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
It's a major ratio that can't be ignored, as it's directly linked to operational performance, i.e. the proper management of the restaurant's raw materials and human resources. These are the elements that fluctuate the most these days, and which we can really influence on a daily basis. As Pitaya's Operations Manager reminded 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 we were told in an interview interview the founder of Tacos Avenue, gross margin is the key indicator of whether you're profitable or not, and whether you should adjust the price of your dishes or look for ways to cut 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
Use management software integrated into POS system, such as Inpulsegives you direct access to your total theoretical material cost, without having to recalculate.
- 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 to get the food cost data for the previous month. Now, I can follow the evolution of my material cost on a daily basis. We manage our margins 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.
Use Inpulse enables you to report daily on losses of raw and finished products, and to enter staff meals. This makes it easy to measure the "known" part 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
The fast-food sector has higher personnel costs than the rest of the sector. This is due to a high turnover of almost 70%, compared with an average of 44% according to INSEE. These successive onboardings have a cost (uniforms, 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 at a round-table discussion in a round-table discussion on staff and stock management..
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);
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.
Here are a few ways you can reduce your restaurant's energy bill such as taking advantage of the preferential tariffs provided by the French government and Europe (tariff shield), but also limiting 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