Running a successful restaurant has two sides. One is about serving delicious food and helping people experience and build great memories with each other. The other is about maintaining restaurant operations with the help of various performance metrics for sales, revenue, staff, and more. Restaurant owners often focus on the food side of things and don’t pay enough attention to the metrics. They miss out on valuable insights and opportunities by running restaurants based solely on intuition.
While great experience and industry knowledge is invaluable, if the only metric you use in planning out your restaurant strategy is total sales, there’s a lot of scope for improvement.
Restaurant performance metrics provide an objective view of how different parts of the business are performing - what’s doing well and what’s going wrong. This helps restaurant owners take better decisions to improve performance.
In this article, we will go through the most important metrics that you should be using at your restaurant.
- Cost of Goods Sold (CoGS)
CoGS is the total cost of all the ingredients used to create dishes sold at a restaurant in a given period of time. However, it does not take into account one-time costs like utility bills, new chairs, and repairs.
In case of full-service restaurants, CoGS should ideally only include consumable products. All the other products used in the process of selling, like paper boxes, cutlery, straws, etc. should be accounted for in a different purchasing budget to streamline the inventory and purchasing process.
Calculating CoGS accurately is highly dependent on proper inventory management as it’s about tracking ingredients. If the inventory is not counted properly, the final cost will not be correct.
Start of the Month Inventory + Additional Purchases - End of the month Inventory = CoGS
CoGS helps understand the actual cost of food over a period of time. Unlike theoretical food cost, it also takes into account wastage, shrinkage of inventory, or other external factors. Calculating the variance between the two can give you an idea about the food that does not end up on plates and hence, does not make you money.
CoGS is one of the components of prime costs, and therefore, plays a very important role in maintaining restaurant performance.
Interested in learning more about CoGS? Here’s a video by Restaurant Accounting Service Inc. to give you more insights about how it works.
Labor Cost/Labor Cost Percentage
Labor cost determines the total amount of money spent on labor at your restaurant, including salaries, taxes, overtime and employee benefits. Labor makes up for one of the biggest costs at a restaurant, usually second only to rent.
Because labor cost includes many variables, it can be helpful to split it by roles to get a more accurate picture. Group together positions that have the same payment type (hourly or salary pay) so that you can calculate the costs more accurately.
Employee Wages + Employee Benefits + Taxes = Total Labor Cost
Once you have your labor costs, the next step is to calculate
the percentage of your revenue that is spent on labor. A healthy labor cost falls between 20-35% of revenue. Any higher than that will affect your overall restaurant profitability
Labor cost/Total Revenue = Labor Cost Percentage
Labor cost is the second component of your restaurant’s prime cost (after CoGS), which is why it’s important to accurately calculate it.
Prime cost is calculated by combining the two biggest costs at your restaurant - cost of goods sold and labor costs.
CoGS + Labor Cost = Prime Cost
As it represents your largest expenses, prime cost has a significant effect on your overall operations - from your pricing strategy, to staff scheduling, marketing budget, and everything else. If you’re looking to reduce costs or maximize profits, managing your prime cost is the best way to do it.
A good prime cost should range around 60% of your entire restaurant costs. Anything higher than that will eventually affect your profitability, and anything lower than that will affect your quality as it means you’re not spending enough on ingredients or labor, or both.
Overhead costs include all the other operational costs of running a restaurant that are not included in prime costs. These include fixed and variable expenses that are necessary for restaurant operations, apart from food and labor. Some examples of overhead costs are:
- Promotional/marketing costs
- Rent/mortgage payments
- Repairs and maintenance
- Licensing fee
Rent + Marketing costs + Taxes + Licensing fee + Repairs + Utilities + Other Expenses = Overhead Costs
Calculating overhead costs is necessary to determine your pricing structure. The price of
your menu item must be able to cover both the prime and overhead costs. If it’s unable to
do so, then your costs will be higher than your revenue, and you will not be able to reach
the break even point. It allows you to better understand where you’re spending your money and how you can improve profitability (by reducing costs or increasing prices).
Variable and Fixed Costs
A restaurant’s total costs consist of fixed and variable costs. Fixed costs include things like rent, salary, capital investment etc. that remain unchanged overtime. Variable costs, on the other hand, are constantly changing and growing with your business. These include cost of ingredients, dynamic labor costs (labor that changes regularly, like staff that works on an hourly basis, or part-time employees), marketing costs, and more.
Fixed Cost/Total Cost x 100 = Percentage of Fixed Cost in Total Cost
Variable Cost/Total Cost x 100 = Percentage of Variable Cost in Total Cost
Knowing exactly how much of your total cost is fixed and variable can be helpful in identifying areas of improvement. Fixed costs tend to take the bigger share as they include heavier costs like mortgage or rent. By tracking the percentage of variable costs in your total cost over time can keep you updated about any significant changes.
Food Cost Percentage
Food cost percentage is a commonly used restaurant metric. Food cost is the total cost of ingredients used to prepare an item, while food cost percentage is the part of the item’s menu price taken up by its food cost.
To calculate the food cost percentage of a dish you need to find the cost of a single serving and divide it by its sales price and multiply it by 100.
Food cost percentage = cost of all ingredients/sale price x 100
For example, if the price of a dish is $18 and its food cost is $6, food cost percentage is: 6/18x100= 33.
Food cost percentage helps you determine whether the price of a particular menu item is able to cover the cost of running your restaurant. If it’s very high, it means that your price is not able to make up for the cost, and your profit margin on the item is very low.
The food cost percentage at fine-dining restaurants falls around 35%, while casual dining falls around 30%.
A restaurant’s total sales are a great indicator of its performance. The higher the sales, the higher the total revenue. Measured against a restaurant’s break-even point, it helps understand whether it’s doing good enough, or requires improvement to increase profitability. If your restaurant’s total sales are below the determined break-even point, you will not be able to reach profitability. Therefore, knowing exactly how much you’re selling is very important to evaluate performance.
The total sales of a restaurant can be easily calculated through its POS system. To better understand your restaurant performance, dig deeper into this number to find out which of your menu items are doing well.
Gross Profit refers to the amount of money earned by your restaurant after deducting the cost of goods sold from the total revenue. It’s important to measure as it tells you how much money you have available from your revenue to pay labor and other overhead expenses.
It’s a key indicator of how well your restaurant is performing. If your restaurant’s gross profit is lower than its labor and overhead costs, you’re not making enough money and will remain in a state of loss.
Total Revenue - Cost of Goods Sold (CoGS) = Gross Profit
Gross Profit is also calculated as a percentage or margin of profit from the total revenue, i.e., the percentage of your revenue that makes up gross profit.
Gross Profit/Total Revenue x 100 = Gross Profit Margin
For example, Total revenue $150,000 - CoGS $55,000 = Gross profit $95,000.
Gross Profit Margin = $95,000 / $150,000 x 100 = 63%
A well-performing restaurant should have a gross profit margin of around 70%
Net profit refers to the amount of money earned by your restaurant after deducting all costs including cost of goods sold, labor costs, and overhead expenses (including taxes). It tells you exactly how profitable your restaurant is.
Knowing your restaurant’s profitability is important to make strategic decisions. High profitability indicates that your current restaurant operations are working well, and opens a world of opportunities for the future. However, a low profitability means that you need to take a step back and understand what’s going wrong, and make changes to improve your restaurant performance.
Gross Sales - Prime Costs - Overhead Expenses = Net Profit
Like gross profit, net profit is also calculated as a percentage or margin of profit from the total revenue i.e., the percentage of your revenue that makes up net profit.
Net Profit/ Gross Sales = Net Profit Margin
Profit margins vary from restaurant to restaurant, but 6% is considered a good average.
Break-even point refers to the amount of revenue required to cover restaurant costs. It’s a key indicator of a restaurant’s performance and indicates whether it has reached profitability or not. If your restaurant is not reaching break-even point regularly, you will not be able to generate profit.
Total Fixed Costs / (Total Sales - Total Variable Costs/Total Sales) = Break- Even Point
For instance, if your total fixed and variable costs are $4,000 and $2,000 respectively for the month, and your total sales come up to $8000, the break-even point for the month will be 4,000/(8,000-2,000/8,000) = $5,333
While fixed costs are easy to calculate, the variable costs that change regularly (like marketing or packaging costs) can make break-even point calculations complicated.
Average Check Size
The average check size measures the average amount a customer spends during a visit at a restaurant. It helps understand how well your staff is able to sell to customers and also gives an idea of how many customers are required to meet your daily revenue goals and break-even point.
Total Sales/Number of Customers = Average Check Size
For higher accuracy, the average check size for each shift should be calculated separately, as it’s likely to vary between lunch and dinner.
Contribution margin refers to the net amount of money that each menu item contributes to your restaurant revenue. It indicates which of your dishes are earning you the most money.
Food cost percentage and contribution margin are different metrics and don't always go in the same direction.
A dish with a low food cost percentage will be more profitable. However, that doesn't mean it will necessarily create a higher contribution margin.
In fact, a dish with a higher food cost percentage may have a higher contribution margin because it sells more frequently and therefore contributes more money to your revenue.
What's more, while food cost percentage is a relative metric, contribution margin is a real number.
For instance, an item like fries that sells at $2 and costs $0.25 to make, has a very low food cost percentage (12.5%), but a contribution margin of just $1.75. A steak that sells at $25 and costs $17 has a high food cost percentage (68%), but its contribution margin ($8) is 4.5 times higher than the fries.
Knowing the contribution margin of each item can help determine which dishes are the biggest revenue boosters, and the ones that need to be tweaked, or taken off the menu.
RevPASH refers to Revenue Per Available Seat Per Hour. This metric calculates the performance of your dining room by taking into account revenue, seats, and time altogether.
RevPASH can be calculated by picking a period of time and dividing the revenue for that period by the number of seating hours (number of available seats/number of hours in a chosen time period).
Revenue in a Given Time Period/ (Number of Hours/ Number of Seats) = RevPASH
Calculating RevPASH helps restaurants optimize seating, increase guest spend and improve your overall dining room occupancy and revenue.
Read more: Grow Your Restaurant Revenue with the RevPASH Formula
Employee Turnover Rate
Employee turnover rate is the frequency at which staff leaves your restaurant over a given period of time. This includes retirement, firing, and resignations. It’s important to know how often your staff is leaving, as turnover costs both time and money, and can significantly affect your net profit.
Number of Employees Departed/ Average Number of Employees x 100 = Employee Turnover Rate
A high employee turnover rate may indicate a problem in your work culture or in your hiring process. Due to the high cost of hiring, it’s important to keep your restaurant’s employee turnover rate as low as possible.
Total Sales by Server
Total sales by server refers to the volume of dollar amount a server is responsible for in a given period of time. It helps restaurant owners get an insight into the performance of individual servers. Comparing the total sales of each server can help identify the ones that require some more training or need to be replaced to improve overall restaurant operations.
Sales Per Labor Hour
This metric gives a breakdown of the average number of sales made collectively by the employees at a restaurant. It helps understand the productivity level of your staff and whether you are getting a good return on investment for your labor costs.
Total Sales in a Given Time Period/ Number of Hours in the Given Time Period = Sales Per Labor Hour
You can also use this metric to compare productivity levels of different staff members and make decisions accordingly. A good sales per labor hour depends on the type of restaurant. Casual restaurants tend to have high productivity levels with low labor costs, while higher-end restaurants, due to their premium service have less productivity with higher labor costs.
Table Turnover Rate
Table Turnover Rate refers to the average number of times tables are occupied in a given time period. Knowing your table turnover rate is crucial for optimizing your restaurant’s capacity. A low turnover rate indicates that your tables are not being used to their maximum potential. Having a high turnover rate is the goal, however, it’s important to find the balance between turning tables and maintaining customer service.
No. of parties served in a given time period/No. of tables = Table Turnover Rate
Being aware of your restaurant's average table turnover rate helps track performance and take strategic decisions to improve operations. A bad table turnover rate can have a significant impact on your revenue, so make sure you pay attention to this number.
A good table turnover rate differs between restaurants. Fine-dining restaurants usually have a lower turnover rate compared to casual restaurants as guests are paying a premium price for better service.
Times Per Table Turn
Time per table turn calculates the average amount of time a table is seated for. It helps understand if the tables are being turned fast enough by the servers, and also provides an estimate of how many parties can be seated within a shift.
(Number of Parties Served in a Shift/ Number of Tables)/ Number of Hours in a Shift = Time per Table Turn
For instance, if a restaurant has served 30 parties in a 2 hour shift, and has 12 tables, the time per table turn will be (30/12)/2 = 1.25 hours i.e. 1 hr 15 mins.
Knowing this number can also help servers provide a more accurate waiting time and allow the host/hostess to better understand if they can accommodate more walk-ins. It also tells you if guests are spending too much time on the table.
Customer Retention Rate
This metric tells you the percentage of return customers in your total customer count. Regular customers are one of the best sources of increasing revenue at a restaurant. As per a Harvard study, just a 5% increase in regular customers can improve profit upto 125%, which makes it crucial to track this number.
(Total Customers-Total New Customers) /Total Customers x 100
A low retention rate indicates issues in your restaurant operations. Is it the food, the service, or something else? Dig deeper to find the root cause for people not returning and take actions to fix the issue