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The ratios to follow in 2023 to preserve the margin of your restaurant

One out of two restaurants closes before its third year... What are the ratios to follow to react quickly in this inflationary context?

Chloé Géray

9

January 2023

The ratios to follow in 2023 to preserve the margin of your restaurant
In this article:

A good management of your restaurant requires reliable monitoring tools and indicators. Having access to your restaurant's turnover is simple: you just have to consult your cash register every day. But is it enough? One restaurant out of two closes before its third year, often because of a lack of margin monitoring.

Inflationary pressures on food products will continue to weigh on restaurants in 2023, combined with soaring energy prices, difficulties in hiring and accessing loans, it will require a high level of responsiveness to overcome the challenges ahead.

What are the ratios to be regularly monitored to react quickly in this uncertain context?

Inpulse deciphers for you the financial ratios and indicators that must be followed in 2023 to control the profitability of your restaurant.

The prime cost

The cost ratio or prime cost is calculated by adding the material cost ratio and the payroll ratio. The prime cost of a restaurant varies between 55% and 65%.

Prime cost = Percentage of material cost + Percentage of personnel cost

This is a major ratio that cannot be ignored because it is directly linked to operational performance, i.e. the good management of raw materials and human resources in the restaurant. These are the elements that fluctuate the most today and that we can really act on on a daily basis. As the operations manager at Pitaya reminds us during a webinar:

"Everything is expensive, gas, electricity, rent... it's difficult in the current context. We can only really act on the prime cost: the cost of materials and the cost of the payroll.
Inès Gauthé PITAYA

Material cost and gross margin

How to calculate your material cost ratio? 

Raw materials (food products, beverages, packaging, etc.) are generally the first source of expenses for a restaurant. The food cost ratio is an indicator that measures the share of the cost of raw materials in the restaurant's turnover. It is the most important ratio to follow in the restaurant business! To calculate it, simply divide the cost of materials by the turnover and multiply the result by 100.

Material cost ratio = (Raw material purchase cost before tax / Sales before tax) x 100

The ideal material cost for a restaurant is between 25% and 35%. However, it is difficult to define an optimal material cost since it is a ratio that depends on many factors such as the type of cuisine offered, the concept of the restaurant, the quality of the ingredients used and the dishes offered, the location of the restaurant, etc.

To manage your restaurant, it is also interesting to break down the material cost by expense category and to define target ratios for each category according to your concept. For example, for a fast food concept with a material cost of 30% :

  • 20% on solids
  • 6% on liquids
  • 3% on packaging
  • 1% on frying oil

What about the gross margin? 

In the restaurant business, the gross margin (or sales margin ratio) is a key indicator of your establishment's profitability. It gives the same indication as the material cost ratio but, unlike the latter, it highlights the profit made and not the cost. In other words, it is the difference between the turnover before tax and the material cost. It must therefore be between 65% and 75%.material.

To calculate your restaurant gross margin, you can do : 

Gross margin = Sales before tax - Cost of raw materials before tax

As the founder of Tacos Avenue told us in an interview , the gross margin is the key indicator of whether or not you are profitable and whether you should adjust the prices of your dishes or look for ways to reduce costs: 

We are in a sector where most entrepreneurs only look at the turnover, whereas the pillar of the restaurant business is the margin. They wait for the first balance sheet to discover the reality of the margin they have generated and sometimes it's too late. With Inpulse, I can monitor the actual gross margin, optimize and understand why there are discrepancies with the theoretical."

What is the difference between theoretical and actual material costs?

- Theoretical material cost

The theoretical material cost corresponds to the material cost that would be necessary to produce the dishes sold by the restaurant under ideal conditions, i.e. if the recipe sheets were perfectly respected, if there were no losses, no theft, etc. 

When creating a dish, it is essential to calculate the theoretical material cost of the dish on a recipe sheet. This calculation is generally done on a portion. 

To calculate the theoretical material cost of a restaurant over a defined period, you have to multiply the theoretical material cost of each dish by the number of sales made on this dish over the period concerned. This is a rather tedious calculation to do yourself:

Theoretical material cost ratio = SUM (Theoretical material cost of each dish x quantity sold of each dish) / Turnover before tax) x 100

Using a management software integrated to its POS system, like Inpulse, allows to have direct access to its total theoretical material cost without recalculating.

- The real material cost

The real material cost of a restaurant over a defined period, corresponds to the total expenditure in raw materials plus the variation in stock over this same period. Indeed, if my stock has increased over the period, it means that I have consumed less than I have spent. Conversely, if my inventory has decreased over the period, it means that I have consumed more than I have spent. It is important to take into account this variation of stock to measure my real consumption.

Real material cost ratio = ((Raw material purchase cost before tax + Change in raw material inventory) / Sales before tax ) x 100

Differences in actual and theoretical consumption

Measuring the gaps

If there is no means of control, the operational reality can be quite different from the objectives set in terms of raw material expenditure. Poor stock management, losses, outdated shelf life, leakage, theft, incorrect proportions during recipe production, breakage: there are many factors that increase the differences between theory and reality. Hence the importance of improving stock management and having access to accurate data to identify what impacts the material cost and causes food waste.

Inpulse 's solution allows you to monitor in real time the actual material cost based on orders placed with suppliers and stock variations measured during inventories. It also automatically calculates the total theoretical material cost for the restaurant, as well as the theoretical expenses per ingredient based on sales and recipe cards. Differences in consumption between the theoretical and the actual are thus highlighted in no time at the level of the ingredient.

"Before, I used to wait several weeks before getting the data on the food cost of the previous month. Now I can track my material cost on a daily basis. We manage our margin much better with Inpulse." Sébastien Medouze, Director of Operations at Gruppomimo

Identify known and unknown markdowns

Once the gaps have been identified, an attempt can be made to measure: 

  • known" markdowns: deviations for which an explanation can be provided (identified losses, staff meals)
  • Unknown" markdowns: discrepancies for which no explanation can be given: unidentified losses, theft. 

Using Inpulse allows you to report on raw and finished product shrinkage on a daily basis and to capture staff meals. This makes it easy to measure the "known" portion of the markdown. 

"I use Inpulse to take inventory, which allows me to have a comparison of theoretical and actual inventory status so I can target my markdown." Tiphaine Bourel, Director Gruppomimo Batignolles.

The personnel ratio or payroll ratio

How to calculate your staffing ratio?

Measuring the staffing ratio will highlight the relationship between payroll (the cost of hiring a company's employees) and sales. This ratio is particularly useful for any business looking to increase productivity and make their restaurant more profitable. It allows you to monitor the cost of your workforce and plan their services more effectively. You can calculate it simply : 

Personnel ratio = Payroll / Sales before tax

It is noted that the fast food industry has higher personnel costs than the rest of the sector. This is due to a high turnover of almost 70%, while the average is 44% according to INSEE. These successive onboardings have a cost (uniform, time spent on training, etc.) and weigh heavily on the payroll ratio.

Complementary to the personnel ratio, the productivity ratio 

The productivity ratio (or profitability ratio) is an indicator that is used to evaluate the amount of work your employees will produce in a given time. It is a very concrete way to estimate their performance and efficiency. This will allow you to improve your overall productivity as well as your gross margin.

The productivity ratio is calculated as follows: 

Productivity ratio = Sales / Number of employees

How to improve your staffing and productivity ratio?

Improving your staff and productivity ratios is possible thanks to a few simple actions to put in place. It can be interesting : 

  • Estimate the number of clients to be served;
  • to define the skills and availability of the teams in place for each service according to the needs identified;
  • to validate and inform the teams in advance in order to ensure a stable schedule.

Find out what Pitaya's operations managers had to say during a roundtable discussion on managing their staff and inventory

The operating expense ratio

This ratio aims to determine the weight of the structural expenses of your establishment. These expenses are generally : 

  • Restaurant Rent;
  • maintenance costs;
  • energy consumed (water, gas, electricity);
  • insurance.

Here is his formula:

Operating expense ratio = Total operating expenses before tax / Sales before tax

It can be broken down into two types of expenses.

Occupancy cost ratio

Occupancy costs are fixed expenses such as investments, interest, leasing, etc., on which no action is possible in the short term. It is therefore not necessary to monitor them more than once a year. To calculate this ratio : 

Occupancy cost ratio = Occupancy costs / Sales excluding VAT

It should not exceed 10 to 12% of your turnover. This ratio must be qualified if you are the owner of the walls of your establishment, without any outstanding credit.

The overhead ratio

The overheads are composed of all the variable expenses of your company. Variable expenses are mostly related to gas, electricity, water, advertising and communication, taxes and duties. These expenses will depend on the volume of activity of your restaurant and will therefore vary or evolve. You can calculate it in this way: 

Overhead ratio = Overhead / Sales

Variable costs, like fixed costs, tend to increase every year. Consequently, you have to find a way to follow their increase to try to limit it.

How to improve your operating expense ratio?

The current inflationary context, accompanied by a significant increase in energy prices, is shaking up the operating expense ratio. It usually represents between 20 and 30% of revenues, but has been rising rapidly in recent months.

You will find here some ways to reduce the energy bill of your restaurant such as using the preferential rates provided by the State and Europe (tariff shield), but also limit your use of lighting and heating by equipping your restaurants with LED bulbs or motion sensors.

The working capital requirement (WCR) ratio

Working capital, or WCR, is the amount of money a restaurant needs to finance to cover its cash flow (expenses and revenues). In the restaurant business, you must be able to finance inventory. When you are just opening a restaurant, it is imperative to calculate the WCR in order to meet the expenses of the beginning of the activity. Estimating your working capital requirements is important for the future of your business, because a negative working capital is a sign of good financial health. It will allow you to develop while feeding your cash flow and it will be easier to obtain a bank loan.

Here is his calculation: 

Working capital ratio = Inventory + Receivables - Payables

If your WCR is positive, it means that your expenses are weighing too heavily in the balance. To lower your WCR, consider monitoring your inventory in real time with the real-time tracking solution offered by Inpulse. Also, be sure to avoid unnecessary financial assets so as not to slow down your growth.

Summary of the profitability ratios of a restaurant

Ratios Calculation methods Average ratios
Prime cost Percentage of material cost + Percentage of personnel cost 55% - 65%
- Actual material cost ratio (Purchase of raw materials before tax + Change in inventory) / Sales before tax
-
25% - 35%
- Theoretical material cost ratio SUM ((Theoretical material cost of each dish x quantity sold of each dish) / Turnover before tax) x 100 -
- Staff ratio Payroll / Sales before tax 30% - 40%
Operating Expense Ratio Occupancy cost + overhead 20% - 30%
- Occupancy cost ratio Occupancy cost / Revenue before tax 10% - 12%
- Overhead ratio Overheads / Sales 10% à 12%
Current income before taxes Sales before tax - Prime Cost - Operating expenses 5% à 15%

To go further

More than 1,200 restaurants and retail outlets use Inpulse on a daily basis