Industry Standard Costs: How Does Your Restaurant Measure Up?
- August 5, 2019
- Posted by: REBL
- Category: flores blog
Industry Standard Costs: How Does Your Restaurant Measure Up?
By Michelle Flores-Gonzales, Chief Operating Officer, Flores Financial
Whether you’re new to the restaurant business or you’re a seasoned restaurateur, you’re no doubt always looking for ways to reduce expenses and increase profitability. Perhaps at this very moment you’re tempted to implement drastic changes to your current business model? Wait! Before you consider dramatic alterations to your menu, staffing levels, or other aspects of your operation, it may be wise to compare your restaurant’s costs to industry standard percentages.
A close examination of how your restaurant expenses measure up to industry standard costs will give you an excellent indication of where you can make minor adjustments, which in turn may help to boost profitability without the need to overhaul your current business plan.
In this article, we’ll answer the following:
- What are industry standard costs in the food and beverage industry?
- Why are these industry standard costs important?
- What are some common mistakes made by restaurant owners/managers?
- What are the average industry standard costs of a profitable restaurant?
- How does a restaurant owner calculate industry standard costs?
What Are Industry Standard Costs in Hospitality?
‘Industry standard cost’ is a term that refers to a cost that is typical to a certain industry. In other words, an industry standard cost can serve as a guideline or a target goal for your business. For instance, in the restaurant industry most businesses aim for a “30/30/30/10” expense-profit model. This shakes out as being:
- 30% of your revenue goes towards cost of goods sold (also known as COGS)
- 30% goes towards labor costs
- 30% goes towards operating expenses
- The final 10% should be left as net profit
Of course, as with most things, there are exceptions to the rule. In fact, your preferred model will depend to a large extent on your restaurant type, concept, and selection of food and drink items. For example, upscale full-service restaurants that serve premium steak and seafood may have higher COGS (perhaps close to 40% of revenue), but will charge a higher price per item. By contrast, pizzerias and diners may only have a COGS of 20-25% but won’t be able to charge as much as higher end concepts.
Why Are Industry Standard Costs Important?
The ability to compare your restaurant’s current expenses against industry standard costs can help you to spot inefficiencies in your ordering process, payroll and staffing management, or line item price points. Industry standard costs provide a guideline for a healthy bottom line, and an objective to meet. They help provide the framework to increase profit margins by paying closer attention to where your prime costs are currently allocated.
What Are the Most Common Mistakes Made by Restaurant Owners?
In my experience, when it comes to cost calculations, there are several missteps that restaurant owners make frequently (especially those new to the industry). These include the following blunders:
- Lack of recipe costing prior to opening
Recipe costing is a vital means of setting an appropriate price point for each line item and determining a realistic profit margin. Effective recipe costing doesn’t only involve the search for good deals on your ingredients, but also involves calculating the ratio of the AP (as purchased) product cost versus the EP (edible portion) cost.
Restaurant-specific accounting software like Flores Insights, powered by PlateIQ, helps you to simplify your recipe costing cards and provides real time pricing information at your fingertips.
- Incomplete budget
Without a comprehensive budget in place, unexpected costs can easily derail your restaurant business from opening day onward.
- Inadequate labor forecasting
Efficient scheduling is part science, part art form. Without the guidance of an accurate labor forecast, it’s easy to over-staff on some days and under-staff others. This will almost inevitably result in dissatisfied customers, demoralized employees, and a general loss of credibility, all of which will eventually affect your operation’s bottom line.
If you’re opening a new restaurant, it’s not unusual to fail to turn a profit in the first year, but if you seek good advice and avoid these common pitfalls, you’re much more likely to go into the black earlier than expected.
What Are the Average Industry Standard Costs of a Profitable Restaurant?
Two of the biggest costs that any restaurant will incur are:
- Food and bar (COGS)
These two costs are known as prime costs. Depending on your restaurant type, average prime costs in the restaurant industry should run about 65% or less as a percentage of total revenue for full-service concepts. It will likely be 60% or less for limited-service operations. Please note that prime costs can be extremely volatile, thus require you to be ever vigilant.
How Do You Calculate These Costs?
The formula for calculating cost of goods sold (COGS) goes as follows:
Sales / (Beginning Inventory + Purchases – Ending Inventory)
Here’s a simple way to think of it: for every dollar sold, what raw costs did your restaurant incur in order to produce that sale? An example would be if the average cost of a menu line item is 40%, then for every $1 sold it would have cost you 40 cents to produce that line item.
Of course, you may run a restaurant that has a relatively high food and bar costs, but comparatively low labor costs. Some have a COGS of 40% with labor costs of 20%. In this case, the low cost of one aspect of the business balances out the high cost of the other. That’s why it’s so important to take the combination of COGS and labor costs as your total prime cost.
COGS, labor and operational costs should be reviewed on a weekly basis on your profits and loss (P&L) sheet. This type of regular review will help you to know where your business stands at any given moment in time, and where adjustments need to be made.
How Does Flores Help?
At Flores Financial, we provide a wide range of accounting and consulting services for hospitality clients and restaurant owners/managers like you. We have the experience and expertise necessary to help you run your restaurant business more effectively and detect and resolve any inefficiencies that are cutting into your bottom line.