How to set up a restaurant that's primed to scale - Part 6: Understanding your margins - EposabilityEposability

Part 6: Understanding your margins - even if you hate numbers

BY JOSH SMITH

24/04/2018

Making your restaurant a success is challenging – there’s a lot to get right. We’ve been around long enough to pinpoint which pitfalls trip people up. And we know that failing is not an option for you. In fact, we’re obsessed about making sure that you don’t simply avoid failing, but that you actually propel your growth.

One thing is certain – being successful in your hospitality business will depend massively on balancing the creative with the numbers. And if the former is your strength and someone else on your team takes care of the latter, it’s still vital that you understand how the numbers illustrate whether you are actually making money, and how much you can afford to re-invest to scale your restaurant.

Once you nail this, you’ll understand why those who don’t are going to severely struggle. And, sadly, there are those who do struggle. Badly.

Being astute with your figures means you can analyse the performance of each and everything on your menu to see how, if at all, they contribute to your success. If you don’t do this, the chances are that you’ll lose money. But it’s not hard to grasp. I’ll show you.

Key accounting terms you need to know

Cost of Sales (or ‘cost of goods sold’, COGS) are, as you might expect, the cost of the  goods that you have sold. This only includes the direct costs of something you have sold e.g. the cost of food and drink sold in a restaurant.

Don’t get ‘Cost of Sales’ confused with ‘Overheads’. Overheads are the other costs that you incur that are not directly related to the product sold, e.g. rent, utilities and all staff costs.

Gross profit (or GP) is the difference between COGS and your revenue.

Sales (exc VAT) – COGS (ex VAT) = Gross profit

Gross Profit margin is your gross profit expressed as a percentage, allowing you to keep an eye on your profitability trends.

Gross Profit Margin = (Sales (exc VAT) – COGS (ex VAT)) ÷ Sales (exc VAT)

Don’t confuse mark up and margin! Mark up is the difference between the actual cost and the selling price. Mathematically, markup is always higher than the gross margin which will make you think you are achieving a higher profit than you really are.

Net profit, also known as “the bottom line” is your profit after operating expenses and all other charges including taxes, interest and depreciation have been deducted from total revenue.

Sales (exc VAT) – COGS (ex VAT) – Overheads (exc VAT) = Net profit

Example 

Gross Menu Price:  £12  This is the price that is printed on the menu
Net Menu Price:   £10
This is the revenue figure (excluding tax) that we use for the P&L calculations

Wine Cost:  £3     Cost of Sale (30% Cost of Sales)

 +/-  £7   ←  Gross Profit (70% Gross Profit Margin)

NB: When you are talking about your Profit & Loss account (P&L) account, it’s VITAL to use NET costs, not GROSS. Otherwise it will falsely inflate your Gross Profit, and every month you’ll think you are generating more profit than you really are.

Getting it right means the difference between make or break

If numbers aren’t your thing then all this might seem a lot to learn. But trust me, once you do you’ll be grateful you did. If you don’t, every sale you put so much effort into making could be costing you money instead of making you money. And then if you grow your sales, you would actually be losing more and more.

This could then force you to make cuts in areas that actually need your investment for you to drive your business, like more marketing or vital repairs.

So schedule in some time now to get your GP calculated right in theory and then periodically ensure that your GP is on target in actual real life terms.

What is a good GP?

Generally speaking, the industry standard GP target should be around 70% for food and 75% for drinks overall. Some businesses with lower food cost – pizza is a good example – could theoretically achieve a far higher GP.

Exceptions to the rule

Your objective is to maintain a good balance between High GP items and Low GP items to balance each other out, and to keep customers coming back more regularly. So you might sometimes find that it will be better to achieve a slightly lower margin, if it generates a greater amount of cash.

Example

Beef Burger

Menu Price £10

Cost of Sale £3

£7 gross profit (70% GP)

Cote de Boeuf

Menu Price £50

Cost of Sale £20

£30 Gross Profit (60% GP)

As you can see from this example, it’s better in currency value to get £30 profit from selling the lower-margin (60%) product instead of the £7 higher-margin (70%) product. 

At the end of the month, if you sold more Cote de Boeuf than beef burgers you would see a lower GP margin, but a greater amount of actual revenue and net profit in the bank.

Pro Tips for controlling your GP

GP is a really good indicator of how efficient you are in the use of your supplies in the production process. Here’s how to increase efficiency to nudge that GP upwards.

Never tire of being brilliant at the basics

> Use a GP calculator to analyse your current position. Check it monthly at the very least (twice monthly is recommended).

> Invest in a great stock management system. Eposability can help you select an exceptional system based on your exact needs.

> Count your stock accurately. Use your stock counts and analysis to pick your top 5 items to work on. This usually represents 70% of the opportunity alone (the remaining small things take time but generally give little return once improved).

> Track your purchases in an organised fashion.

> Track your wastage separately.

> Train your team – they need to understand how important food & drink costs are.

Analyse your Stock Journey

This is the process your stock goes through inside your business – from the moment it arrives, to the moment it leaves. Your stock journey needs to include:

> Arrival – has everything been delivered that you have ordered and paid for? Check items off using delivery notes.

> Storage – Is it secure and protected from damage or premature perishing? Are stock areas organised? Is stock going missing e.g. falling behind shelves or stored in cupboards that you are unaware of?

> Usage – Do staff use the stock correctly? Are they following recipes, portioning correctly, storing opened goods correctly, and generally taking good care of the stock that they are using?

> Execution – Are stock items delivered to the customers appropriately: hot, fresh and on time? This reduces mix-ups, refunds, replacements, giveaways etc, all of which can affect your GP.

> Record your waste properly – Know where you are wasting items; analyse this weekly and ensure you take steps to reduce wastage wherever possible. E.g. if too much has been ordered and some has gone out of date, rectify by ordering the correct amounts the following week.