Key Restaurant Profit Drivers – Controlling Food and Labor Costs

Restaurant and bar owners grapple with assorted costs, striving to provide top-notch service while bringing home a profit. The balancing act can be challenging for even the most highly skilled and seasoned hospitality professionals. Unfortunately, letting operating costs spiral out of control can spell the end for any food and beverage business.

Holding your own in an increasingly competitive industry calls for creativity and consistency, but thriving as a restaurant owner also requires spending discipline. Whether you’re just getting started with your food service venture, or you’re an established restaurateur, with a track record of success, keeping costs in line is a sure way to drive profits and strengthen your small business finances. Among your most important concerns, food costs and labor costs deserve your ongoing attention.

Managing Food Costs

Getting to the bottom of your company’s food spending budget may require a bit of effort, particularly if you’ve never nailed down the elusive figures driving your food and beverage business. Though the process may pose challenges, once you get a handle on food costs and put tools in place to monitor your money, tracking and controlling spending becomes second nature.

Food costs typically represent about 30 percent of a restaurant’s total operating budget. The actual figure for each establishment is influenced by a number of factors, so successful restaurants may show higher or lower costs. The type and location of the restaurant, market pricing, and other variables are at play, each impacting food cost figures. Consequently, what works for one operation may not be the answer for other food businesses.

Whether your total food cost percentage dips into the 20’s, approaches the mid-30’s, or falls somewhere in-between, these tips can help you control spending and boost profitability.

• Maintain Consistent Output – Chefs and restaurateurs understand the importance of consistency. It’s what brings customers back again and again, seeking their favorite dishes. Behind the scenes, consistent output also helps manage food costs. You can’t expect steady returns, when the plates leaving your kitchen don’t adhere to the portion control standards you’ve established for each dish.
• Control Waste – Food that doesn’t make it from your kitchen to tabletops and carry-out containers undermines your restaurant’s financial health. You can’t always predict demand, so it’s hard to balance buying decisions. But monitoring and minimizing waste is a top priority, directly impacting your food cost and profitability.
• Price and Review Your Menu – Properly pricing your menu accounts for the cost of ingredients. Unfortunately, the price paid for recipe components isn’t fixed. In order to hold your profit margin on each dish, you may have to adjust your menu as ingredient prices rise. Though it’s tempting to dismiss market fluctuations, failing to respond to price increases can turn profitable dishes into financial missteps.
• Break it Down – It’s easy to become complacent, monitoring food costs. General reports and profit/loss statements provide valuable insight, but you may need to drill deeper to get the whole story. Food cost discipline includes a close look at spending, beyond broad categories. With thorough, timely analysis, it’s possible to identify problems, before runaway food costs get out of hand.

Understanding Prime Cost

Labor costs combined with food and beverage costs comprise a key financial metric for restaurant operators. Taken together, these spending totals represent a food and beverage operation’s prime cost. Well-managed foodservice businesses maintain a prime cost of approximately 55 percent, or less. This single chunk of spending can be split evenly between food and labor costs, or it can be heavy in either category, as long as the total doesn’t exceed the 55 percent mark.

When labor costs, including wages, benefits, taxes, and insurance, inflate your prime cost, you may need to correct the imbalance or risk financial distress. These tips can help you control labor costs.

• Look at Smaller Pieces – Budgeting for wages and other labor expenses accounts for your entire operation, but a wide-angle view doesn’t always provide the details you need. For an exacting look at your business finances, divide your overall labor cost in to smaller pieces. Group hourly front-of-house staff in one category, and examine your back-of-house labor costs as another separate group of employees. Salaried managers should also be set apart, enabling you to independently analyze and make adjustments in each labor cost segment.
• Minimize Turnover – Employing competent, well-trained staff saves you money in the long run, so it pays to devote resources to development and retention. Fulfilled employees are more likely to stay with you and productivity surges when everyone on board has a professional stake in your restaurant’s success.
• Be Resolute, Not Absolute – There’s always room to improve productivity, but you may have to look beyond labor cost percentages. Viewing labor as a percentage of your total operating costs gives you a sense of where you stand, so the information is helpful. But with other factors influencing the amount you spend on staff, it’s also important to recognize labor cost as a single piece, among the many moving parts comprising your food and beverage operation.
• Change Your Compensation Plans – Labor costs capture wages, insurance, and other benefits. When costs rise beyond affordability, reviewing and adjusting employee compensation can help ease labor spending. Aligning your pay structure with industry norms is one step you can take to pare costs. And by shifting to a merit-based pay structure, it may be possible to stimulate better performance that helps fund pay increases with higher productivity and sales.

Among the most prominent financial concerns driving restaurant profits, food and labor costs loom large on your bottom line. Fortunately, there are many steps you can take to eliminate unnecessary spending in these areas.