Chapter 25: Doing the Math

Tasked with making your restaurant profitable, you are struggling with how much to charge on your menu. What is the standard, and what formulas are needed to arrive at those numbers?When you became a restaurant manager, you never thought that it would involve so much math. Surprise! Proper calculations are an enormous requirement in order to be successful. What should you do?

There are three main components to consider when talking about managing the bottom line—labor, COGS, and overhead expenses. Whatever is left over is basically profit. This elementary

view is admittedly an oversimplification, but in terms of what you can control, it is a good starting point.

LOGICAL LABOR

Labor includes all hourly staff and salary managers, plus all applicable payroll taxes and benefits. Although the calculation does vary based on concept, a typical maximum allowable is 30 percent. This amount roughly breaks down to 8 percent for FOH staff, 13 percent for BOH, and 9 percent for salaries. Again, not an exact science, but you know that your servers, bartenders, and support staff are paid tipped minimum wage, which accounts for why your FOH labor numbers are nearly half of the BOH labor impact. 

As an example, let’s examine a $3M restaurant. At these sales, 9 percent for salary equals $270,000 to split among managers and chefs.

Labor is the most controllable expense in your restaurant. When you make your staff schedules, use sales from previous week as a guide, measured against your maximum percentages. Using the numbers from above, weekly sales rounded to $60,000 you have:

• 8 percent for FOH staff = $4,800 allowable

• 13 percent for BOH staff = $7,800 allowable

• 9 percent for salary = $5,400 allowable

The challenge comes when you experience a decrease in sales and how it affects what you can spend on staff in relation to management. Salaries obviously don’t fluctuate. They are a fixed

cost. Using the figure above, if you are spending $270,000 in salary, that $5,192 actual per week will have to come out either way. So, if your sales were $48,000 (not $60,000), then it gets much harder to stay within budget.

• $5,192 for salary @ $48,000 = $42,808 left = 10.82 percent for salary

• If your max labor is 30 percent, then you only have 19.18 percent instead of 21 percent for staffing = $9,206

With weekly sales at $48,000, you have a 27-percent decrease. It is imperative that you schedule accordingly. Stagger the in-times for your team based on estimated volume, and make sure to make cuts to the floor and kitchen once the rush begins to subside. Also, examine your higher-wage positions and see if management can alleviate their labor impact. If you can help cover the front door, that duty will eliminate one host shift for the night—and probably your largest FOH hourly wage.

COGS: THEORETICAL

Next is COGS, which is the amount required to actually obtain or create the item you are selling. If a can of beer costs the restaurant $1.50 to bring in, and you sell it for $6, your COGS is 25 percent. The following are standard COGS thresholds:

• Food > 30 percent

• Beer > 22 percent

• Wine > 25 percent

• Liquor > 18 percent

Again, those calculations also vary greatly by concept and location. Quick service restaurants will likely have much lower food COGS than in fine-dining establishments. Also, the market will probably allow you to charge more for alcohol in affluent areas of major cities than you can competitively price in suburban areas.

Using the above percentages with a sales ratio of 60 percent food, 20 percent liquor, 10 percent beer, and 10 percent wine, you can determine your target overall COGS. Let’s say you have $1M in sales. The calculation would be the following:

• Food: 60 percent in sales = $600,000. At 30 percent COGS = $180,000 spent.

• Beer: 10 percent in sales = $100,000. At 22 percent COGS = $22,000 spent.

• Wine: 10 percent in sales = $100,000. At 25 percent COGS = $25,000 spent.

• Liquor: 20 percent in sales = $200,000. At 18 percent COGS = $36,000 spent.

• Total sales = $1,000,000. Total spent = $263,000. Overall COGS = 26.3 percent.

You should periodically run a product mix (p-mix) of your sales to determine your true ratios and to determine when they fluctuate. In the above example, if your overall target is 26.3 percent, but you are trending to more than 60 percent in food sales, you know that you will have to adjust either your prices or your expectations.

WHAT TO CHARGE ON YOUR MENU

Determining the cost of an item is imperative before adding it to the menu. COGS is calculated in a simple equation: Take how much an item costs to make and divide it by the menu price. For example, let’s examine a grilled chicken sandwich and a possible breakdown:

• Chicken breast = $1.50

• Sourdough roll = $0.30

• Lettuce leaf = $0.03

• Tomato slice = $0.06

• Onion slice = $0.04

• Pickle spear = $0.08

• Garlic aioli = $0.07

• Total = $2.08 COGS

If you sell the sandwich for $7.49, then you would divide it into $2.08, thus making it a 27.77 percent COGS. For every dollar you make on the sandwich, $0.28 goes to paying for the raw materials. Of course, you can adjust your COGS by raising your price or lowering the cost (and often the quality) of the materials but your audience might not like the end result.

Whereas food cost estimating can be challenging at times, beverage is a bit simpler to measure, as it comes in a uniform standard (750-ml liquor bottles, 15.5-gal kegs, etc.).

Kegs: A 15.5-gallon keg (1,984 oz) holds 124 pints (16 oz). Assuming four pints are wasted for pour-offs (initial foam, head), the remainder is 120 pints per keg. If a keg costs $180, then each beer would be $1.50. If you sold that beer for $6, then your COGS would be 25 percent. But if your target COGS is 22 percent, then you must charge at least $6.82 (Formula = cost/

percentage = 1.50/0.22).

Bottled Beer: Divide the cost by the number in the case. If a case of 24 costs $32, then each bottle would be $1.33. If you sell it for $6, your COGS is 22.16 percent.

Liquor: A 750-ml bottle of liquor holds 25.4 ounces. Traditional pours are 1.5 ounces. Assuming that 1.4 ounces are lost in waste, there are 16 single drinks per bottle. If a vodka bottle costs $24, then 1.5 ounces would be $1.50. If you sell a vodka for $8.50, then your COGS is 17.65 percent.

Wine: A 750-ml bottle of wine holds 25.4 ounces. Assuming that 1.4 ounces are lost in waste and that the wine is served in six-ounce portions, there are four glasses in a bottle. If possible, you want one glass to pay for the bottle. If it cost $9, then charge $9 a glass, making your COGS 25 percent. As wine turns quickly, the waste potential is high. Keep close tabs on the quantity on hand.

COGS: ACTUAL

Up to this point, we have discussed what the costs should be, the theoretical percentages based on straightforward calculations. But in order to determine what your COGS actually is, you must take a detailed, accurate inventory. Although some concepts say to perform this monthly, weekly counts will give you the ability to react quicker if you see that your numbers are inflated.

Whether you use an inventory software platform or simply an Excel file, you will need to assign value to each inventory item. As you receive invoices for your order, you must compare those amounts to your numbers to make sure there has not been a fluctuation.

Once you take inventory, you will have a total amount on hand for every department. The major groups are liquor, bottle beer, draft beer, wine, food, nonalcoholic beverage, and possibly retail, although you can split these into subcategories if you wish. For example, you can split liquor into vodka, gin, bourbon, etc., or food into produce, meat, dry goods, etc. Subcategories will allow you to dig deeper when anomalies arise.

Once you have the amounts assigned to your categories, you will need to determine the usage—that is, what product you actually sold between your current inventory and the last one. The

formula for usage is: beginning inventory + invoices – ending inventory.

Once you have your usage, then divide it by your sales to get your actual COGS. For example, you might start the beginning of the period with $7,000 in food inventory and have $6,000 at

the end. During that time, if you sold $28,000 in food and paid $6,500 in food invoices, the formula would be:

• $7,000 (beginning inventory) plus $6,500 (invoices)

minus $6,000 (end inventory) = $7,500 usage

• $7,500 (total usage) divided by $28,000 (food) = 0.267

= 26.7-percent food costs

MANAGING COGS EFFECTIVELY

Think of your theoretical as your target numbers but use your actual as your real data. The difference in the two has much to do with how your COGS is managed. Just behind labor, COGS is your most controllable expense. When you see that your actual COGS is climbing beyond your target numbers, you will need to investigate four key factors: waste, theft, portioning, and calculation.

Waste: If your kitchen is prepping too many burgers and the meat goes bad, it will throw your costs off. This effect is the same when bartenders toss a mistake cocktail. Waste logs and comp

tabs are necessary to track these occurrences, and you should review for trends and work with your team to minimize errors.

Theft: If you know that someone is taking steak and whiskey out the back door, that situation is obviously an issue. But theft is often not so blatant. Examples include when bartenders give

out free drinks or managers order food without ringing it into the POS. To account for such practices is why you have a comp button so everything can be tracked for inventory.

Portioning: If the portion for fries calls for six ounces but the line cook is serving seven, then he is losing you money. The biggest culprit in this overage is the cook’s not measuring with a scale or measured scoop. Cooks using their hands for measurement can throw COGS off tremendously. This discrepancy is akin to not using jiggers behind the bar. If untrained bartenders eyeball it instead of measuring, they will pour your profit on that drink down the drain. Do the math. If shots increase to 2 ounces, then that $24 bottle of vodka goes from being 18.75-percent COGS to 25 percent. Significant!

Calculation Error: This area is in reference to faulty math in the COGS calculation, often due to an increased expense not taken into consideration. If the price of avocados goes up 20 percent, you will need to reexamine what you are charging for guacamole. Recalculate all COGS every month, using the most recent pricing reflected on your invoices.

CONTROLLING MORE THAN YOU THINK

The third component in managing your bottom line is the category of overhead expenses. Let’s make a distinction. Fixed costs are those that we cannot alter. Rent is a prime example. There is nothing you can usually do to lower that cost. But there are a lot more controllable expenses that you can make sure are not unnecessarily inflated.

For example, you might think your payments for worker’s compensation is a fixed cost but you can indirectly affect what you owe. The monthly payment is based on what you remit in wages. If you are spiking labor, your bill will be higher. More substantially, worker’s compensation will go up if you have a claim, so make sure you provide a clean, safe environment (dry floors, proper kitchen mats, safety-focused staff).

That variation is true for most bills. If you leave the air conditioning on when you are closed, your energy bill will climb. If someone else is dumping their garbage in your bins, your waste-removal costs rise. Reviewing your monthly statements is key, especially comparing it to prior months. If you witness an increase, you need to investigate.

The most controllable of these costs come from the goods that you purchase and the vendors you use. Make sure you are not unnecessarily using expensive to-go containers, review your

linen statement to see if you need to adjust your napkin pars, monitor all invoices to see if you are now being billed more for the same product, and watch for delivery fees and service charges

that were not previously agreed upon. You should build relationships with your vendors and sit down with them periodically to see if options are available for better pricing.

It is harder to put a target goal for all overhead expenses, but for the sake of this discussion, I will select 30 percent, including rent. Now apply this amount to the 30-percent max for labor and the 27-percent max for COGS to equal 87 percent, which brings 13 percent down to the bottom line. That number is before ownership distribution and investor payment.

If you are able to keep your labor in check, COGS low, and overhead expenses in line, then you are in a great position to have a profitable restaurant. Learn to master the financial aspects and you will have a very bright future in this industry.