There are many criteria for a restaurant to measure success: praise from customers, comments from local media, and return visits from satisfied customers. But if the business is to continue, it also needs some hard numbers.
There are at least seven key ratios that can be used to measure the ongoing costs and revenues of a restaurant business. Tracking them and using them to make adjustments to the business can help owners or investors maintain the level of profitability required for the business to flourish.
- Each of these numbers measures how efficiently the restaurant operates as a business.
- It is possible to evaluate food costs, inventory control and even the use of floor space.
- The restaurant owner uses these numbers to determine where changes need to be made.
- Investors use them to measure the actual profitability of the company.
Main cost of total cost
In the catering industry, the main costs include food, beverages, management, hourly labor and welfare costs.
A rule of thumb is that the main cost of a full-service restaurant should be equal to or less than 65% of the restaurant’s total sales. The main cost of limited service restaurants (such as fast food restaurants) usually accounts for 60% or less of total sales.For companies that have their operating structure and do not need to pay rent or mortgages, the ratio is even higher.
Major costs above these percentages may indicate that certain costs must be cut.
Specific food costs as a share of total costs
Food cost as a percentage of total cost is used to measure the actual cost of a particular product on the menu. This indicator is especially useful if you plan to change the menu.
The food cost tracked can be for a specific menu item or a group of items. For example, a restaurant may find that it spends 20% of the total food cost on hamburger ingredients, even though only 5% of its sales are hamburgers. Or, 40% of food costs may be spent on seafood, even if fish is not the restaurant’s famous menu item.
This indicator can be used to determine whether a particular menu item should be discontinued. From an investor’s point of view, it helps to show whether the company is sticking to its strategic moves.
Restaurants rely on perishable goods, so it is important for their managers to maintain appropriate inventory levels. The inventory turnover rate is calculated by dividing the net sales by the average cost of inventory.
Generally speaking, restaurants that handle fresh ingredients want to keep their inventory turnover rate within 7 days.
Indicators that are significantly higher than the industry average may indicate insufficient inventory purchases, failure to take advantage of quantity discounts, or the risk of supply shortages.
On the other hand, calculations that are significantly below average may mean buying too much food, slowing business, or deteriorating food quality due to lack of fresh products.
Sales per square foot
The restaurant analyzes the sales per square foot to determine the efficiency of floor space usage. This financial indicator divides the total sales over a period of time by the total area of the restaurant location.
This number may lead to improvements in restaurant layout and use of available space. It may help determine how to expand the seat or need to replace heavy or underutilized equipment.
Revenue per seat
To calculate the revenue per seat, the total revenue earned on a given night is divided by the total number of seats available in the restaurant.
For investors, low revenue per seat indicates low pricing or slow business.
This indicator is most useful when managers plan to reduce or increase the number of available seats. It can also be used to analyze the actual benefits of possible refurbishment costs.
Food/beverage expenses sold
The ratio of food/beverage expenses to sales measures the profitability of a company on each item. It can be broken down into specific menu items (e.g. salmon), food groups (e.g. seafood) or summaries (e.g. all foods provided).
By using this indicator for menu items, management and investors can understand the profitability of each item and whether the pricing or menu needs to be changed.
The current ratio is calculated by dividing the assets on hand by the liabilities incurred. This indicator measures the liquidity of the organization.
A current ratio greater than 1 indicates that if liquidation is required, the company can only use short-term assets to repay short-term debt. It shows that the company has the ability to pay for items such as food, beverages, and employee salaries in a short period of time.