Running a restaurant requires a lot of work: in the kitchen, in the office, and out on the dining floor. It also requires a bit of math.
If that sounds daunting, you needn’t worry — this blog post covers the 9 most important restaurant business metrics that every restaurateur should be aware of.
1. Your Break-Even Point
The most important figure to keep in mind when opening a restaurant is the break-even point. This number represents how much in revenue you’ll need to generate before you’ve earned back your initial investment. Everything you earn after that is “in the black”— profits that you get to keep.
This is a critical number. Creditors and investors will need to know your break-even point before lending you money. The break-even point applies to the initial investment, of course, but can also be applied to subsequent, smaller investments.
For example, an expansion of your dining area will cost a lot of money, but also make more back (hopefully). In that situation, you’d also want to calculate the break-even point for that particular investment.
How to calculate Break-Even
The break-even point is equal to your total fixed costs divided by your total sales net of variable costs and then divided by total sales. Fixed costs are expenses that don’t vary with the level of sales you make.
For example, the heating or insurance bill you pay each month is a fixed cost. Variable costs will fluctuate with your sales performance. Employee wages and inventory are classic variable costs in the restaurant industry.
The equation looks like this:
Fixed Costs ÷ ( (Total Sales – Variable Costs) / Total Sales)
Though it seems like a complex formula, it can be calculated by simply plugging those figures into a spreadsheet.
2. Cost of Goods Sold (COGS)
Cost of goods sold is a financial accounting concept. It’s required for financial disclosures and is very useful to managers. Generally, it refers to the costs of inventory that is used to generate revenues. These are inventory/merchandise costs used to put your food and drinks on the table.
Accordingly, this number does not include excess inventory stocked away in the freezer room.
Managers need to track their cost of goods sold. All restaurants go through substantial inventory over a year of operation. Tracking and managing these costs can help a business thrive.
Knowing your COGS can also help you boost your profit rate — or the percentage of your revenue retained as net income. Often, an increase in COGS results when a supplier increases prices on items. But COGS will also increase when sales go up, so interpreting this metric depends heavily on context.
How to calculate COGS
How you calculate COGS may differ based on the nature of your inventory system. For restaurants with a computerized inventory tracking system, it may be easy to run a report on the cost of goods sold.
For those who take inventory manually, it’s simply a matter of taking monthly starting inventory, adding new purchases during the month, and then subtracting the final count at the end of the month.
It’s quite simple! The formula is just:
Beginning Inventory + Purchased Inventory – Final Inventory
3. Overhead Rate
Overhead rate aims to calculate how your fixed costs are allocated across time. Usually, fixed costs are paid on a monthly or even longer periodic basis. Nevertheless, you may wish to measure these costs on a per hour basis. Overhead rate does this by dividing your fixed costs by hours of operations.
How to calculate Overhead Rate
Overhead rate is pretty easy to figure out. You simply take the sum of your fixed costs—costs that you pay for whether you have any customers or not—and divide it by the number of hours you were open during that period.
The equation looks like this:
Total Fixed Costs / Total Amount of Hours Open
4. Profit Margin and Rates
There are two major profit margins and rates to look at. These are gross profit and net income. Though the two are commonly mixed up, they are technically separate accounting concepts. Gross profit margin indicates the revenues you earn, net of cost of goods sold. This total equals the money that’s used to pay down operational and fixed expenses.
Gross profit does not account for wages, rent, heat, utilities, etc. Those expenses are instead accounted for as part of net income. The net income rate reflects the percentage of total revenue that is truly left over when all costs are accounted for.
How to calculate Profit Margin and Rates
Simply subtract COGS from your total sales for gross profit. To calculate the gross profit rate, divide this profit by total revenue and multiply by 100.
Total Sales – COGS = Gross Profit Margin
Gross Profit Rate= (Total Sales – COGS)/Total Revenue * 100
Total Sales – Total Costs = Net Income
Net Income Rate = (Total Sales – Total Costs)/Total Revenue*100
5. Inventory Turnover Ratio (ITR)
Inventory turnover indicates how many times the total quantity of your inventory is sold over a particular time period. This metric is key for managers who want to keep a lean, efficient inventory. It’s critical to avoid overstocking your shelves to cut down on storage costs and waste.
You also want to avoid selling out of goods, as this might upset customers and cost you revenue. By studying your ITR, you can optimize your inventory to reach a happy medium.
How to calculate ITR
COGS / ( (Beginning Inventory + Ending Inventory) / 2)
6. Food Cost Percentage
Food cost percentage measures the ratio of a menu item’s cost to its selling price. This is a very critical metric to follow and can significantly impact your profit margins.
Certain menu items will have higher food cost percentages than others. Items with a food cost percentage between 20 and 30 percent are ideal, but it’s fine if some items reach up to 40 percent. You want to take this metric into consideration when setting a mix of items for your menu.
These numbers will change as suppliers alter their costs as well, so the ratio should be routinely monitored.
How to calculate Food Cost Beverage
Food cost percentage is presented as a percentage and can be calculated by dividing the item’s total cost by its selling price.
Item Cost / Selling Price
7. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
The name of this metric kind of speaks for itself. EBITDA measures net income without including government taxes, allocation costs like depreciation, and interest on debt. The idea here is to get a firm sense of how you are performing from operations, not financing. This is achieved by starting with total revenues and subtracting operational costs only.
How to calculate EBITDA
The information needed to calculate EBITDA can be found on your income statement. An income statement presents revenues, COGS, and all expenses broken out by category for a given accounting period. If you contract with an outside accountant, they may be able to assist you with calculating EBITDA.
To calculate this metric, take your net income and add back interest, taxes, depreciation expense, and amortization expense.
Depreciation expense is the portion of an asset’s cost that you’ve allocated to a particular accounting period. For instance, a $100 item may be depreciated at a rate of $10 per year. Amortization works the same way, but for intangible assets such as goodwill and trademarks.
Net Income + Interest + Taxes + Depreciation + Amortization
8. Employee Turnover Rate
The employee turnover rate, or ETR, reflects the proportion of your restaurant’s employees that quit or get fired over a particular time period. This is important to know because employee turnover can cost you time, money, and extra paperwork. You always want to minimize the turnover rate to keep things running smoothly.
How to calculate Employee Turnover Rate
(Employees That Left Restaurant / Average Number of Employees During the Period of Time)*100
9. Labor Cost Percentage
Labor costs usually make up a large portion of total operating expenses for restaurants. Knowing this exact percentage allows you to monitor and control these costs. The labor cost percentage reveals how much of your revenue is being spent on wage and salary costs.
How to calculate Labor Cost Percentage
To find this number, simply divide total labor costs by revenue for a particular time period and multiply by 100.
(Labor Costs / Total Revenue) * 100
The Bottom Line
By routinely monitoring your key performance metrics, you can adapt your strategy and operations quickly and effectively. Running a successful restaurant is hard work, and finance is just one small part of it.
However, if you can optimize your menu prices, inventory turnover, and supplier rates, you’ll be well on your way to running an efficient restaurant. Don’t forget to keep following our blog for more posts like this about restaurant management and finance.