Running a restaurant takes grit. It’s a tough business with lots of pressure, high turnover, and an endless number of things that can (and probably will) go wrong. So it should come as no surprise that it takes constant measuring and tinkering to keep things running smoothly.
Great restaurants don’t become successful or profitable overnight, they take months or years of hard work while analyzing each and every decision to figure out what works and what doesn’t.
To help you get started, we’re revealing 7 key restaurant metrics that will enable you to make informed decisions to improve profitability and ensure the long-term success of your restaurant:
1. Cost of Goods Sold (CoGS)
Cost of Goods Sold or CoGS is the total cost for all of the inputs associated with creating the products/dishes you sell to your customers. It typically includes spending on raw materials and labor but excludes indirect costs such as costs associated with marketing, sales or distribution.
Why is Cost of Goods Sold (CoGS) Important?
COGS is a crucial figure for restaurants as it helps determine the profitability of menu items, assess pricing strategies, manage food costs, and make informed decisions regarding inventory control, purchasing, and menu engineering.
How to Calculate Cost of Goods Sold (CoGS)
Here's the formula to calculate COGS:
COGS = Opening Inventory + Purchases - Closing Inventory
2. Labor Cost/Labor Cost Ratio
The labor cost ratio measures the proportion of a restaurant's revenue that is spent on labor expenses. It includes all labor-related expenses, such as: employee wages, salaries, and bonuses, payroll taxes, health care/insurance plans, vacation and sick days, and overtime.
Why is Labor Cost Ratio Important?
The labor cost ratio is important because it helps evaluate the efficiency of labor utilization and assess the impact of labor costs on overall profitability. A lower ratio indicates that you are effectively managing labor costs and optimizing staff utilization, while a higher ratio may indicate potential inefficiencies or areas for improvement.
How to Calculate Labor Cost Ratio
Here's the formula to calculate labor cost ratio:
Labor Cost Ratio = (Total labor cost / Total revenue) x 100
3. Gross Profit/Gross Profit Margin
Gross profit margin measures the amount of revenue that remains after deducting the cost of goods sold. It tells you how much money you are left with to pay for other expenses like rent, electricity, etc.
Why is Gross Profit Margin Important?
The gross profit margin is important because it provides insights into a restaurant's ability to generate profits from its primary business activities.
How to Calculate Gross Profit/Gross Profit Margin
Gross profit is expressed as a number, whereas gross profit margin is expressed as a ratio or percentage.
Gross Profit = Total Revenue - CoGS
Gross Profit Margin = (Gross Profit / Total Revenue) x 100
4. Break Even Point
The break-even point is the amount of sales or revenue at which a restaurant neither makes a profit nor incurs a loss. It is the point where total revenue equals total expenses, resulting in a net income of zero.
Why is Break Even Point Important?
The break-even point reveals the amount you need to make in order to pay all of your expenses and turn a profit. So if you're not reaching or exceeding it consistently over a long period, you’ll either need to find more funding until you can consistently generate enough profit, or eventually close down.
How to Calculate Break Even Point
Break Even Point = Total Fixed Costs / ( (Total Sales - Total Variable Costs) / Total Sales)
5. Inventory Turnover Ratio
The inventory turnover ratio measures how efficiently a restaurant manages its inventory by evaluating the number of times inventory is sold and replaced within a specific period.
Why is Inventory Turnover Ratio Important?
Keeping track of your inventory turnover ratio can help you better manage your inventory so you can avoid overstocking or understocking. It can also help assess the effectiveness of inventory management and provide insight into the liquidity and sales performance of your business.
How to Calculate Inventory Turnover Ratio
The inventory turnover ratio is calculated using the following formula:
Inventory Turnover Ratio = (CoGS / (Beginning inventory + Ending inventory) / 2
6. Food Cost Ratio
The food cost ratio represents the total cost of ingredients to create a given menu item in relation to its selling price (revenue). A lower ratio indicates that a smaller proportion of a dish's revenue is allocated to the cost of ingredients, which generally suggests better profitability. On the other hand, a higher ratio indicates that a greater proportion of the revenue goes towards food costs, which generally means less profitability.
Why Is the Food Cost Ratio Important?
The food cost ratio helps you identify areas for cost-saving opportunities, analyze pricing strategies, and make informed decisions related to menu design, portion control, purchasing, and recipe costing. It helps optimize food costs while maintaining quality standards and ensuring a profitable operation.
How to Calculate Food Cost Ratio
You can calculate your food cost ratio using the following formula:
Food Cost Ratio = Food cost of menu item / Selling price of menu item
7. Prime Cost
The prime cost is the total sum of a restaurant’s labor costs and Cost of Goods Sold. It represents the two largest expenses for most restaurants: food and labor. As a rule of thumb, many restaurants aim to have a prime cost that is roughly 60% of total sales.
Why is Prime Cost important?
Prime cost is an important metric because it represents the majority of a restaurant’s controllable expenses. Since these costs are such a signification proportion of restaurant operations, this metric is one of the most impactful ways a restaurant owner can optimize to decrease costs and increase profit.
How To Calculate Prime Cost
To calculate prime cost, simply add the total of all labor expenses (wages, salaries, overtime, etc.) to the cost of goods sold. If you want to view prime cost as a percentage, you can use the following formula:
Prime Cost Percentage = Prime Cost / Total Sales
Bottom Line
Restaurants have a ton of moving parts, and require some impressive attention to detail in order to keep operations running smoothly. These seven metrics are a great start to developing a better understanding of your business, but they’re only the start.
There are hundreds of metrics that measure things like finances, profitability, turnover, and beyond, but it can be hard to keep track of them all on your own. With the right point of sale technology, you can leverage detailed analytics and reporting to get a much deeper look into your business.
Find out how RPOWER point of sale can help you optimize your operation and increase profitability.