Measurable Improvement: A Three-Phase Approach to Increasing Profit With Food Cost Control Systems

Overcoming food and beverage cost problems is perhaps the single biggest stumbling block for the independent restaurant operator. Welcome Survey in which more than 50% of our new members tell us having better systems and controls and getting a handle on food and beverage costs are among their greatest challenges.

You absolutely must have systems in place for every phase of your operation. In this article we'll discuss the systems and controls necessary for controlling food and beverage cost, many of which are used by the big chain operators,. Used regularly, these systems will help you recognize and reduce your overall food and beverage cost.

The strategic systems needed for gaining control of food and beverage cost can be divided into 3 distinct phases:

• Phase 1: Target -- Determine what your costs should be

• Phase 2: Execute -- Best practices for controlling food and beverage costs

• Phase 3: Measure -- Track and report the results

It's important to note that each phase is equally important to the overall success when developing your strategy for controlling food and beverage costs.

Many operators already utilize several of these systems with some degree of success, but if you really want to impact your bottom-line from 2%-5% of sales or more then you should make a commitment to go "all-in".

Phase 1 - Target

It's often been said, "Before you can get somewhere you must first know where you are going." Likewise, to gain control over your food cost you must first know, based on your current menu pricing, what those cost should be running. In the fast-paced environment of restaurants, food and beverage cost are typically expressed in terms of percentage of sales. The objective of the target phase is to determine what the ideal cost percentage (sometimes referred to as theoretical cost) for your restaurant should be.

One of the biggest mistakes an operator can make is to formulate food or beverage cost percentage expectations based solely on industry averages. When we talk about ideal cost percentage, we are neither referring to a number that you want to be at nor do we mean a standard metric; rather, we are referring to the ideal food cost percentage you should expect based upon your current pricing and the expected usage if recipes are followed exactly.

The following steps you through the process of establishing an ideal food cost target. These steps work equally for creating an ideal beverage cost target.

Step 1 -- Use the Correct Method for Calculating Food and Beverage Cost Percentages

One of the most common mistakes made when calculating food and beverage cost ratios is to measure food or beverage usage against total sales. The primary rule of thumb in cost control is to measure food cost against food sales and beverage cost against beverage sales. The following example illustrates the correct method for calculating the cost of sales.

Notice that to get the correct food cost percentage the food cost amount is divided by the food sales amount, resulting in a 35% food cost. Likewise, beverage cost of $5,000 is divided by beverage sales of $20,000 for a 25% beverage cost ratio. The total cost of sales ($33,000) is then compared to total sales ($100,000) resulting in a 33% overall cost of sales.

However, for even better cost control we need to break down sales and cost categories to even smaller groups. In the chart above, note that sales and cost categories for food and beverage are further broken down into the following subgroups.

• Food Groups

  • Food

  • Soft Beverage

• Beverage Groups

  • Liquor

  • Draft Beer

  • Bottled or Canned Beer

  • Wine

The percentages reported for each subgroup cost category is likewise calculated as a percentage of the respective sales category for each, i.e. soft beverage cost is measured against soft beverage sales, liquor cost against liquor sales and so on.

(Note: According to the National Restaurant Association Uniform Systems of Accounts, soft beverages are reported as a subgroup of food. Beverage sales consist of alcoholic beverages only.)

Step 2 -- Configure Your POS System for Proper Sales Reporting

Whether you are using a POS system or a simple cash register, it's important that it be setup to report sales in a fashion that complements your cost control systems. To do this you must configure your POS sales report groupings to match the sales tracking groups prescribed in Step 1 above.

Next, your cash register or POS (point-of-sale) system should be programmed to track individual sales for each of your menu items - and that each menu item is tied to one of these groups. If you are using an "open" key to ring up some of your menu then you reduce to your ability to pinpoint cost control issues to a specific sales group or menu item.

The sales (product) mix report is a basic feature found in most cash registers; if your register doesn't have this capability then you need to seriously consider upgrading. This report should tell you the quantity sold and total sales for each menu item for a given period. Most all registers will give you this report for daily, weekly and monthly sales mix.

Step 3 -- Calculate the Current Cost for All Menu Items

Costing out your menu is an arduous task, but you must know your menu cost before you can make intelligent decisions on cost-cutting. The first step in calculating your ideal food cost is to cost out your entire food menu, including all recipes and prep items. To accomplish this, you'll need a listing of every ingredient that you use as well as the current cost. Hopefully, you already have an inventory listing and are using it to take weekly or monthly inventories so that you can accurately track your food cost from one week or period to the next -- more on that later.

Next, create a menu costing sheet similar to the one illustrated below. Using the inventory listing, record to the menu costing form the quantity and cost of each ingredient used. Add the total cost of all ingredients used to arrive at the menu cost.

In the example, note the cost for a 12-inch Deluxe Pizza is $2.94, 24.6 percent of the selling price; and that this menu item has a profit contribution of $9.01. It is essential to know the expected food cost percentage for every item on your menu and the profit contribution in dollars. It's a good practice to periodically update your menu cost calculations based on the current purchase price for ingredients.

Step 4 -- Compute the Ideal Cost Based Upon the Menu Sales Mix Report

Ideal food cost (oftentimes called theoretical cost) is the cost expected for a given sales mix over a period of time, assuming proper portioning and normal waste and yields. It is impossible to know the ideal food cost unless you first know the portion cost for each ingredient of every menu item. Even then, as cost for ingredients change, so will ideal cost.

Sales mix (the number of each menu item sold for a specified period) affects the ideal cost too. If one period you sell a greater percentage of high-cost menu items and the next period you sell more low-cost items, then the ideal cost for each period will differ; for that reason, ideal cost is an ever-changing target. However, for most restaurants the sales mix is fairly consistent from one month to the next.

The Ideal Cost Worksheet example above is a simple method for recording the ideal cost of your menu for a given period. Simply list the cost of each menu item and the number of sales for that item. Then, multiply the cost times the number of sales to arrive at the ideal cost for each item. Next, add the ideal cost for all items to arrive at the total ideal food cost for the period.

In this example, the Ideal Cost Worksheet tells us that the expected (ideal) cost for the week ending 3-15 for this restaurant was $4,825. The sales for that same period were $18,046, resulting in an expected food cost percentage of 26.7 percent.

Using the Ideal Cost Worksheet form, enter the menu item sales and menu cost using a POS sales mix report for the most recent month. If you have completed menu cost calculations properly, then by multiplying the items sold for the month times the cost of each item you are able to calculate your ideal cost percentage. Most operators add 1-2% to allow for waste, order substitutions and small price increases. Using the example above, setting a food cost percentage goal of 28% would be an acceptable target for management to shoot for.

Phase 2 - Execute

Now that you've established a food cost goal, it's time to turn your attention to implementing systems and controls needed to hit your goal. High food cost is rarely the result of a single problem; rather, it stems from a breakdown in (or lack of) multiple systems in execution. Waste, theft, over-portioning, vendor price increases and unrecorded sales may be the causes of rising food cost, but it's typically a lack of systems and controls that allow these causes to take place. Ultimately management needs to be held accountable for controlling costs; however, the way to make management accountable is to implement systems and then judge them by how well they execute the systems. Argue as you may, but the chief reason that the big chain restaurants are successful is not because they have the best product -- it's a direct result of having systems and controls that management must follow and execute.

Purchasing and Receiving Systems

You should have a written policy describing what your restaurant should be doing to purchase the best products in the most economical and efficient way. Establishing purchasing procedures lets everyone know the system used in your restaurant for ordering product, the people or positions responsible for placing orders and the frequency in which you order products. This policy should reflect the vendor bidding process used and product specifications and should consist of an approved vendor list containing vendors, current sales representatives and contact information. It also needs to address vendor practices with respect to gifts or rebates that are intended to influence the buying decisions made by your purchasing personnel.

Some of the tools used as purchasing controls include:

• Running Inventory Order Guide. An order guide is a set of forms that contain a listing of all the products a restaurant uses. It is usually divided into separate sections such as meat, produce, cleaning supplies and paper. The order guide is used as a tool for counting and tracking all the products that your restaurant uses and must reorder. When using an order guide, all products are counted at least once a week and some, such as produce or seafood, may be counted as many as five to six times if you receive fresh product daily. The unique layout of the guide allows you to keep running inventory counts on all your products, thus simplifying weekly inventory counts without too much additional effort. For more information, see "How to Avoid Running Out of Product With an Effective Order Guide."

• Purchase Orders. Whereas the order guide helps to track and control what is ordered, purchase orders provide an excellent financial control to ensure that all purchases have been authorized and invoiced with correct pricing. A purchase order showing the quantity and price quoted should be completed for every vendor order. Hourly staff receiving deliveries can simply compare the invoice with the purchase order, alerting the manager if there are any discrepancies.

In addition to a comprehensive purchasing policy, restaurants need to adopt receiving best practices to prevent losses and problems when product is received at the back door. The policy should establish acceptable receiving hours and which personnel are authorized to receive and sign for deliveries. It should include guidelines for inspection of product received, weight verification, such as the use of a scale to check product weights, and the proper use of purchase orders to verify invoiced items.

Preparation and Storage Controls

The key to controlling waste and spoilage is found in having proper storage and preparation systems. Goop preparation practices also help to create consistency of recipes, improved portion control and keeping your shelves free of excess inventory. Tools for controlling preparation and storage include:

• Master Prep List. Perhaps the single most important system to master in a restaurant is the appropriate use and execution of a prep list. Preparing the proper quantity of food products is a critical function in any kitchen. Waste and food costs go up if you consistently prepare too much; don't make enough and you lose sales opportunities and disappoint your guests. A properly designed prep list should be completed for each station and should include a spot for recording quantities on hand, par levels, amount to be prepared, shelf life and proper storage containers needed for each prepared item. Optimally, prep levels should be checked before each shift to ensure there is sufficient product available. Adjustments must be made when usage is abnormally high or low. All prepared foods should be properly wrapped, labeled and dated. The best way to ensure proper rotation is to practice first-in first-out product usage. Older dated product should be moved to the front and newer product to the rear. You should never allow unlabeled and undated product to be stored.

• Master Recipe Manual. The only method for ensuring that your staff knows how to make your signature meatballs is to document the recipe and enforce strict adherence practices among your kitchen staff. Recipe pages should be laminated or placed in protective coverings and bound. They should be kept in a secure area and issued to prep cooks as needed to ensure consistency. Cooks should then turn in all recipes prior to ending their shift. Recipe manuals should never be allowed to leave the premises.

• Yield and Shrink Test Worksheets. Shrinkage, waste and trim are significant factors that can negatively affect your bottom line. If you cut your own steaks, seafood or poultry, or offer cooked meats such as prime rib, smoked brisket, ribs, roast beef or pulled pork, then it is a certainty that the true cost per pound of the finished product will be significantly greater than the original purchase price. By periodically testing your product yield you are positioned to react to conditions that affect yield, such as holding or cooking times or changes in product specifications.

Cook Line Management

Perhaps the most volatile area for controlling food cost is the cook line. Whereas theft can occur anywhere, and certainly vendor prices and proper preparation practices can have an equally negative effect on food cost, it is usually on the cook line that many restaurants lose their profits. Common issues on the cook line include incorrect portioning, waste and overcooked or cold food resulting from the kitchen getting slammed, items being prepared without a food ticket (unrecorded sales) and communication failures between kitchen and service staff (incorrect orders).

Here is a list of policies and systems that have proven results:

• No Ticket, No food Policy. This is perhaps the singularly most effective policy for controlling food and beverage cost and implementing it should be #1 on your to do list. If your POS or cash register doesn't have the ability to print orders to the kitchen and bar (often called requisition printing) then you may want to start shopping for one that does. It is common knowledge among POS vendors that restaurants using requisition printers typically enjoy as much as 5% or more in cost savings than those that don't. The reason is simple -- by employing a policy that all orders must be rung up on the POS before they can be made, you eliminate the possibility of unrecorded sales.

• Keep a Waste Log. Every restaurant experiences some degree of waste. However, waste is a controllable expense. You should have systems in place to both minimize and record wasted product such as meals returned by the customer, kitchen mistakes and spoilage. Keeping an accurate accounting of the value of wasted product can help to account for variances between ideal and actual food cost.

• Portion Control Tools. Poor portion control is one of the leading causes of food cost variances. Think about it; your ideal food cost is based on the premise of exact portioning for each menu item, including the portioning of each ingredient within a menu item. If your prep and line cooks have gotten in the habit of "eyeballing" measurements rather than sticking to the exact recipes, chances are your food cost variance could be as much as 5 percent or more. Proven portion control strategies include the use of portioning scoops, scales and measuring spoons and cups. Preportioning can be effective in controlling costs by using portion baggies and a scale to preweigh product prior to stocking the cook line.

• Recipe Quick-Reference Charts. The fast-paced environment of most restaurant kitchens makes it impractical to use the recipe manual for every menu item. Characteristically, cooks are required to memorize the proper portions and steps for preparing each item on their station. The recipe "quick reference" is used as the name implies, providing the cook with an at-a-glance list of ingredients, portion size and proper portioning utensil for each preparation step. Optionally, recipe references can be accompanied by photos of the finished product. Proper portioning and adherence to recipes, along with a visual reference of the properly prepared menu item help to ensure consistency in both taste and presentation.

Inventory Control Systems

Every restaurant operator appreciates the need for inventory control, but amazingly, few independent restaurant operators practice it. You don't need expensive software to control inventory, although there are a lot of good ones out there. What you do need is to realize the importance of maintaining inventory levels at their proper amounts. Too much product on hand often leads to waste, increased opportunity for theft, and a decrease in available cash.

Keep in mind this one simple fact -- inventory is cash, and when your cash is sitting on the shelf it cannot be used to pay wages and rent or purchase the products that are not on the shelf. Likewise, a shortage of proper inventory levels leads to expensive hotshot deliveries, higher prices and running out of product on a busy Friday night.

You can gain control of your inventory by using these 3 basic systems:

• Maintain Optimum Inventory Turnover. To calculate monthly inventory turnover you divide the cost of sales for the month by the average value of inventory on hand. For instance, if you use $10,000 per month in food product, and the average value of food inventory on hand is $2,500, then you are turning over your food inventory 4 times per month (10,000 ÷ 2,500 = 4). Optimum inventory turnover for most restaurants are approximately:

  • Food - 4-6 times per month (5-7 days product on hand)

  • Liquor - 0.25-1.5 times per month (Varies among concept/sales mix)

  • Bottle beer - 2-3 times per month

  • Draft beer - 1-2 times per month (Varies with number on tap/concept)

  • Wine - 0.75-1.5 times per month (Varies with size of wine list/sales mix)

• Conduct Weekly Inventories. To accurately calculate the cost of sales it is first necessary to calculate the value of inventory on hand. If you are using the running inventory order guide as described earlier, then your staff is already in the habit of conducting cyclical counts of product on hand to facilitate the ordering of replenishments. The best time to take weekly inventories is when the shelves are at their lowest. For most restaurants this would be after close on Sunday and before opening on Monday. Taking a full inventory on Sunday evening kills two birds with one stone. First, doing so enables you to quickly calculate your food orders to bring the shelves back up to par. Second, you can use the counts recorded on your order guide as the entries into an inventory spreadsheet that has been set up to mirror the products listed in the order guide. Spreadsheets should be configured to record count and purchase price of each product. A column should be added with a formula that multiplies the unit count times the unit purchase price to arrive at the total value of the product on hand.

• Daily Key Item Inventory Tracking. This is one of the most effective cost-saving measures any restaurant can carry out. The objective of this practice is to identify 10-15 high-cost, high-use items that you use every day, then to track the purchases and sales of that item daily. For example, let's say that your restaurant has several items that use 8-ounce chicken breasts. The manager begins the day by counting the number of breasts on hand and records it to the key item tracking sheet. She then enters the number of breasts received from the vendor that day. The number sold for the day is taken from the item sales mix report (includes all items that have an 8-ounce breast). Finally, she counts the actual number of breasts left at the end of the day. Ideally, the actual use should match the calculated usage. The running inventory order guide, mentioned in the Purchasing and Receiving section earlier, is an excellent tool for tracking your key inventory items. It also serves as an inventory count form for your weekly inventories.

Phase 3 - Measure

There is an old business axiom that tells us we can only expect what we inspect. In the first phase of our plan for controlling food and beverage cost we established our expectations. In the second phase we addressed the many different components of how best to execute the plan by emphasizing the need for daily systems and controls. In the final phase of our plan we must inspect the results of that execution. This phase is accomplished through timely and accurate reporting. The most effective method for measuring food and beverage cost control is to calculate the cost of sales on both a weekly and monthly cycle.

Prepare Weekly Reports

Monthly profit and loss reports are important to overall financial planning and for comparing to previous month and year results. Weekly reports are more focused on current results and are used by management to review previous week's performance. Irregularities can be addressed immediately rather than waiting an entire month to find out you had higher than desired food cost.

Weekly reports for managing food cost should be prepared as follows:

• Cost-of-Sales Calculation. Many operators believe that what they spend on food and beverage purchases is their cost of sales. While this may be true in the long run, for weekly cost analysis it is inaccurate. The true cost of sales is not what you spend, it is what you use. This is where one of the benefits of taking weekly inventories comes in. The correct formula for calculating cost of sales is this:

Total food purchases + beginning inventory - ending inventory = cost of sales

Operators who take inventories and calculate their cost of sales each week are far more profitable than those who don't -- taking anywhere from 2 percent to 10 percent more profit to the bottom line. The reasons are twofold:

• By calculating the cost of sales weekly, operators can quickly identify problems, giving them the opportunity to react immediately rather than wait an entire month, and lose even more profit.

• Maintaining tight control on inventory levels ensures that your cash is in the bank and not on the shelf in the form of excess inventory or, even worse, susceptible to spoilage, waste and opportunity for theft.

• Ideal Cost Calculation. As we explained during Phase 1, by periodically computing your ideal cost, it gives you a sense of what your food cost percentage should be running. You can use the same tools to monitor ideal cost on a weekly basis. Needless to say, you need to keep your menu cost updated for this to have relevancy. You can then compare your actual cost for the week against the ideal cost. Some POS systems provide a setting to affix an arbitrary cost to each menu item, and many have ideal (theoretical) cost reporting built into their reports, saving you the trouble of transferring the totals from your sales mix reports to the ideal cost spreadsheet.

• Inventory Turnover Calculation. Review inventory turnover each week to spot excess inventory. Many suppliers will buy back nonperishable items. For all other excess inventory, you could run daily specials to move it.

Creating a Culture of Cost Awareness

At the end of the day, the real benefit of implementing the aforementioned cost control systems is that your management and staff begin to develop awareness for waste and inefficiency. The more your staff puts these systems into place, the better your numbers will be.

Simply stated, the success or failure of your food cost-control efforts boils down to the diligence of your management team to make sure systems are followed day in and day out. Remember this; all of the big chains began as single restaurant. It was their ability to implement and adhere to systems that allowed them to duplicate their success as they opened new stores.