Just as we happily share our vast point of sale (POS) experience and expertise with startup owners in order to help them make the best decisions from the very beginning, we at Sintel Systems are happy to share articles, advice and commentary about the retail restaurant market.
The RR post is a worthwhile (if lengthy) read, thus we’ve provided a bulleted summary here below:
There is No Budgeted Food Cost Guarantee
RR writes that hitting your budgeted food costs “does nothing to guarantee there will be enough money left over from the sale to pay for things like labor, rent, insurance, linens, smallwares, uniforms, utilities, taxes, etc.” Missing that target only means, “Give things a closer look,” not that there’s a problem. “Rather than comparing the food costs,” RR says, “you should be comparing the gross profits from each item.”
Price By Gross Profit
RR writes, “If you want to create prices in your restaurant that guarantee you’ll have enough dollars left over after paying for food, you’ll need to make three important considerations,” listed below.
1. Market price point – RR asks, “What does your market consider a fair price for the food you are preparing, served in the atmosphere you offer?”
2. Menu item cost – “You need to keep up-to-date recipe dollar costs for every item on your menu, and use those costs to figure into your pricing.” In their post, RR suggest using spreadsheets, however a robust POS system can link inventory programs directly to a vendor’s invoicing system and update prices automatically. “Any effort you make toward calculating recipe costs and inventory is going to pay off,” RR writes, adding, “Even the more expensive software will make you money in the end.”
3. Needed gross profit – “The most important consideration in setting menu prices,” writes RR, is “knowing what your guests cost you to serve.”
Calculating Needed Gross Profit
RR’s post goes into some detail on how to calculate needed gross profit, specifically per person, as that gets added to a recipe cost to arrive at the menu price. Keep these five key points in mind along the way:
1. Unlike a menu price, a needed gross profit is a “fluid number,” necessary when keeping menu prices within the price point of the market being served. RR writes, “It’s only important that the end result gives you an average gross profit per person that delivers enough gross profit to pay the bills.”
2. To establish the needed gross profit numbers, start with your financials, preferably from months where you achieved the most of your financial goals. Calculate your overhead from your profit & loss statements by adding up your operating expenses outside of product costs, and to this figure add the ideal profit you should have made during the time period. Hence, Total Needed Gross Profit = Total Expenses for Year – Product Costs + Ideal Profit.
3. RR suggests factoring in cost increases, so for example, assuming a 5% cost increase gives this formula: Total Needed Gross Profit x 105% = Total Needed Gross Profit (adjusted for next year).
4. With this information, you can now figure out how much gross profit you will need from each customer coming in through the door. “That is, assuming you track how many people come into your restaurant,” RR writes. “If you don’t, you need to start doing it now, and you’ll need to estimate how many covers you did for the previous year. Estimate low to be on the safe side.” Hence, Total Needed Gross Profit ÷ Previous Year Customer Count = Needed Gross Profit Per Customer.
5. Needed Gross Profit Per Customer is the amount of gross profit one would have had to collect from every one of last year’s customers to achieve your financial goals for the upcoming year. Now you’re armed with actionable information: What you need to collect from every person this year to achieve your profit goal. RR writes, “If you can exceed your total needed gross profit per year with your actual gross profit, and you do a good job of controlling your expenses, you will exceed the profit you budgeted for.”
It’s quite clear from the arguments made in the Restaurant Report post that accurate reporting on customer counts at the point of sale is an important factor in making the calculation for needed gross profit.
As the only full-service POS provider — from software development to franchise incubator to ongoing support — part of Sintel’s commitment to our customers and industry is to share ideas and information. Whether you’re a first-time franchise hopeful, a small business owner or an established chain, it’s always smart to stay on top of best practices to achieve financial success.
If you are interested in learning more about Sintel’s POS systems and how our knowledge and support can impact your future success, call us for a complimentary phone consultation
Read the full Restaurant Report post here.
Finally, while watching costs, be sure to always consider expanding your business! Expansion is a cost reducer, because one may amortize the cost of goods over a larger base, expansion reduces cost: As volume goes up, the price per item drops. This is specifically true in the restaurant and frozen yogurt industries where large amount of perishable items cannot be purchased and stored for a single location.
Sintel Systems is the only full-service provider of tailored Point of Sale systems across retail, restaurant and service industries, including frozen yogurt shops, pizzerias, sushi restaurants, cafés and retail stores.
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