How to Manage Your Restaurant By Daily, Weekly and Monthly Numbers to Stay On Top of Your Business
By Jim Laube and Chris Tripoli
By the time you’ve finished reading this article, you should be able to:
? Identify what numbers should be examined daily, weekly and monthly and what they can tell an operator about how their restaurant performs.
? Describe how weekly prime cost reporting makes managers more cognizant of the effect of their labor scheduling.
? Explain the value of the menu item sales report in advising you of customer preferences.
How do you know if your restaurant is operating as you expect or want it to? Is it by the looks on the faces of your guests? The accolades or complaints that show up on Yelp? The amount of activity in your kitchen? Or is it based on just a good or bad sensation in your gut?
While you may think you get a sense of how you’re doing by the aforementioned or similar factors, to really know what’s going on with your key margins, profitability and financial condition, you’ve got to look at your numbers.
In the process of working with hundreds and even thousands of independent restaurateurs, we’ve noticed some traits that virtually all of the highly successful operators possess. One is that they understand and pay very close attention to their key or critical numbers.
They know that their numbers will tell them if their restaurant operates as it should or whether problems develop that require attention. They also know that certain numbers can give them a sense of how profitable their restaurant is likely to be long before their accountant tells them.
By understanding your key numbers you can put yourself ina position to be more proactive as opposed to reactive when it comes to managing your business. You’ll be better able to identify and solve potential problems early on rather than later. And you’ll tend to see the “big picture” of where your restaurant is at, rather than drowning in all the operational details and minutiae that tend to overwhelm many independent owners.
In this article we’re going to look at three stages of examining the key numbers. We’ll discuss what numbers should be examined daily, weekly and monthly and what they can tell an operator about how their restaurant performs.
“Managing by the numbers” means using important daily information that helps you more efficiently operate each shift. We’ll discuss these numbers and where they come from.
Working with many management teams, we’ve learned that smart restaurant operators prefer to start with a well-defined annual plan and operating budget. Then, they separate the operating budget into periods that account for seasonality so that their managers have reasonable revenue goals accurate operating expense targets. Without converting the revenue and operating objectives into effective daily numbers, it becomes unrealistic to expect your management team to meet the period’s revenue goals, and hit the expense targets.
Using daily numbers properly, managers are better prepared to accurately plan the preparation of product, efficiently manage labor cost, and meet their shift’s sales goal. The daily numbers include a daily sales report, a menu item sales report commonly referred to as a “P-mix,” and an hourly staff labor report.
A daily sales report isn’t simply a sales record containing information required for proper bookkeeping anymore. Instead it has become the single best tool used for revenue projecting, weekly revenue tracking and hourly labor management.
Of course the main purpose of the daily sales report remains to track the day’s actual sales, account for any voids, promotions, refunds and paidouts so that cash is accurately accounted for. Additional items regularly posted on the daily sales report include the total credit card deposit, tips claimed, and gift certificates sold; however, consider using this daily document to note variances in your projections. This provides valuable information with which to measure the day’s activities against the restaurant’s weekly goals and make plans accordingly. For the daily sales report to become a complete daily recap and planning guide, post sales by day part (breakfast, lunch, dinner) and include guest counts and per-person spending averages. This is useful information that helps management better track trends in daily customer spending.
Therefore, if there were particular goals set for weekly breakfast sales, a manager would know how he was progressing toward it simply by following this information on the daily sales recap. Tracking lunch guest counts and per-person spending may help in deciding what daily lunch special to offer just as by following the dinner sales and per-person averages might help decide when it is good to launch a server sales contest on appetizers or desserts.
A menu item sales report (P-mix) is very important to use daily, as this single report tells you more about what your customers are saying than any other tool in your tool chest. A daily sales report, however, can tell you about your revenue (sales) but the menu item sales report tells you how that revenue was achieved. It is the daily record of your customers’ preferences.
Chefs and kitchen managers tell us that looking at these reports daily gives them greater detail than the usual monthly P-mix report, and allows them to better plan daily specials and batch recipe preparation. For example, it is one thing to know that you sell 360 orders of fish and chips a month. But knowing which days you sell 15 orders and which days you sell six orders tells you more about how many items to prepare.
If your restaurant concept includes separate lunch and dinner menus, then knowing when items are sold becomes as important as how many. We have seen some examples in which the daily use of the menu item sales report helped management decide what items to place on which menu to increase sales. An example of this might be a popular steakhouse that was also known for offering very good hamburgers. They were reluctant to separate the hamburgers from their steak and seafood offerings at dinner until they reviewed the daily item sales report and found that the majority of hamburgers were sold between 11 a.m. and 3 p.m. Monday through Friday. They created a hamburger steak (ground sirloin) for the dinner menu and began offering the hamburgers at lunch only. The hamburger steak sold at a higher price point with a greater gross profit than the burgers, creating a small sales increase in dinner sales without increasing guest counts.
The hourly staff labor report provides valuable information to help you maintain an accurate labor cost, and better control staff scheduling. There can be no greater reason to use this report daily than knowing that labor is the single greatest cost you have in operating your restaurant.
Another reason might be the fact that understanding numbers that are large and take place over a longer period of time are much harder to successfully manage than smaller numbers taking place in a shorter period of time. Knowing that projected revenue for the period is $85,000 and that the kitchen is allowed to spend 14 percent gives the person doing the kitchen schedule a total to spend of $11,900. Although a good start, we have found it is more effective to further break down labor goals into weekly hours allowed so it can be tracked and compared daily.
Daily reports can allow you to track total hours worked by person, by category, and by day part. This is important because some staff members work in more than one department. Checking your labor report daily helps you maintain your labor goal better because it allows you the opportunity to know before you go over a department’s budget of hours, as well as before a staff member may go over his/her scheduled hours, creating overtime hours.
As a rule, the more we can make our period goals for revenue and expenses into weekly goals, and check our daily numbers against them, the more likely we are to hit the target.
Weekly Prime Cost Calculations
Prime cost is a restaurant’s total food, beverage and all payroll costs for a designated period, say a month or week. In this calculation, payroll costs would include salaries and wages of working owners, managers and hourly employees plus the payroll taxes, benefits, workers’ comp and other payroll-related expenses.
How to Calculate Prime Cost
+Salaries & Wages
+Payroll Taxes & benefits
= Prime Cost
THE UNIFORM SYSTEM OF ACCOUNTS FOR RESTAURANTS, 8TH EDITION
The Uniform System of Accounts for Restaurants, which was first published in the 1930s, has been the National Restaurant Association’s (NRA) best-selling publication. Restaurant Startup & Growth and RestaurantOwner.com are proud to have teamed with the NRA to produce this latest version.
The NRA Uniform System of Accounts for Restaurants, 8th Edition, will provide a reference to classify virtually every cost or expense you might incur in running a restaurant.It also gives you the proper financial report format for a restaurant, rather than having to adapt a format more appropriate for another type of business. If you are preparing a business plan for a restaurant, it allows you to develop your financial projections in accordance with industry standards. This can give lenders and prospective investors confidence that you understand how the finances of this industry work. Other benefits include enhancing your ability to:
- Present your restaurant’s financial statements in an industry-standard format and use your numbers to know how your restaurant performs.
- Account for your sales, receipts, discounts, costs and other transactions in an organized and systematic manner.
- Put in place essential internal controls to protect your cash,food, beverages and other assets.
- Address restaurant-specific accounting and tax issues.
The manual will be available early this year.To be alerted when the Uniform System of Accounts becomes available, please email the National Restaurant Association at firstname.lastname@example.org.
Prime cost is one of the best indicators of profit potential and how well the restaurant’s biggest and most volatile. costs are being managed. Restaurants whose prime costs are out of control nearly always have issues with product l consistency, food quality and, for that matter, poor management practices. l How a restaurant controls its prime cost is often a very telling indicator of how well the overall business enterprise is managed.
Calculating prime cost once a month is not enough. Virtually all the successful operators we work with — those who are really serious about maximizing their profitability — want to know their biggest and hard-to-control
costs not just once a month, but at the end of every week.
When prime cost is calculated weekly, operators and managers don’t have to wait for their monthly P&L (profit-and-loss statement) to find out what happened in these important cost areas. If there’s a problem with food, beverage or labor, the weekly prime cost report puts them in a position to know about it and to react quickly.
In restaurants that rely only on their monthly P&L to track prime cost, what typically happens when there’s a big spike in, say, hourly payroll or liquor cost on the monthly P&L? What can the operator and managers do about it then? How long has the problem been going on? By the time they get their P&L they’re probably halfway through the following month and it is old news. Also. what are the chances that someone will blame the spike on an “inventory” or “accounting” problem?
When prime cost is calculated at the end of every week the numbers become much more believable (because it’s easier to verify them) and when something is out of line you’re in a much better position to investigate it quickly, cut your losses and get the problem resolved.
Weekly prime cost reporting will change the entire culture in your kitchen because of the awareness and the sense of ongoing accountability it creates. If you’re only telling your chef or kitchen manager food cost monthly, it’s really just an abstract, elusive number that happened in the past. Put them on notice by telling them that their food cost last week was 3 points higher than normal, and there’s a very good chance that more attention will be paid to what’s going on in the kitchen and the problem will be gone by the time food cost is calculated again next week.
Another benefit of weekly prime cost reporting is that it also makes managers more cognizant of the effect of their labor scheduling. When labor costs are reported each week, in the context of prime cost, the connection between labor cost and the weekly schedule is highlighted and managers become much more diligent in generating a schedule that more matches customer counts and business activity.
It’s very common for restaurants to see their prime cost go down by 2-5 percent of sales within the first several weeks of calculating these numbers weekly. Yes, it takes some time to calculate but figuring prime cost should take just a few hours a week after a reasonable learning period.
Prime cost is one of the most important and revealing numbers in any restaurant. Knowing what it is more frequently can give you a much better understanding of your cost structure, profit potential and how well your restaurant’s key cost areas are being managed.
Monthly P&L Analysis
The daily and weekly numbers are an integral part of staying on top of and managing the ongoing ebbs and flows of restaurant operations and profitability. However, only an accurately prepared income statement (also referred to as a P&L) can provide a complete picture of a restaurant’s profitability over a designated period.
We believe a complete financial statement package that includes an income statement and balance sheet should be prepared and reviewed monthly. In numbers and several operational factors, restaurants are different from other small businesses such as insurance agencies, car repair shops and bookstores. Therefore, we believe it’s important that restaurant operators use an industry-standard format for presenting their financial information.
The National Restaurant Association’s Uniform System of Accounts for Restaurants (USAR) is the source for an industry-standard financial reporting format for restaurants. There are several advantages in using the USAR for preparing and presenting restaurant financial statements.
- The USAR format gives restaurant operators a “common language” based on a well-thought-out and “industry specific” means of understanding and analyzing a restaurant’s operating performance.
- It allows for the easy comparison of any restaurant’s key costs and margins with other restaurants that use the same format.
- It provides detailed instructions for accurately recording and classifying the different transactions costs and expenses of operating a restaurant.
- It makes it easy to compare a restaurant’s operating results with industry averages that are published annually in the National Restaurant Association’s “Restaurant Industry Operations Report.” (See Page 26 for more information on how to purchase it.)
- Using the USAR format in financial projections enhances the credibility of restaurant owners when presenting financial packages and business plans for raising capital from lenders and potential investors.
RULE OF THUMB
What Should a Restaurant’s Prime Cost Run?
In table-service restaurants, the generally accepted rule is that prime cost should run no more than 65 percent of total sales. Many of the larger, casual-theme chains are able to keep their prime cost 60 percent or less but for most table-service independents, achieving a prime cost of 60-65 percent of sales still the opportunity to achieve a healthy net income provided a restaurant has a fairly normal cost and expense structure in the areas of their P&L.
Profitability issues generally arise when prime cost exceeds 65 percent of sales and gets closer to 70 percent of sales.When this happens, it becomes increasingly difficult for nearly any table-service restaurant to make an adequate profit and return on investment.
In some areas, state and local laws make it more challenging for restaurants to achieve a 65 percent prime cost because of the imposition of higher minimum wages and the disallowance of applying a tip credit to the wages of tipped employees. In states such as California, Oregon and Washington, operators can’t apply any portion of tips to the minimum wage calculation. Servers earn full minimum wage that can be well over $6 per hour plus tips. However,the 65 percent or less prime cost threshold should still be considered and operators should be especially vigilant in scheduling and other means of controlling their prime costs.
Also, as much as is practical, menuprices should reflect the added cost of labor and doing business in these states.
In quick-service restaurants (QSR), the goal is to keep prime cost at 60 percent of total sales or less. Some high-volume QSR operations have been known to achieve a prime cost of 50 percent or less and can generate as much as 20 percent to 25 percent net income as a percent of sales.
Following is the industry-standard format for presenting a restaurant P&L
(summary) as prescribed by the National Restaurant Association’s Uniform System of Accounts. (See “The Uniform System of Accounts for Restaurants, 8th
Edition” on Page 28.)
The USAR is designed to highlight the key numbers on a restaurant’s P&L, including:
Prime cost. As mentioned earlier, prime cost includes cost of sales and payroll. While we recommend calculating prime cost at the end of each week, prime cost should also be highlighted on the P&L.
Other controllable expenses. In addition to cost of sales and payroll, certain other expenses are generally deemed to be manageable or controllable in some way by management and other store personnel. These expenses have been grouped into specific categories, such as direct operating expenses, marketing and utilities. A more detailed report should also be available to show the monthly and year-to-date amounts in the individual accounts that are included in these summary categories.
Many independent operators prefer to receive a summary version of their P&L so they can quickly scan the key numbers and get a sense of how the restaurant is performing. Some operators only delve into the more detailed reports if something doesn’t make sense or appears to be out of line.
Controllable income. Separating controllable from noncontrollable expenses makes it possible to calculate one of the more important margins on any restaurant P&L, “controllable income.” Controllable income is a key indicator of management’s effectiveness in driving sales and controlling costs and expenses. It is the purest number to evaluate management’s effectiveness, because it reflects only those line items over which they exert any influence or control.
Many restaurants that pay their managers an incentive based on financial results often use the amount of controllable income generated to determine the amount of management incentive earned.
Noncontrollable expenses. Noncontrollable expenses include occupancy costs such as rent, property taxes and building insurance as well as other expenses like equipment leases and depreciation, over which managers and store personnel have very little control or influence.
Restaurant operating income. Restaurant operating income is the amount of income generated by a restaurant without regard to corporate overhead, financing costs (interest), nonrecurring income and expenses and income taxes. It is useful when comparing operating results to industry averages and other restaurants.
Restaurant income statements are enhanced through the use of comparison with budgets, prior periods and trend analysis over several periods.
It’s a Numbers Game
Restaurants can generate lots of numbers. The key to independent operators is to focus time and resources on generating and analyzing those numbers that provide the most valuable and useful insights into how well (or how badly) the restaurant performs.
When a restaurant’s key numbers change, it means that something in operations is either getting better or worse. Your numbers can provide a reliable early warning system that something in your operation is amiss and needs attention. Staying on top of your key numbers is a way to stay on top of your business and your prospects for success.