Operating a profitable restaurant requires constant tinkering and testing until you find the best practices for your business. Restaurant owners have experienced this first-hand in the last few months, trying out new ways to not only engage customers but drive digital traffic to increase online orders.
To ensure the success of these new tactics, and to get your restaurant in a secure financial footing, there are certain performance metrics you can track that will showcase the health of your business. Calculating your metrics during, or after, a period of economic crisis is especially important because it will allow you to identify negative trends that require immediate attention.
As restaurant owners know, understanding your bottom line is just the starting point. As restaurants begin to open their doors, rely more heavily on off-premise channels, and begin to use CARES Act or PPP loans, calculating the cost of paying your staff and the inventory it takes to execute a new online ordering menu are critical steps to getting your operation back in business.
According to the 2019 Restaurant Success Report 68% of restaurant professionals review sales reports, 45% review labor reports, and 32% review menu reports on a regular basis. 20% of restaurant professionals refresh their sales reports multiple times every day.
Increasing a restaurant's efficiency and profitability doesn't happen overnight, especially with operation restrictions and the challenges that come with keeping your guests and staff safe. But understanding your numbers and what impacts them will ensure your success down the line.
Below, you’ll find seven restaurant performance metrics key to understanding success and how to go about calculating them.
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7 Restaurant Performance Metrics and How to Calculate Them
1. Break-Even Point
Break-even point is a must-have metric if you're opening, or re-opening, your restaurant. This number lets you pinpoint how much you must bring in in sales to earn back an investment. The number can then be used to forecast how long it’ll take to earn that money back.
You can also use break-even analysis to justify a big purchase, like a commercial kitchen redesign, the launch of a new marketing campaign, or a revamp of your on-premise menu. 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, both for you and the stakeholders in your business.
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 for break-even point is:
Total Fixed Costs ÷ ( (Total Sales - Total Variable Costs) / Total Sales) = Break Even Point
In this scenario, $10,000 - $3,000 (sales minus variable costs) equals $7,000. $7,000 ÷ $10,000 = 0.7, and $4,000 (fixed costs) ÷ 0.7 = $5,714.29.
Related Resource: How to Increase and Measure Restaurant Sales
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 for COGS is:
Beginning Inventory + Purchased Inventory - Final Inventory = Cost of Goods Sold (COGS)
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:
Total Indirect (Fixed) Costs / Total Amount of Hours Open = Overhead Rate
4. Prime Cost
A restaurant’s prime cost is the sum of all of its labor costs (salaried, hourly, benefits, etc.) and its Cost of Goods Sold (COGS). Typically, a restaurant’s prime cost makes up about 60% of its total sales. 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. Thus, a restaurant’s prime cost represents the primary area a restaurant owner can optimize in order to decrease costs and increase profit.
How to Calculate Prime Cost
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:
Labor + COGS = Prime Cost
Inventory costing can help make the process of managing inventory easier — and more profitable. Here are the differences between the FIFO, LIFO, and WAC methods.
Learn how a better point of sale system can help you run your restaurant.
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%. 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%.
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 upsell or design your menu to promote the items that contribute the most to your revenue and bottom line.
The equation for food cost percentage is:
Food Cost / Total Sales = Food Cost Percentage
6. Gross Profit
Gross profit 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 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:
Total Sales - COGS = Gross Profit
7. Employee Turnover Rate
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 for employee turnover rate is:
(Starting Number of Employees + Ending Number of Employees) / 2 = Average Number of Employees
Lost Employees / Average Number of Employees = Employee Turnover
If you have ten employees at the beginning of a given month and eight at the end, the equation would look as follows:
(10 + 8) / 2 = 9
2 / 9 = .222
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%.
Need a Hand with Those Calculations?
To gain true insight and value from these metrics, you should get in the habit of calculating and recording them regularly, on a weekly or monthly basis. From there, you can compare your business's current performance to any historical data to identify problem areas and trends.
Many POS systems for restaurants calculate these metrics automatically so that you don't have to. Learn more by comparing POS systems to choose the right one for you.
If you need help calculating your restaurant's performance, download the free restaurant metrics calculator.