Critical KPI’s For Restaurants

Running a successful restaurant requires a blend of great food, service, and operational efficiency. To understand how well your restaurant is performing and identify areas for improvement, tracking Key Performance Indicators (KPIs) is essential. KPIs can be used to measure many aspects of a restaurant such as efficiency, profitability, and customer satisfaction. This article delves into some of my favorite KPIs that we recommend every restaurateur monitor and use in their business.

Sales per Square Foot

Measures how effectively a restaurant uses its available space to generate revenue. It shows the revenue generated for each square foot of space and is one of the most reliable indicators of a restaurant’s potential for profit.

Formula: Sales Per Square Foot = Annual Sales / Square Footage

Example:
A restaurant with $900,000 in annual sales and 3,000 square feet of space would have:

Why it matters:
This metric allows restaurant owners to evaluate the efficiency of their space. A higher number indicates that the restaurant is generating more revenue for the space it occupies. In most cases, full-service restaurants that don’t generate at least $200 per square foot have very little chance of generating a profit. This KPI is useful for comparing locations or understanding how layout changes impact performance. For instance, if a smaller restaurant produces similar sales as a larger one, it’s using its space more effectively, possibly through higher customer turnover or a well-optimized layout.

Prime Cost

Prime Cost is the sum of your Cost of Goods Sold (COGS) and labor costs. It is one of the most important metrics in the restaurant industry because it accounts for the two largest expenses.

Formula: Prime Cost = COGS + Labor

Example:
If a restaurant’s COGS is $30,000 and labor costs are $40,000:

Prime Cost=30,000+40,000=70,000

As a percentage of sales, if the restaurant has $100,000 in sales:

Why it matters:
Prime cost typically makes up 60-70% of a restaurant’s total costs and measures the costs that are generally the most volatile and deserve the most attention from a control perspective. Managing prime cost efficiently is key to profitability. Keeping labor costs under control, minimizing food waste, and ensuring accurate portioning are essential for reducing prime costs. If prime costs rise too high, it may be difficult for the restaurant to stay profitable, even if sales are strong. As such, many successful restaurants calculate and evaluate their prime cost at the end of each week.

Average Covers

Average Covers tracks the number of customers (covers) served during a specific period, such as breakfast, lunch, or dinner, helping restaurants understand how many people they are attracting daily.

Formula: Average Covers = Total Customers Served / Number of Days in the Period

Example:
If a restaurant serves 2,500 customers over 25 days:

Why it matters:
Tracking average covers helps restaurant owners plan for labor, inventory, and scheduling. It also helps gauge marketing efforts and understand seasonal fluctuations. If average covers are increasing, it could be a sign that your customer base is growing. If covers are decreasing, it might signal a need for marketing initiatives or adjustments to customer service.

Break-Even Point

The break-even point is the level of sales necessary to cover all expenses (both fixed and variable costs). It indicates how much revenue a restaurant must generate to start making a profit.

Formula:

Example:
A restaurant has $15,000 in fixed monthly costs, sells meals at an average of $25 each, and incurs $15 in variable costs per meal:

Why it matters:
Knowing the break-even point helps restaurants set realistic sales goals and offers a clear target for financial sustainability. It can also assist in pricing decisions and simply helps determine how much needs to be sold to cover fixed expenses like rent and utilities. Understanding this helps guide strategies to promptly address sales declines, as well as assess the overall performance of a restaurant.

Average Check Size

Average check size measures how much each customer or group spends on average per visit.

Formula:

Average Check Size = Total Sales / Number of Covers

Example:
If a restaurant makes $80,000 in sales and serves 2,000 customers:

 Why it matters:
Average check size helps assess whether customers are purchasing high-margin items or if there’s an opportunity to increase revenue per customer through upselling. Improving this KPI could involve adding more appealing higher-ticket menu items, training staff to upsell, or creating combos and promotions that encourage customers to spend more.

Revenue per Available Seat Hour (RevPASH)

RevPASH measures how much revenue each seat generates per hour of operation, allowing you to gauge seating efficiency and help operators with planning employee shifts, purchases, store layout, and enhance table turnover.

Formula:

Example:
If a restaurant generates $9,000 in revenue in a day with 50 seats and operates for 8 hours:

Why it matters:
RevPASH helps measure how well you’re utilizing your space, particularly in high-traffic periods. Low RevPASH may suggest that the restaurant has idle tables or is not turning them over fast enough. Increasing RevPASH could involve optimizing seating, reducing wait times, or increasing the efficiency of table turnover.

Inventory Turnover

Inventory turnover tracks how quickly a restaurant is using and replenishing its stock of food and beverages. It reflects how well you’re managing inventory levels.

Formula:

Example:
If a restaurant’s COGS is $30,000 and its average inventory is $6,000:

Why it matters:
A high inventory turnover rate indicates that food is being sold quickly, reducing the likelihood of spoilage. However, if it’s too high, operators could be at risk of running out of items and losing sales, so it’s all about finding the right balance for your specific restaurant. Conversely, a low turnover rate may suggest overstocking or waste. Keeping this metric in check is essential for managing food freshness and controlling storage costs.

Conclusion

Tracking and understanding KPIs equips restaurant owners with the insights needed to make data-driven decisions. These metrics help identify inefficiencies, optimize pricing and operations, and ultimately drive profitability. Regularly monitoring these KPIs can turn a good restaurant into a great one, ensuring both growth and financial sustainability. To learn more about these KPIs and how you can improve them for your restaurant operation, please contact Tim Reynolds at tim@dhw.cpa or 828.322.2070.

Tim Reynolds is a Tax Principal at DHW with over 25 years of experience in the accounting industry. His areas of expertise include various federal and state income, transactional, and excise taxes, as well as general accounting and financial statement preparation. Additionally, Tim serves as an operational consultant for the retail, restaurant, grocery and manufacturing industries. Tim can be reached via LinkedIn, email at tim@dhw.cpa or call 828.322.2070.