Increase restaurant profit: What you can do to improve your bottom line
Do you know how to increase restaurant profit? We have heard this many times, “Nothing is wrong with my restaurant. Everything is great! My customers are happy. I have good employees and the food it great. My only problem is that I’m not making a profit.” This could be absolutely true, except for the first statement. Maybe you do have great employees, your customers are happy and your food is great. However, you should be making a profit, so if that’s the case, then there is something wrong. Yes, unfortunately there is a problem.
For the most part, you have a great restaurant, but something is holding you back from the profits you could be making.
Let’s take a look at all the aspects that go into your restaurant and see what could be happening. Do you know your overall profit margin? Do you know how much is going out and how much is coming in and what mix it should be at? I know, you may think, well, I have an accountant or bookkeeper to do that. That is great if you have someone to help you keep your books, but the point of this is that you need to be aware of what all those numbers mean. For the food service industry there are three big pieces to be aware of shown on the chart below. The three main components are Food Cost, Labor Cost and Other Expenses. Overall, this is considered your prime costs. You have to understand Prime Costs.
An ideal prime cost should be between 60 to 65%.
Food and labor are the two big chunks of the restaurant’s prime cost.
Food cost percentage should average between 25 to 38%. Food cost percentage may fluctuate due to your menu mix and what type restaurant you are such as: upscale or casual style dining.
Labor cost percentage should average between 25 to 35%. Fast food restaurants can achieve labor as low as 25%, but full service restaurants may have labor percentages between 30% and 35%, especially upscale dining. These two components are your prime cost, so overall this should be in the range of 60% to 65%.
The remaining expenses are your overhead.
You may say, “I’m aware of my food costs because I know how much money goes out to my food suppliers and vendors.” Food Cost includes more than just how much you pay your food vendors or suppliers. Food cost also includes how you price your menu, how the food is prepared, how much food is going out the door. You need to look at the cost of goods sold as well as the profit you make after sales. The end result is your food cost percentage.
Do you complete an inventory? If not, are you aware of how much food is wasted due to spoilage? If you aren’t aware of how much of each item is in your restaurant, how do you know what to order? Are you also aware of how much your cooks and servers waste due to mistakes?
Let’s look at one very low cost item such as salad mix for an example. By decreasing your waste percentage from 10% to 4% on an average sales of 1000 salads a week with a retail cost of $3.50 per side salad, the difference in your retail profits $5,000 to $10,000 in one year for just that one low cost item. See the charts below for a breakdown.
Some businesses do monthly inventories. You should consider doing weekly inventories, so that you can catch issues sooner. If you find one or two items that you want to track more closely to determine when the issues is happening, and who is working when the items are going missing you should consider doing a daily “Perpetual Inventory” on those items. This will help you pinpoint when the items are going missing and who could be responsible for that loss.
Keep in mind we didn’t add the cost and price of the salad toppings of tomatoes, onions, olive, peppers, croutons and other items depending on the way your salads are made. Imagine the difference of keeping those items under control as well. Better yet, look at a high cost item such as steak or a drink such as fine wine, depending on your menu mix. Also, you can imagine that by just increasing your menu cost by a few cents will add up to greater profits over a year. You could be losing hundreds of thousands of dollars a year just in food waste. Do you track the waste that occurs? Do you know how much food is voided or comped?
There are several ways to keep those costs down and increase restaurant profit. One way is by doing an inventory of your food items and tracking your total sales and costs of the food from your vendors. If you find there is a lot more food or beverages missing from your inventory than can be accounted for by waste, then there may be theft happening. There are so many ways that could occur because people could be voiding checks after the food is made. They could be walking out with food from your restaurant. There could be people eating or drinking away your profits. People could be giving away food to friends or family. Bartenders or servers may give free food or drinks to try to increase their tips. Most employees are not doing this intentionally to hurt your profits, but to be honest, most people don’t really think about it. It isn’t coming off of their paychecks, so they don’t care. Maybe your managers aren’t paying attention to what is happening or are feeding into the issues.
Maybe a different vendor will have better prices. You need to take into account the quality of the food, as well as the price. Poor quality could result in lower sales from dissatisfied customers, so that’s a tough balancing act. Maybe cutting and preparing food from fresh items will save you money. A bag of whole potatoes to make fresh-cut fries is usually much less expensive than buying pre-cut fries.
Another issue could arise if your staff needs more training. Perhaps they make more mistakes than they should. Taking the time to train them can make a difference in your bottom line.
It also could be your menu pricing. Are you charging more or less than you should for your menu items? Maybe changing prices can change your profit. You need to charge a reasonable amount, compared to the local competition. If you want to make more money, consider lowering your food cost percentage. Have you evaluated your food cost percentages or used a menu pricing tool? Your food cost percentage should be between 25% to 35%. You can use our menu pricing tool to help you figure out your prices.
Do your employees use proper sanitation and food controls? Do you use date dot stickers? Do your employees understand FIFO (First In, First Out)? If not, then maybe you need to have some training on this matter. You could be losing food to spoilage when all it would take is rotating the oldest items to the front to use first and the newest stock to the back.
Now, let’s look at the mix of labor costs.
Do you often have people standing around without doing anything? People should be busy throughout the shift and the work should be divided among the staff on duty. One person not pulling their weight will cause issues with staff members seeing the environment as unfair and decreasing employee morale. Set the expectations up from the point of hiring the employee and from the start of each shift. Using a side work chart can help to distribute the work, so that one person isn’t left with the majority of the work. This will also ensure that the work is being completed throughout the shift for a better functioning restaurant. If someone is not working their load, then discuss that with the person to make sure they understand. Keep your attitude positive and that will help a lot.
Do you cut employees when your business is slow? Do you build your schedule around your business trends? Are you prepared for special events in your community? Labor costs are part of the prime numbers which also includes payroll taxes, employee benefits, health insurance, unemployment and workers’ compensation. This is just one way to increase restaurant profit.
What can affect my restaurant’s labor percentage?
Restaurant sales will affect your labor cost, especially if management did not react quickly in reducing the amount of employees on any particular shift when the sales slowdown. Management plays a huge role in this.
Employee rate of pay can affect your labor cost percentage. When creating your employee schedules keep in mind the pay rate of different employees and that person’s job proficiency. If someone is at a higher pay rate, but is fast and efficient that may be worth the additional pay. If someone is not as proficient, maybe the person needs additional training or a different position. Keep this in mind when hiring staff because it’s not good to drop pay rates, but starting someone at a lower rate and once they become better at the job, the pay can increase with the experience and job proficiency.
Balance out per shift the employees and their pay rates. Do not over load the shift with heavy hitter pay rates. The employees with the highest pay rate should generally be working your busiest shift. Those paid less can work during slower days. Also, balance out the experience levels so that not all the inexperienced people are on at the same time. Spread them out all throughout the week.
Have a mix of employee strengths and the employee pay rates per shift. The first employees that should be sent home due to a drop in sales should be the employees that have the highest pay rates or are the least proficient at their jobs.
Cross-train your employees to work in more than one position. If there would be a drop in sales, then that crossed trained employee will help in reducing the labor cost.
Do you teach employee safety techniques to keep them as safe as possible? Do your staff know what to do if there is a robbery, fire, power outage, or local disaster? There are so many times we think it could never happen to us, but it certainly could happen. Knowing what to do can make a difference when it comes to workers compensation, customer or employee safety.
Other expenses are your overhead costs for utilities, lease or mortgage amounts, taxes, repair costs, equipment maintenance, advertising, pest control. You can negotiate rates for some of these items, or shop around for maintenance agreements.
You can look for free or low cost sources of advertising your restaurant. Social media has become a big thing for businesses. Do you have a Facebook page? Do you have a website? Have you registered your restaurant with the local yellow page listings–on paper and online? If you aren’t sure how to do these things or don’t have the time, maybe an employee may be familiar with this and will help you out with for free or at a low cost. Check out local business colleges or tech schools to see if someone there can help you. There are lots of options you may not even have considered.
Do you keep your restaurant clean? What do you see when you walk in the front door? What about the restrooms? The restrooms are a big thing for customers. If it is grungy or dirty they may assume that the rest of the restaurant is also dirty and may never come back. You’ve lost a customer and you won’t know why. There are lots of great cleaning checklists and cleaning charts to help you track cleaning tasks. Keeping up on cleaning is vital to your restaurant’s reputation, food safety and customer loyalty.
Now, hopefully all the things that could be happening to decrease your profits can be addressed. You can check out the forms pages for useful charts, forms and checklists. You can also find some great spreadsheets for tracking labor, inventory control, sales, and even scheduling.
If you still can’t pinpoint where the money is being drained from your profits, then we would be happy to help you out with an assessment or even just a free phone consultation with one of our experts could help guide you in the right direction. If you really want to increase restaurant profit, you may benefit by an assessment or consultation.You won’t know what you are losing if you aren’t aware of what is happening. Be informed, be smart and set up systems to control your restaurant to help you move from lower profits to higher profits.