How to Keep Your Restaurant Making Money: Cost Control 101

What makes a restaurant a success? Is it the menu? Or having a dynamic chef? Or is it having an incredible front- of-the-house staff? All of these are important factors, but the bottom line is that if a restaurant or foodservice operation’s finances are not managed correctly, no dish or service will produce a strong business.

So how do you build that strong business? You have to make more money than you spend. Your sales, or revenue, have to be higher than your costs.

Two terms you need to know off the bat:

• Revenue is the income from sales before expenses, or costs, are subtracted. It is also referred to as gross profit.
• Costs are the expenses you incur to purchase, prepare, and serve your products.
• Profit is the amount of revenue you get to keep after all costs are paid. Once you have paid everything the company owes (from the electricity bill to state taxes and everything between), the result is net profit.

If your costs are higher than your sales, your business is losing money. If costs remain higher than sales for a long time, your restaurant is going out of business. Very popular restaurants can actually have high sales volume – meaning they are earning a LOT of money – but still ultimately fail, if they do not properly manage costs.

Profitability in the restaurant and foodservice industry is very, VERY tight. This means that restaurants have to control every penny to make money.

Just a few small mistakes, done over and over, can EASILY close a restaurant or foodservice establishment.

As future managers and chefs, you need to understand how to manage your costs and still provide a great product with good value to your guests. This is why it is so important to understand and monitor your operation’s costs daily. Cost control is a business’s efforts to manage how much it spends

TYPES OF COSTS

In the restaurant and foodservice industry, a successful operation needs to manage and control many costs. The four main categories break down as:

1. Product or food costs 
2. Beverage costs
3. Labor costs
4. Overhead costs

The first three costs – food costs, beverage costs, and labor costs are controllable costs. This means that they are incurred only when a meal or service is provided to a guest. A manager or chef can manage or adjust these costs based on the operation.

The fourth cost – overhead costs – includes insurance, utilities, and an operation’s lease or mortgage on the building. These overhead costs do not change. They are considered fixed, or non-controllable, costs because managers and chefs cannot adjust them. It is very important for an operation to understand the differences in how all of these costs work and how they can or cannot be managed.

Controllable Costs

Controllable costs include food & beverage and labor costs.

Food and Beverage Costs

Food costs are the cost of food items that a restaurant uses to create a menu item for sale. Beverage costs are the cost of the ingredients to make a beverage for sale. Food costs can go up and down as sales go up and down, and do so in direct proportion. As sales go up, more food is purchased to replenish inventory. As sales go down, less food is purchased. If adequate cost controls are in place, little waste exists, and no theft occurs, then the amount of food used should be in direct proportion to sales.

Management can control food and beverage costs by using standardized recipes; exercising standard procedures for portion control, menu listing, and pricing; or by one of several other restraints. For example, if the price of chicken increases and no action is taken, the restaurant’s food cost will increase. At this point, management can either raise the selling price of all chicken entrees, reduce portions, reposition the items on the menu, or eliminate chicken from the menu altogether. By taking action, management has controlled the effect of the increased cost of chicken, resulting in no increase in the restaurant’s food cost.

Consider the two tools used to control costs below. The first is a Menu Item Food Cost Card – it tells us how much a single entree of penne pasta will cost. The second is a Recipe Food Cost Card – it tells us exactly how much it will cost to make an entire RECIPE’S worth of the same dish.

They both have the same information… the only difference is in scale. Do you want to know how much it will cost to make ALL of a recipe or how much you will pay to make just one PLATE of it?

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Menu Item Food Cost Card: Penne Pasta

No. Portions:	1	Menu Price:	$ 13.50
Ingredients	No.Recipe Units	Recipe Units	Cost perRecipe Unit	Extended Costs
Pasta, penne, cooked al dente	4.0	oz	$0.05	$0.20
Chicken, b/s breast, cut	5.0	oz	$0.12	$0.60
Spinach, fresh, chopped	1.0	oz	$0.16	$0.16
Parsley, flat leaf	1.0	tbsp	$0.06	$0.05
Oil, salad	0.5	oz	$0.07	$0.04
Cheese, parmesan	1.0	tbsp	$0.30	$0.30
Sun-dried tomato Alfredo sauce	2.5	oz	$0.11	$0.28
Un-costed ingredients: salt, pepper				$0.02
Recipe cost	$2.05
Portion cost	$2.05
Food cost % (portion)	12.2 %
Gross profit margin (portion)	$ 11.85

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Recipe Cost Card: Pasta Sauce

Recipe Amount	Recipe Unit	Ingredients	Invoice Cost	Invoice Unit	Recipe Cost	Recipe Unit	ExtendedCost
1	pt	Olive oil	$112.00	4 gal	$3.50	pt	$3.50
0.5	lb	Onion, finely chopped	$16.50	50 Ib	0.33	lb	$0.17
0.5	lb	Celery, finely chopped	$27.85	30 Ib	0.93	lb	$0.46
1 can	#10	Tomatoes, chopped	$18.00	6/ #10	3.00	#10	$3.00
3	cloves	Garlic	$0.05	clove	0.05	clove	$0.15
1	oz	Salt			0.10		$0.10
0.5	oz	Pepper			0.10		$0.10
1	tbsp	Sugar			0.10		$0.10
to taste		Oregano			0.10		$0.10
to taste		Basil			0.10		$0.10
to taste		Parsley, chopped			0.10		$0.10
						Total	$7.88
						# portions	24
						Cost/ portion	$0.33

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Labor Costs

Labor costs are the costs of all of the staff (management, front- and back-of-the-house staff) from wages to benefits (insurance, retirement plan, etc.). Labor costs can go up and down as sales go up and down, but not necessarily in direct proportion. Management salary remains the same regardless of the operation’s sales volume. If the general manager, assistant manager, and chef are collectively paid $200,000 per year, they will receive that amount regardless of what the restaurant makes for a year. However, staff members such as the waitstaff and line cooks are often paid an hourly wage and are scheduled according to anticipated sales. As a result, the cost of hourly employees goes up as sales go up and goes down as sales go down. If proper scheduling is used, the cost will go up and down in direct proportion to sales levels. Putting this all together, labor is considered a controllable cost.

Of course, there is at least ONE exception. Sometimes, sales and labor are NOT related.

holidays, so labor is only 18.5% of soles ($1,500.,. $8,000).

Noncontrollable Costs

Noncontrollable costs include the business’s overhead costs.

Overhead costs are fixed costs. They stay the same regardless of sales volume. Insurance is an example of a fixed cost. After an insurance policy has been negotiated, the cost remains the same throughout the term of the policy. For example, if the cost of insuring the business is $1,000 per month, it will remain at $1,000 every month. Changes in how much money the business makes will not affect that cost.

There are two main methods by which an operation monitors, assesses, and tries to control costs- the operating budget and the profit and loss report.

The Operating Budget

An operating budget is a financial plan for a specific period of time. Most budgets cover one year and are broken into months. Budgets are an essential tool for managing an operation’s many costs. They list anticipated sales revenue and projected costs, and they give an estimate of the profit or loss expected for a period of time (month, quarter, year, etc.).

Operating budgets serve many purposes in the management of a restaurant or Foodservice operation, including:

• Predicting potential sales and where the revenue will come from (food and beverage sales)
• Identifying the controllable cost needs, such as labor, food and beverages, and supplies
• Noting all noncontrollable costs such as rent, insurance, taxes, and licenses
• Identifying operating goals and managers’ performance responsibilities
• Providing a benchmark or road map of performance for the operation

Remember, an operating budget takes into account all aspects of an operation’s finances, including all sales, controllable and noncontrollable costs, employee benefits, and depreciation, which is a loss of value over time.

Here’s an example of an Operating Report. It lays out how much the restaurant EXPECTS TO SPEND on food, beverages, labor, as well as other fixed and controllable costs. Use the list of terms underneath the example to understand how the report works.

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SAMPLE RESTAURANT OPERATING REPORT

Projected Sales
Food Sales	$50,000.00
Beverage Sales	$10,000.00
		Total Sales	$60,000.00
Projected Food Cost
Food Cost	$15,000.00
Beverage Cost	$3,000.00
		Total Cost	$18,000.00
		Gross Profit on Sales	$42,000.00
Projected Operating Expenses
Payroll	$18,000.00
Employee Benefits	$4,000.00
Music and Entertainment	$2,500.00
Repair and Maintenance	$500.00
Promotional Activities	$1,000.00
Administrative	$1,000.00
Utilities	$2,000.00
		Total Operating Expenses	$29,000.00
		Profit after Operating Expenses	$13,000.00
Projected Occupational Expenses
Property Tax	$1,200.00
Rentals and Miscellaneous	$0.00
Liquor License Fees	$ 800.00
Insurance	$2,000.00
Mortgage	$4,000.00
Interest	$1,000.00
Depreciation	$300.00
		Total Occupational Expenses	$9,300.00
Other Income or Expenses
Extraordinary Income	$0.00
Extraordinary Expense	$0.00
		Total other Income or Expenses	$0.00
		Profit before Income Tax	$3,700.00

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EXPLANATION OF TERMS FROM OPERATING REPORT

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A forecast is a tool that managers use to look at current business trends ( how much money a restaurant has been making ) and to use that information to make an educated guess (predict) how these changes will affect the operating budget in the future. For example:

1. Assume you manage a restaurant where chicken entrees are popular. If the price of chicken goes up, what happens to your budget? You must forecast your food cost to go up or offer a new entree that does not include chicken.
2. You know that there will be road construction in front of your restaurant starting next month. How will this affect your budget? Your new forecast might show lower sales than your operating budget because your guests may not be able to get to your restaurant.

The first step to making an accurate forecast is to look at historical data: information related to the restaurant’s past performance. To plan for the future, a manager must look at what has occurred in the past. Please remember that a forecast is an estimate of future sales and costs. Outside factors, such as weather, time of year, local construction, and so on- both in the post and present- need to be accounted for as well.

At the end of the day, an estimate or a forecast is NOTHING MORE THAN AN EDUCATED GUESS.

SAMPLE SALES HISTORY REPORT

UNIT SALES	January	February	March
Lunches	119	227	302
Lunch beverages	119	227	302
Dinners	500	600	728
Dinner beverages	500	600	728
Other	50	50	50
Total Unit Sales	1,288	1,704	2,110
UNIT PRICES	January	February	March
Lunches	$10.00	$10.00	$10.00
Lunch beverages	$2.00	$2.00	$2.00
Dinners	$20.00	$20.00	$20.00
Dinner beverages	$4.00	$4.00	$4.00
Other	$2.00	$2.00	$2.00
SALES	January	February	March
Lunches	$1,192	$2,272	$3,021
Lunch beverages	$238	$454	$604
Dinners	$10,000	$12,000	$14,560
Dinner beverages	$2,000	$2,400	$2,912
Other	$100	$100	$100
Total Sales	$13,530	$17,227	$21,197

From this report, the restaurant manager can forecast sales for NEXT February (hint: it is a little busier at this restaurant in February than in January, but not nearly as busy as it will become in March).

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Revenue

To estimate potential changes in revenue, managers look at previous sales from operational records like the sales history report above. Changes in revenue involve only two factors:

1. an increase or decrease in the number of customers, which is called customer count, or
2. an increase or decrease in the amount of money the average customer spends per visit to the restaurant. This second factor is called average sales per customer. It is calculated by the total dollar sales divided by the total number of customers, as shown below:

• Total sales = $1,000
• Total number of customers = 100
• The average sales per customer: $1,000 / 100 = $10.
• So, the average customer spends $10 on a meal in your restaurant.

CUSTOMER COUNT: how many people did we actually serve?

AVERAGE SALES PER CUSTOMER: how much did each person spend ON AVERAGE?

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Food or Beverage Costs:

A detailed sales history is a record of the number of portions of every item sold on a menu. Of course, this can vary. For example, the popularity of dishes can shift with the seasons and trends. Some menu items are more expensive than others. Therefore, food costs must be adjusted in a forecast if menu popularity changes.

To produce a more accurate forecast, managers can use a smoothing technique called the moving average technique. This technique helps to average sales information over a period of several months, so the numbers are not based on one unique month.

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Guessing how much people will spend and how much of a particular item people will buy is only HALF THE BATTLE. We must also control how our culinary workers cook product.

Imagine: a line cook is asked to prep chicken breasts for lunch service tomorrow. How much chicken does he pull from the freezer to defrost? Do you really want that cook to GUESS? Of course not. You only want her to pull what you will need – otherwise you will have wasted product – a LOSS.

How about once she starts cooking? If your chicken sandwich only calls for 3 tomato slices and your worker decides to put on an extra slice ON EVERY SANDWICH… Again, you are losing money.

The kitchen MUST produce the right amount of product. If restaurant cooks are preparing more food items than servers are selling, then the operation is creating waste and thus losing money. All of this is why kitchens use a production sheet (also known as prep sheets or par sheets). This sheet lists all the ingredients/ core items that are going to be prepared for a given date.

Here’s an example of a daily prep sheet with par levels. Note that there are different amounts of prep for slower days and busier days.

SAMPLE PRODUCTION SHEET

So far, we have looked at tools and records that show what has happened in the past, including trends related to menu item popularity. We discussed how restaurant managers look at historical data to try and guess what will happen NEXT. There are several software product that can help with this, especially point-of-sale (POS) systems.

When you see POS, think “cash register.” All modern restaurant systems used to put in customer orders have sales report functionality built right in. Using this information, managers can anticipate what is likely to happen moving forward.

Projected sales are used to estimate:

• Staff labor needed both for production and front of the house 
• Production of menu items for kitchen staffing
• The ordering of food and beverage items
• Once a budget is created, this becomes the planning tool for the restaurant

Forecasting means using previous experience to foresee future occurrences. Restaurants use forecasting to predict changes in their annual operating budget. Then, daily adjustments help management and staff know what to expect.

These are the steps involved in forecasting:

1. Analyze current sales history:  Knowing any current changes in menu popularity or changes in customer count sis very important.Consider  changing the menu or price for an item that is consistently in high demand or removing a poorly selling dish. IfSaturdaynight sales are trending slow, reduce inventory and schedule fewer staff members.
2. Account For Externalities: If a blizzard is predicted, consider closing early. On the other hand, if the restaurant has air-conditioning during an August heat wave, consider increasing supplies and scheduling more staff to account for more guests.
3. Predict Sales Volume: Based on all this information,estimate how busy the operation will be for a particular service or time period. Schedule staff and deliveries of perishables accordingly.
4. Predict Sales Mix: Anticipating how much you  will sell of each menu item helps to plan work. For instance, if the seared duck breast accounts for 5 percent of dinner entree soles and the restaurant expects 100 guests this evening, expect to sell five duck breasts. (Of course, have more than five prepared, just to be safe- this isn’t an exact science.

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Profit and Loss Report

While a budget defines what you plan to do, a profit and loss report explains what actually happened.

A profit and loss report (also called a P&L report or P&L statement) is a all the sales and cost information for a specific period of time. It shows whether you lost or made money for the time period. It also shows whether an operation performed as the budget predicted it would.

A profit and loss report lists sales income first and then lists all expenses. All income received by the restaurant (food soles, beverage sales, and other sources of income if appropriate- such as merchandise sales) must be listed. Then all costs incurred by the restaurant are listed by categories (food costs, beverages, labor, etc.). The end of the report reflects the amount of profit or loss for the period covered. For an operation to be profitable, sales need to be greater than costs. If sales are less than costs, then the restaurant is operating at a loss. It lost more money than it received for that period of time.

Sample Profit and Loss Report

Category	Itemized	Totals
Sales
Food	$40,000
Beverage	$10,000
Total sales		$50,000
Cost of Sales
Food	$16,000
Beverage	$2,500
Total cost of sales		$ 18,500
Gross Profit
Food	$24,000
Beverage	$7,500
Total gross profit		$ 31,500
Controlled Expenses
Salaries And Wages	$13,000
Employee Benefits	$2,000
Legal/accounting	$500
Marketing	$250
Utility services	$1,650
General and administrative	$2,200
Repairsand maintenance	$1,100
Other Income	$300
Total controlled expenses		$21,000
Fixed Expenses
Rent	$3,500
Depreciation	$475
Utility Services	$100
Insurance	$1,200
Loan Payments	$1,500
Total fixed expenses		$6,775
Profit/ Loss		$3,725
Income Taxes		$275
Net Earnings/ Loss		$3,450

Losses on a P&L report are listed in RED and profits are listed in BLACK. When a business owner or manager says they are “in the red,” they mean they are losing money. When their company is doing okay, they say they are “in the black.” 

Managers use a profit and loss report to judge the efficiency of an operation, to help determine where costs have grown unexpectedly, and to make basic management decisions that help control those costs. For larger organizations, investors, owners, and managers use P&L reports to determine the profitability of an operation.

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Purchasing Control – Invoicing

An invoice is a bill received by the restaurant for something purchased for use, such as food deliveries and cleaning supplies. When the restaurant receives a delivery, the invoice must be checked to make sure that it is accurate. All items on the invoice should have been received in the right quantity for the right price.

This can also be checked using a packing slip, which is sometimes included. This is a list of items, often separate from the invoice, showing quantities of items received. If something is inaccurate with the invoice or delivery (such as items missing, returned, or with the wrong pricing), then the invoice needs to be corrected. You must also check to see if any unauthorized items were added to the order by checking the purchase order and invoice.

Accurate deliveries are very important for the profit and loss statement. For example, an item not received but charged to the restaurant will cause costs to be higher. In addition, missing items may lead to unexpected changes in the menu, which can reduce sales.