Every restaurant is unique, and there are no financial rules set in stone on what your restaurant needs to follow. But financial rules of thumb can better help a restaurant manage their finances, pay their bills and remain profitable.
Conducting a restaurant financial analysis is recommended if you have several months or years of data.
An analysis will allow you to:
Understand what dishes sell best
Calculate which dishes are rising in cost
Find areas to cut back on to reduce costs
Prepare for seasonal dips
There are basic rules of thumb that most restaurants can follow. A restaurant financial plan should include some of these basic rules of thumb:
Cost Percentages and Restaurant Financial Planning
Financial planning is key to a restaurant's success, and this must start with cost. Cost, in terms of food, would be the cost of the food divided by the sales price. You want to make sure that you’re able to cover the costs of:
Ingredients and food
Selling pizza that costs $10 to make for $15 will not yield enough profit to keep the lights on. The following averages are cost as a percentage of sales that most restaurants follow:
28% - 32% for most restaurants
40% in some high-end restaurants
You may even find pizza places having a cost of 20%, but an upscale steak restaurant may have costs of 40%, where the steak costs $8 and the dish sells for $20.
Percentage of cost for other areas may include:
18% - 20% for liquor
35% - 45% for wine
12% - 20% for coffee
10% - 15% for soda
15% - 28% for beer (draft beer is much cheaper than bottled)
You'll also want to consider any consumables that may be part of the bar, and this can include your olives or mixes or any other items added into the drink.
There’s a reason that a restaurant financial model will include percentage of cost: it allows for a safeguard in ensuring enough money is earned on a dish to remain financially sound.
Employee Salaries and Wages
The financial model for a restaurant will have to revolve around employees. Sales are important, and you’ve made sure that your percentage of cost follows the general rule of thumb, but someone has to keep your restaurant running.
Owners that fill the role of chef or manager may skew the numbers below drastically, but in most cases, you’ll want your employee salaries and wages to be:
25% - 35% of total sales (full-service on the higher-end, limited-service on the lower-end)
10% maximum of total sales for management
Hourly employees will have a gross amount of payroll of 15% to 20%, depending on if the restaurant is full-service or limited-service.
Employee benefits are another consideration, and this will vary greatly from state-to-state. Most restaurants will try to keep their employee benefit costs at 5% to 6% of their total sales.
Rent and Occupancy Costs
Rent costs should not exceed 6% of your total percentage of sale. So, if the restaurant does $20,000 in sales a month, rent would be $1,200 or less in the ideal scenario. The reason that you want to keep rent so low is that there are also occupancy costs that need to be considered.
Occupancy costs include:
Real estate taxes
The general rule of thumb is that occupancy costs stay around 8% of total sales. Now, you may be wondering why these costs seem so low, and the reason is that when costs are too high, it’s viewed as excessive.
All restaurants need to be able to generate adequate profit, and if the cost to rent and occupy the building is too high, it’s going to be difficult to maintain profit. These costs are somewhat fixed, especially with rent, so there’s little that can be done to cut back on these costs.
Track Your Money and Finances
A lot of new restaurant owners will be very relaxed in tracking their money and finances. Every piece of bread in a sub shop should be tracked. Every slice of cheese and paper product needs to be accounted for properly.
Restaurants should have a system in place to track every penny that comes in and out of a restaurant.
A few of the best practices to keep track of money are:
Financial profit and loss statements produced monthly to keep track of finances month-to-month.
Labor and food costs reported weekly to ensure profitability and keep an eye on percentage of profit for dishes.
Inventory counting and computing on a weekly basis.
Following accounting best practices allows restaurants to have an overview of their financials, and this is key to finding discrepancies in your operation. A sub shop may find that there are 50 less sub rolls and several pounds of meat that are not accounted for properly.
Employee theft or comping of meals may be too high, and this can quickly cause a stable business to fall into debt.
Make going over financials a habit – one that is done on a monthly basis. Doing so can help an owner correct any financial abnormalities as they come.
Menu Updates and Reworks Save Money
Keeping a menu exactly the same for years, or even months, can be a major loss of money for a restaurant. There are a lot of reasons to update a menu, and they may include:
Ingredient prices rising
Dishes leading to too much waste
Adding more food items
Food waste is a major concern, with 40% of food wasted through the food service industry. Cutting down your menu to remove foods that don’t sell fast enough and lead to spoilage is a great start.
You may also want to reduce the production of food or find ways to repurpose some foods that reduce waste. Menu prices should be updated, dishes removed and even online menus updated to reflect pricing changes.
If a certain dish requires ingredients that no other dish on the menu offers, it may be time to incorporate a new dish that requires these ingredients or remove the dish from the menu completely. It’s better to remain profitable by removing a dish than wasting up to 40% of your food.
Follow Prime Cost Standards
Prime cost is an essential standard to follow, and it is derived by:
Calculating cost of sales
Calculating payroll costs
Adding the two figures together
When you add these two figures together, you come up with prime cost. This is the cost to effectively run a restaurant, and they should not exceed 65% of a full-service restaurant and 60% for a table-service establishment.
The goal is to have money left over for other things, such as rent and profits for the owner. Prime costs can be very volatile, and it’s important to keep strict control over these prime costs if you want to maintain healthy profits.
Successful restaurants will calculate prime costs on a weekly basis, adjusting where necessary to keep their operations running smoothly.
There may be times when staff needs to be reduced because of a seasonal lull in customers, or food prices may swell due to trade agreements or drought. Accounting for these fluctuations can help a business remain successful and should be part of every business’ accounting system.