3 Important Restaurant Finance Metrics and How to Calculate Them
Every industry has important financial metrics that business owners need to keep an eye on to make sure the business is staying on track. This is no different for restaurant owners. However, the restaurant business is unique in a few key ways.
To help you better understand your restaurant business, we've compiled a handy list of the 3 most important financial metrics for restaurant owners, and the formulas for calculating them.
For a restaurant, the largest expense is going to be the cost of the food and beverages consumed by customers. Therefore, keeping a running total of the Cost of Goods Sold (COGS) in your restaurant is easily one of the most important numbers you need to know.
Here's how you calculate your COGS:
Value of Inventory at start of period
+ Value of new purchases
- Value of Inventory at end of period
= Cost of Goods Sold
So, what does this mean?
The COGS in the restaurant industry usually falls between 20-40% of sales. So if your COGS is higher than that, you need to rethink your pricing strategy, or look into whether there is a lot of food waste. You could also be paying too much for your food and beverage in the first place.
The second biggest expense in most restaurants is the cost of labor, so understanding what percentage of your total sales goes to labor is key to getting a handle on your finances.
Calculating your labor cost is really simple:
Total cost of labor / Total sales
= Percentage of labor cost
So, what does it mean?
While the cost of labor can vary considerably from restaurant to restaurant, the total of your COGS and Labor Cost (called "Prime Cost") should be around 60%, so if your COGS is in the right place, but your Prime Cost is over 60%, then you're probably spending too much on labor. If your labor costs are too high, take a look at whether staff are staying too long on their shifts, or clocking in early, or even whether you have too many scheduled employees.
Once you've got a handle on your labor costs and COGS, then you're ready to determine how much you need to sell to break-even every month. While the break-even point for a restaurant can be a bit of a moving target since different dishes cost different amounts, you can still get a good ballpark based on a 3-month rolling average of monthly expenses.
The break-even point is relatively simple once you know your cost structure:
Average Monthly Fixed Costs / ( (Average Monthly Sales – Average Monthly COGS) / Average Monthly Sales)
= Break-even Point in Sales
So, what does it mean?
Basically, the break-even point is the amount of monthly sales you'll need to achieve in order to cover your costs and start earning a profit.
While there are several other important calculations and numbers you should know for your restaurant, these three are the most important. If you'd like to learn more about business finance, and how to read financial statements and gain key insights from them, download our free eBook "Business Finance is Hard...but it doesn't have to be."