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Operating a profitable restaurant requires constant measuring and tinkering. Even when you find the best practices for your business, it’s almost guaranteed to change. Be it menu prices, staff schedules, food costs, it’s all a journey rather than a destination.
There’s a specific set of critical performance metrics restaurant operators need to track to help them measure success along the journey.
Increasing a restaurant's efficiency and profitability doesn't happen overnight. It takes time and a strong data foundation on which accurate measures can be analyzed and insights gleaned.
Read on to see seven such performance metrics key to understanding success and how to go about calculating them.
7 Critical restaurant calculations to track your key performance metrics
1. Break-even point
If you need to justify a big purchase, a break-even point can help forecast how long it’ll take to earn that money back and get that bottom line green. This could include a commercial kitchen redesign, the launch of a new marketing campaign, or all the costs associated with that next location.
For example, saying a project or initiative will cost $20,000 is one thing, but saying it’ll pay for itself in three months is a better way to put things into perspective.
How to calculate break-even point
If your restaurant does $10,000 in sales one month, pays $3,000 in variable costs, and $4,000 in fixed costs, your break-even point in dollars is $5,714.29 for that month. This means that you start earning profit after selling $5,714.29 worth of food and drink.
The equation and breakdown for break-even point is:
Break-even point = Total fixed costs ÷ ( (Total sales - Total variable costs) / Total sales)
4,000 ÷ ( (10,000 - 3,000) / 10,000)
4,000 ÷ ( (7,000) / 10,000)
4,000 ÷ 0.7
Break even point = $5714.28
2. Cost of goods sold (COGS)
Cost of Goods Sold (COGS) refers to the cost required to create each of the food and beverage items you sell to guests. In this way, COGS is really just a representation of your restaurant’s inventory during a specific time period.
In order to calculate COGS, you need to record inventory levels at the beginning and end of a given period of time, along with any additional inventory purchases.
By identifying ways to minimize these costs — like negotiating better rates with your food distributor, selecting in-season ingredients, or using techniques to make your inventory last longer — it's possible to significantly increase margins. Every dollar you shave off COGS is another dollar added to the restaurant’s gross profit, which is extremely helpful when ramping up to be fully operational.
How to calculate COGS
If you have $5,000 worth of inventory at the beginning of the month, purchase another $2,000 worth of inventory during the month, and end the month with $4,000 worth of inventory left over, your cost of goods sold for that month is $5,000 (beginning inventory) + $2,000 (purchased inventory) - $4,000 (final inventory) = $3,000.
The equation and breakdown for COGS is:
Cost of goods sold (COGS) = Beginning inventory + Purchased inventory - Final inventory
5,000 + 2,000 - 4,000
7,000 - 4,000
Cost of goods sold (COGS) = $3,000
Calculating your restaurant cost of goods sold might seem like a pain, but it's an important part of making sure your business is healthy. Here's an easy way to calculate it.
3. Overhead rate
Fixed costs are important to know because they’re straightforward: one bill, one price. But wouldn't it be helpful to see your fixed costs broken down on an hour-by-hour or day-by-day basis?
Calculating your overhead rate can help. It’s a form of cost accounting that helps you understand how much it costs to run your restaurant when looking only at fixed costs.
How to calculate restaurant overhead rate
Let's say your fixed costs for the month were $10,000 total, and your restaurant is open eighty hours per week in a 31-day month. Assuming you’re open every day, your overhead rate would be $28.23 per hour and $322.58 per day. However, these numbers would increase if you were calculating for a shorter month, like the 28-day month of February, because you’re allocating the same amount of money over fewer working hours. In that case, costs would go up to $31.25 and $357.14 per hour and day, respectively.
The equation for overhead rate is:
Overhead rate (hour) = Total indirect (fixed) costs / Total amount of hours open
10,000 / 354.29
Overhead rate (hour) = 28.23
Overhead rate (day) = Total indirect (fixed) costs / Total amount of days open
10,000 / 31
Overhead rate (day) = 322.58
4. Prime cost
A restaurant’s prime cost is the sum of its labor costs (salaried, hourly, benefits, etc.) and its Cost of Goods Sold (COGS). Restaurant prime costs typically account for about 60 percent of total sales, split evenly between COGS and labor.
Prime cost is an important metric because it represents the bulk of a restaurant’s controllable expenses. While you can't control fixed rent costs on a weekly or monthly basis, you can find ways to decrease prime costs by managing labor carefully. Prime cost represents the primary area a restaurant owner can optimize in order to decrease costs and increase profit.
How to calculate restaurant prime costs
Now that you know how to calculate COGS, calculating prime cost is straightforward. Add up all of your various labor-related costs. These costs include salaried labor, hourly wages, payroll tax, and benefits. Then, simply add the sum of your labor costs and your COGS to find your restaurant’s prime cost.
The equation for prime cost is:
Prime cost = Labor + COGS
5. Food cost percentage
Food cost percentage represents the difference between the cost of creating a specific menu item (the cost of all of the ingredients in a dish) and the selling price of that item.
How to calculate food cost percentage
If it costs $3.28 to prepare your salmon dish and you sell it for $15, your food cost percentage would be 21.9 percent. Although it depends on the novelty aspects of your dish, your guests’ expectations, and your restaurant’s service type, a restaurant’s food cost percentage should typically be between 28-35 percent.
You can calculate your food cost percentage for all goods sold by dividing your total food costs by your total sales during a set time period. If you understand your food cost percentage for each of your menu items, you can choose to promote and upsell the items that contribute the most to your revenue and bottom line.
The equation and breakdown for food cost percentage is:
Food cost percentage (for single salmon dish serving) = Food cost / Total sales
3.28 / 15
Food cost percentage = 21.9 percent
Learn the importance of food cost percentages, how to calculate them, and how to take control of them.
6. Gross profit
Gross profit formula shows the profit a restaurant makes after accounting for its cost of goods sold. The resulting gross profit represents the money available to put towards paying off fixed expenses and take away as actual profit.
To calculate gross profit, subtract the total cost of goods sold during a specific time period from your total revenue (the total sales of food, beverages, and merchandise).
How to calculate gross profit
If a restaurant's total sales number for the month is $15,107 and its cost of goods sold is $5,293, the restaurant's gross profit for the month is equal to $15,107 (total sales) - $5,293 (COGS) or $9,814.
The equation for gross profit is:
Gross profit = Total sales - COGS
7. Employee turnover rate
Employee turnover rate is the percentage of employees that leave or are fired that need to be replaced during a specific time period.
The restaurant industry has a notoriously high employee turnover rate compared to all other industry segments. In the fast-paced restaurant environment, high employee turnover can hurt operational efficiency and require a lot of time and attention to get new hires up to speed.
How to calculate employee turnover rate
Start by adding the total number of employees at the beginning and end of a given period of time. Then, divide the sum by two to find the average number of employees during the set period. Take the difference between the number of employees at the beginning and end of the set time frame and divide the number of employees who left by the average number of employees.
The equation and breakdown for employee turnover rate is:
First you need to determine the average number of employees for your operation.
To calculate turnover rate, simply multiply the quotient (.222) by 100 to get the turnover percentage. So, in this example, the turnover rate is .222 x 100 or 22.2 percent.
Avg number of employees = (Starting number of employees + Ending number of employees) / 2
Avg number of employees = (10 + 8) / 2
Avg number of employees = (18) / 2
Avg number of employees = 9
If you have ten employees at the beginning of a given month and eight at the end, here's the equation:
Employee turnover = Lost employees / Avg number of employees
Employee turnover = Lost employees / 9
Employee turnover = 2 / 9
Employee turnover = 0.222 or 22.2 percent
Successful restaurant calculations require consistently accurate cost data
Having reliable, readily available sales, labor, and COGS data is the only way these metrics can provide meaningful insights. Garbage in, garbage out, as the saying goes.
Before you can get in the habit of regularly calculating and recording these measures, you need to ensure the data powering your calculations is clean and up to date. This starts with your foundational systems — a point of sale platform that's heavy on the analytics and reporting.
Toast provides exactly this, with detailed restaurant sales and menu reporting. Tagging on Toast Payroll and Team Management as well as xtraCHEF by Toast extends your reporting and analytics foundation with precise labor and COGS reporting, both powered by valuable, time-saving automations.
Regardless of which systems you use, it's both never too late and well past time to solidify the data foundation for your restaurant's critical calculations.