurant.*
The Food and Beverage Factor
If a restaurant’s food and beverage cost percentages are trending higher than the approximate 30%, owners may need to address the following questions, in order to identify and correct the cause(s):
- Have portion control, spillage, and waste been fully evaluated?
- Has inflation been factored into sales prices?
- Are policies established for complimentary food and beverages to customers?
- Is there a set policy on employee complimentary meals and are they properly reflected in the financials?
- Are steps in place to reduce or mitigate employee theft? (This could include using cameras and spotters, restricting storage areas, bonding certain employees, as well as reviewing discounts, voids and over-rings.)
- Are purchasing and receiving duties properly segregated?
- Are physical inventories taken frequently enough? Are perpetual inventories maintained for items identified as high-cost or expensive?
- Are inventory par levels maintained?
If labor costs are higher than the approximate 35% of sales, restaurant owners should consider the following questions, in order to ensure efficiency and enhance oversight:
- Is the restaurant’s timekeeping system appropriate for the tracking needs of the establishment (time clock, fingerprint, biometric readers, etc.)?
- Does the timekeeping system provide reports on whether employees are adhering to their schedules?
- Are employee work schedules properly managed to minimize overstaffing?
- Are overtime hours monitored?
- Are paychecks approved by management?
- Are systems in place to ensure that wage rates and tips are being paid correctly?
Sales that are trending lower than budgets and prior periods are a major concern for restaurant owners, especially if the cause for the decline is unknown. Asking the following questions can assist owners in determining the contributing factors for the decline:
- A decline in sales could be indicative of insufficient marketing. Is there a marketing plan in place that includes the use of social media?
- Have popular social media sights reflected poor reviews with respect to the food, service, or cleanliness?
- Does the menu reflect the proper amount of selections to please varying customer preferences?
- Is there a significant differentiation in customer experience from competitors?
- Are the menu price points reasonable? Do such menu price points consider location, type of restaurant, and target customers?
Other Causes of Declining Profitability
Even if most of the previously mentioned issues have been addressed, an owner may still be troubled by a decline in profitability. The following questions can assist restaurant owners in identifying areas of improvement for reducing or reversing the decline:
- Is the owner and/or management visible and are they devoting enough time to overall operations?
- Are general and administrative expenses, as a percentage of sales, higher than the norm?
- Are sufficient cost-effective policies and procedures in place to discourage and reduce employee theft, especially of cash and inventory?
- Is the accounting software system fully integrated with a sophisticated-enough point-of-sale system, and is the owner or management utilizing the important features of the software?
By paying careful attention to the crucial flow of data analysis the benchmarking provides, an owner can take the actions necessary to develop and sustain a rewarding and successful restaurant business.
To learn more about restaurant benchmarking, contact:
Nicholas Loguercio, Partner, Hospitality Practice Group 212.331.7406 | NLoguercio@BERDONLLP.com
*Industry standard according to “The Uniform System of Accounts for Restaurants,” published by The National Restaurant Association.
Berdon LLP New York Accountants