A Note About This Blog:
The following short blog is
written to explain the benefits of a new, comprehensive Excel
spreadsheet that we just made available for download. This program
uses the collection of key data to automatically generate actual food
costs, ideal food costs, recipe card price changes and product order
guides. On Monday, we will be posting a more general blog that once
again returns to our food cost control focus. In the meantime, if you
are an independent or regional food service operator that is not
currently able to execute these critical cost control practices, you
may find this free restaurant spreadsheet program and article useful.
In
the past two months, Food Buyers Network has published whitepapers
about various restaurant food cost control topics, such as yield
management, recipe costing, menu engineering, product specification
development, product usage variances and ideal food costs. While
executing these restaurant cost control practices takes focus and
commitment, they also require the processing and management of
operational data.
While all of the data required to execute food
cost control practices is readily available, many operators often
access this data during specific food cost control tasks, rather than
systematically processing it in a manner that makes it
available for multiple food cost control reports. One example of this
is the often neglected practice of recipe costing through the use of
standardized recipe cards that are updated frequently to ensure the
most current pricing. While most operators update their product prices
prior to executing a food inventory, as this is a critical best
practice to ensure the proper valuation of inventory, they do not
manage this process in a manner that enables them to simultaneously
update both their inventory product prices and their recipe card
prices. Rather, mangers spend twice the time necessary by updating prices in two
separate areas or, more likely, the practice of updating menu item
recipe prices gets forgotten.
Quite frankly, getting access to
many of the powerful food cost control reports can be achieved
relatively easy, if key data is entered in a single location. To help
independent and regional food service operators achieve this, we have
developed a free Excel program that you can download from our site. By
creating a series of spreadsheets that collect key operationaldata,
such as product prices, menu item recipes, menu item prices, on-hand
inventory figures and the menu item sales mix, restaurant managers are
then able to easily generate ideal food costs, actual food costs, order
guides and recipe cards in a systematic fashion. Of course, executing
this process still requires a time commitment, but by utilizing a single
program to process key operational data, it will become much easier and
more efficient to generate these reports.
You can download this restaurant spreadsheet on our site. There are instructions, but this program is still in BETA, so there may be some glitches. If so, please shoot us an email or give us a call so we can fix them and get out a new version. As always, we hope you find these tools helpful.
Download Spreadsheet Here
Almost every restaurant and food service operator in the country shares a similar monthly routine—the completion of a product inventory and the subsequent generation of a food cost percentage. This process not only enables the creation of a restaurant profit and loss statement that illustrates the financial health of the business, but can also uncover emerging operational performance issues. Unfortunately, not as common among restaurant operators is the routine generation of a theoretical food cost that can supplement an actual food cost percentage by providing a food cost target, or baseline. This article will examine the practice and benefits of routinely generating an ideal food cost as part of a holistic approach to food cost control management.
If you stood on the floor of Chicago’s McCormick Place during the National Restaurant Association show and polled attendees to uncover the universal ideal food cost, you would probably get a myriad of responses, quickly discovering that there is no universal ideal food cost consensus. This, of course, is because a theoretical food cost, also known as an ideal food cost, is determined by the particular performance characteristics of a business; specifically, the menu pricing, product costs and menu sales mix of a given restaurant. Not only is it impossible to pinpoint an industry-wide universal ideal food cost, but it is also equally impossible to determine a restaurant-specific, consistent ideal food cost percentage. If this were not the case, the process of evaluating actual monthly food cost figures would be quite easy, as one could simply compare the actual food cost to the restaurant’s established ideal food cost policy. Achieving this, however, would require an operator to establish their desired ideal food cost percentage and then price every menu item accordingly. Stated differently, every item sold would need to have the same mark-up margin that would produce the ideal food cost percentage goal. This is both an unrealistic and undesirable pricing strategy, as it does not take into consideration market pressures, competition and menu item contribution profit. Further, it would also require the constant re-pricing of menu items to compensate for the slightest shift in specific menu item product costs. Since doing so is obviously not advantageous or realistic, it should be understood that a particular restaurant’s ideal food cost will continuously fluctuate, and that routine re-calculation of the ideal food cost must occur if an accurate performance evaluation of the actual food cost is to be established. Armed with the increased knowledge and visibility provided by this information, an operator can efficiently target cost control efforts in the proper direction. Specifically, a significant variance between these two numbers will indicate a behavioral and performance issue, while a slim variance will indicate a change in the product costs or menu item sales mix.
Rather than routinely generating an ideal food cost percentage to serve as a baseline, as previously described, restaurant managers and operators often look at historical food cost percentage trends to evaluate current monthly food cost performance. While using historical data to generate actionable trending information is highly valuable in both food cost control and restaurant profit and loss management, it can also lead to misleading results if this practice is not supplemented by the use of a theoretical food cost. While historical data does serve as an indicator of food cost performance, this indicator can be misleading, as using historical data as a benchmark, or ideal target, does not address a possible shift in the product cost, menu pricing or menu sales mix, as we previously illustrated. If any of these variables change, then using a past food cost percentage, as a measure of current employee food cost control performance, would be misleading. It would, likewise, be just as misleading to use the same information to write off an increase in the actual food cost percentage as simply a result of rising product costs.
In addition to using historical trends, managers will often also rely on their operational experience, awareness and knowledge when evaluating an actual food cost percentage. While operational familiarity is critical in uncovering restaurant cost control issues, our experience has shown that there are too many variables involved for gut-reaction management to be effective in gauging food cost control performance. The algorithm used to determine an ideal food cost looks at three variables, each of which is determined by a multitude of factors. Quite frankly, attempting to determine the cause of a rising, or lowering, food cost percentage without the baseline provided by a theoretical food cost is, at best, an educated guess.
It is worth noting that a rising food cost percentage is not always cause for alarm. If both actual and ideal food costs trend upward, then further investigation may uncover that this upward trend is due to a shift in the menu sales mix, rather than product cost increases or behavioral issues. Because products with a higher food cost percentage often have a higher contribution profit, a rising food cost due to a shift in the menu sales mix could be a positive trend, as it may result in higher profits. For example, while a significant increase in the number of lobster or filet mignon dishes sold may increase the overall food cost percentage, it may also result in increased bottom line profit, as these items provide higher contribution profits despite their higher food cost percentages. Uncovering such intricacies, however, is very difficult if ideal food costs are not calculated and used as a baseline when evaluating current food cost. Imagine the time wasted and the morale issues created if an operator reacted negatively to a rising food cost that was simply the result of different guest choices, creating additional profit for the business. This issue is very common among businesses that have frequently changing menu offerings and product mixes, such as hotels, caterers and conference centers.
The actual process of calculating a theoretical food cost is not overly complicated and can be routinely executed with some minor preparatory work. The first step in creating an ideal food cost is to collect the data necessary to complete the theoretical food cost equation; specifically, the menu item recipe costs, menu item prices and menu item sales mix. For most operators and restaurant managers, the menu item prices and menu item sales mix information is relatively easy to acquire, as almost all restaurant POS computer systems offer a detailed reporting of menu items sold. Menu item recipe costs, however, are not always as easy to come by. Access to this data requires routine recipe costing that includes the ongoing maintenance and updating of menu item recipe cards. It is important to note that calculating an ideal food cost using menu item costs that are outdated will produce significantly skewed results that may not reflect the true ideal food cost. While completing and maintaining recipe cards does require a time investment, it is absolutely critical to complete recipe costing to ensure that menu item cost trends are tracked. Once all of this data is collected, calculating the ideal food cost is easy. The theoretical food cost formula is simply the total ideal food expense, divided by total ideal revenue, which is easily calculated using the data previously mentioned. To greatly simplify this process, we recommend that you either create your own spreadsheet to perform the calculations, or download our free ideal food cost calculator from the Food Buyers Network website.
As a final note, operators should be realistic in their attempt to execute this critical food cost control practice. Determining a perfectly accurate ideal food cost is very time-intensive, as it is necessary to cost every single item sold. As you can imagine, this would be a very difficult process, as an operator would need to track and cost every side-item, add-on and special order sold during a given period. Fortunately, a highly accurate ideal food cost can be generated by focusing efforts solely on the items listed on the menu, including frequent specials. While not completely accurate, the aggregate volume of these items will rarely be affected by the ideal food cost of those items that you did not track. Just keep in mind that the ideal revenue figure that is used in the calculation is the ideal revenue of only the items being tracked, and not the total food revenue, as one would find on a restaurant income statement. The end result of this process is an ideal food cost that is sufficiently accurate to gauge food cost performance, without spending too much time on calculating an exact number.
Hopefully, this article has effectively communicated the need to routinely calculate theoretical food costs as part of a larger food cost control management program. Again, we recommend that you download our free spreadsheet to make these calculations easier.
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Generating periodic food cost percentages is likely a common routine for most food service operators. While establishing these costs is highly valuable, the mere act of calculating food cost figures does nothing to lower costs, unless the underlying causes of food cost variances are identified and eliminated. The difficulty with doing so is that identifying these variances is not always an easy task. While monthly food cost percentages may indicate a cost control problem, they are often too vague to indicate the exact nature of the problem. Without this knowledge, cost control efforts cannot be effectively focused on resolving issues and improving profitability. Unlike food cost percentages that do not provide the necessary detail to target cost control actions, a product usage variance analysis will identify the exact usage variance for each product analyzed. By uncovering this critical information, food cost control measures can be taken to reduce and eliminate these costly variances.
Before proceeding, it should be noted that product usage variances are
dependent on standardized recipes, as recipe standardization is
necessary in establishing ideal usages. These recipes should contain
standardized units of measurement for the products being analyzed so
that this information, along with menu mix or menu item sales data,
will enable the calculation of ideal product usages that will serve as the baseline when determining variances. Once recipe
standards have been established, determining product variances is a
relatively easy task.
A product usage variance is the difference between the ideal and
actual usage volumes of a specific product, most commonly expressed as a quantity, percentage or cost. Identifying a product usage variance begins with the identification of all menu item, prep and batch recipes that utilize the product being analyzed. Then, using menu item or batch recipe production counts and the standardized product portion utilized in these recipes, ideal usage figures can be calculated. This, along with the actual usage figures determined using inventory extensions and the product purchasing history, will enable the calculation of product usage variances. To help
with creating your own product usage variances, you may find it useful to download the Product Usage
Variance restaurant spreadsheet that is available on our website.
While it may, at first, seem advantageous to calculate a product usage variance for every purchased product, doing so is not highly recommended. The
amount of time necessary to calculate variances for all
purchased products would greatly diminish the benefits of executing such a comprehensive
analysis. Rather, operators should be pragmatic when executing routine food cost control procedures, and focus efforts in a manner that will make the greatest impact in the least amount of time. Limiting a usage analysis
to only key items will not only save time, but will also have the greatest food
cost impact. This concept is commonly known as the Pareto
principle and, applied to this scenario, states that 80% of your costs (or revenue)
are a result of 20% of your products (the 80/20 rule). Therefore, by focusing usage analysis on only the top twenty percent of products by total spend,
an operator can make a significant cost control impact
without a significant time investment.
To help identify the key items
that should be routinely analyzed, we recommend that an
operator request a velocity report from their suppliers for the prior
quarter. This report will list each product purchased in an
aggregated, descending dollar format. Our recommendation is to begin
with only the top five to eight products on this report. While only a
handful of products, these key items represent the majority of your
purchasing expense and any strides made in eliminating variances with
these items will result in significant cost control and profitability
improvements.
The report in Figure 1, below, is a portion of an actual velocity report that lists the top eight products purchased for a restaurant. While we have truncated the report to save space, the full report indicates that this restaurant spent $234,042 during the given quarter, of which 49% was a result of the top eight products--those listed in the report. Put another way, the top 5% of products purchased represent almost 50% of the total spend.
To illustrate how executing product usage variances for key items can result in substantial food cost improvements, we have calculated the actual product usage variances for these top eight products, as indicated in the two right columns of the report. The average product usage variance for these items is 8%, which represents $9,178 lost dollars each quarter for this restaurant--4% of total spend! This restaurant could quickly lower their food cost expense by 4%, simply by closely monitoring the top eight items.
Figure 1
Total number of items: 147
Total Spend: $234,042
Total Spend of top eight products: $115,188
Total Variance for top eight items: $9,178, which equals 4% of spend
While the ambitious operator will recognize the opportunity to gain an
additional 4% by tackling the remaining 139 items, doing so will be
incredibly time intensive. This does not mean, however, that these opportunities should be completely ignored. Rather, after
repeated variance analysis on the top products has resulted in the
elimination of usage variances, operators can begin to substitute other products into the usage analysis. It is recommended that operators routinely analyze sensitive, high dollar
products that are prone to waste, spoilage or theft. Additionally, operators should stay vigilant during shifts to uncover operational issues that may be causing variances on specific products. Based on this operational awareness, these additional products can be added to the usage analysis. Following this methodology will result in the targeted reduction of food cost variances for all products over time.
Once key products are identified and usage variances determined, the critical function of investigating these variances and establishing procedures to reduce them must begin, as the identification of variances will not lower food costs unless the root cause is determined and eliminated. A few of the possible problems that could lead to usage variances are:
- Failure to properly charge for items, especially add-ons and extras
- Incorrect portions being used for menu items or batch recipes
- Yield goals not being consistently met
- Theft
- Improper receiving procedures
- Spoilage & Waste
- Employee Error
- Failure to follow recipe, cooking and preparation procedures
- Inventory/Counting/Transfer Mistakes
While this is not a complete list, the underlying cause of usage variances can often be linked to employee behavioral issues. it is widely accepted that modifying employee behavior is best achieved
when specific actions are targeted and measurable goals set. By using
product usage variances, specific and quantifiable goals
can be established to gauge employee performance and modify behaviors.
Managing employee performance based on vague food cost percentages will
typically not produce the same positive results that can be achieved by
using specific product usage variance information when coaching staff.
Further, demonstrating to staff that specific operational issues
can be monitored and tracked will often result in the self-policing of
behaviors, increasing standards and procedures compliance.
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