Food and Beverage Cost Control in Restaurants and Bars

Introduction: The Case for a Control System

One of the primary reasons restaurants and bars fail is that owners and operators neglect to implement a food and beverage control system. Without one, they have no way of knowing whether anything is missing or whether costs measure up to standard. A control system is a necessary and beneficial tool for maximizing profit and keeping waste and pilferage to a minimum.

Profit Planning

One of the most critical aspects of food and beverage control is profit planning. Ultimately, the profit generated must be sufficient to keep the business running and the owner satisfied with the investment.

Three ratios are extremely important in profit planning:

Operating Ratio = Net Income Before Taxes / Net Sales. This ratio is commonly known as net profit to net sales — the higher the ratio, the better. For example, in full-service operations with an average check of less than ten dollars, the median operating ratio is usually greater for units serving food only compared to those serving both food and alcohol. Franchise-operated multi-units produce higher ratios than either company-operated multi-units or independents, and operating profit increases as sales volume increases. For full-service operations with an average check of more than ten dollars, the operating ratio is better for businesses serving both food and alcohol compared to food-only establishments. Multi-unit, company-operated units show a greater median operating profit than independents, and operating ratios again increase as sales volume rises. For limited-service operations, the operating ratio is highest for company-owned chains.

Management Proficiency Ratio = Net Profit After Taxes / Total Assets. This ratio indicates what management does with the assets it has. The higher the ratio, the better the job management is doing.

Net Profit to Net Equity = Net Profit After Taxes / Net Equity. Some businesses make a relatively small profit on each item sold yet rely on high volume with a relatively small investment compared to sales. This produces a modest operating ratio but a strong net profit to net equity.

According to industry experts, there are several steps a restaurant can take to increase profitability (Nation's Restaurant News):

• Design a detailed income statement.
• Hire an accountant with food service experience.
• Monitor daily purchases.
• Buy only cost-saving equipment.
• Base purchases on menu items.
• Plan one week in advance to prevent unexpected events.
• Shop for lower insurance rates.
• Train and test servers in menu knowledge.
• Promote food and beverage items.
• Keep the menu exciting.
• Use entertainment as a profit stream.
• Offer merchandise sales.

In order to generate profit, sales are essential. Spending money upfront can often save money in the long run. Balancing food and beverage costs with labor costs is central to profit planning, which is ultimately the foundation of a profitable operation.

Fundamentals of Cost Control

To calculate the costs of food and beverage, restaurants often rely on a straightforward formula:

Opening Inventory (the dollar value of food and beverages already purchased and on hand at the start of the period) plus Purchases (the total of all invoices for the period) minus Closing Inventory (the value of all products not used during the period) minus Adjustments (including employee meals, complimentary items, etc.) equals Cost of Food.

While this method can be time-consuming, it is very important. Smaller businesses may choose to assign an estimated figure for inventory and use their purchases for the period to determine food cost.

On their own, food and beverage costs are meaningless; however, when compared against targets, it becomes easier to identify differences between actual and budgeted costs. The owner can then make the necessary adjustments.

There are many reasons why actual food and beverage costs may exceed projections, and understanding these reasons is an important part of control. The main causes are: waste; pilferage and theft; poor security; spoilage; improper portion controls; increases in raw food prices; and poor forecasting.

Cost, Volume, Profit, and Break-Even Analysis

Cost, volume, profit (CVP) analysis — also known as break-even analysis — describes the relationship between sales volume, fixed and variable costs, and profit. Management can determine what sales volume is required to show a profit while also assessing the level of costs and profit or loss at any specific sales level.

The break-even point can be calculated arithmetically. For example, if a customer orders a $9 meal, the variable costs associated with that meal are subtracted immediately. The remainder contributes toward paying off the fixed costs. When all fixed costs have been covered, the restaurant breaks even.

Once the break-even point is reached, the contribution margin becomes profit. If the variable costs associated with the $9 meal are $5.50, then the restaurant contributes $3.50 toward fixed costs. Once all fixed costs are paid, the restaurant earns a profit of $3.50 for each meal served.

Conclusion

Food and beverage control is important to the success of any restaurant because it directly impacts profitability. A profitable restaurant typically generates a 28%–35% food and beverage cost. Along with labor costs, these expenses consume 50%–75% of total sales. Because of the impact food cost has on an operation, inadequate food and beverage control — combined with poor profit planning — is usually the cause of a failing business. Beyond the bottom line, food cost also reflects an operation's food quality, the value provided to the customer, and the overall skill level of management.

Bibliography

"Profit By Inch." Nation's Restaurant News. 1999.

Gordon, Robert, and Mark Brezinski. The Complete Restaurant Management Guide. 1998.

Miller, Jack, and David Hayes. Food and Beverage Cost Control. 2001.

Dittmer, Paul. Principles of Food, Beverage, and Labor Cost Controls. 2002.