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
Jan 2023
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 2024, and combined with soaring energy prices, difficulties in recruitment and access to loans, we'll need to be highly responsive 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 you need to monitor in 2024 to keep your restaurant's profitability under control.
The prime cost ratio is calculated by adding the food cost ratio and the payroll ratio. A restaurant's prime cost varies between 55% and 65%.
Prime cost = Percentage food cost + Percentage personnel costs
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 climate. We can only really act on prime costs: food cost and payroll costs".
Inès Gauthé PITAYA
Raw materials (food products, beverages, packaging, etc.) are generally a restaurant's main source of expenditure. The food cost or food cost ratio is an indicator that measures the share of raw material costs in restaurant sales. It's the most important ratio in the restaurant business! To calculate it, simply divide raw material costs by sales and multiply the result by 100.
Ratio food cost = (Cost of raw materials excluding VAT / Sales excluding VAT ) x 100
The ideal food cost for a restaurant is between 25% and 35%. However, it is difficult to define an optimal food cost, as this ratio depends on many factors such as the type of cuisine offered, the restaurant concept, the quality of the ingredients used and the dishes offered, the location of the restaurant, etc.
To manage your restaurant properly, it's also a good idea to break down food cost by expense category, and define target ratios for each category according to your concept. For example, for a fast-food concept with a food cost of 30%:
In the restaurant business, gross margin (or sales margin ratio) is a key indicator of your establishment's profitability. It gives the same indication as the food cost ratio, but unlike the latter, it highlights the profit made, not the cost. In other words, it's the difference between sales excluding tax and food cost. It should therefore be between 65% and 75%.
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."
The theoretical food cost corresponds to the food 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 food cost of the dish on a recipe sheet. This calculation is generally based on one portion.
To calculate a restaurant's theoretical food cost over a given period, multiply the theoretical food cost for each dish by the number of sales of that dish over the period in question. This is quite a tedious calculation to do yourself:
Ratio food cost theoretical = SUM (food cost theoretical for each dish x quantity sold for each dish ) / Sales excluding VAT ) x 100
Using a management software integrated to your POS system, such as Inpulse give you direct access to your total theoretical food cost without having to recalculate.
A restaurant's actual food cost over a given period corresponds to total expenditure on raw materials plus the change in stock over the same period. If my stock has increased over the period, this means that I have consumed less than I have spent. Conversely, if my inventory has decreased over the period, it means I've consumed more than I've spent. It's important to take this stock variation into account when measuring my actual consumption.
Ratio food cost actual = ((Cost of raw materials excluding VAT + Change in raw materials inventory) / Sales excluding VAT ) x 100
If there are no means of control, the operational reality can be quite different from the objectives set in terms of raw materials expenditure. Poor stock management, losses, out-of-date best-before dates, leakage, theft, incorrect recipe proportions, breakage: there are many factors that can lead to discrepancies between the theoretical and the actual food cost. That's why it's so important to improve stock management and have access to accurate data to identify what impacts food cost and causes food waste.
Inpulse 's solution enables you to monitor food cost in real time, based on orders placed with suppliers and stock variations to measured during inventories. It also automatically calculates the total theoretical food cost for the restaurant, as well as theoretical expenditure per ingredient based on sales and recipe sheets. Differences between theoretical and actual consumption are thus highlighted in no time at the ingredient level.
"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 food cost on a daily basis. We manage our margin much better with Inpulse." Sébastien Medouze, Director of Operations at Gruppomimo.
Once the gaps have been identified, an attempt can be made to measure:
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.
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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 industry. 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.
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
Improving your staff and productivity ratios is possible thanks to a few simple actions to put in place. It can be interesting :
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..
This ratio aims to determine the weight of the structural expenses of your establishment. These expenses are generally :
Here is its formula:
Operating expense ratio = Total operating expenses before tax / Sales before tax
It can be broken down into two types of expenses.
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 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.
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.
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 its 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 reduce your WCR, keep an eye on your inventory in real time, thanks to Inpulse's real-time tracking system. You should also take care to avoid unnecessary financial investments, so as not to slow down your growth.
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