Mastering Cost Controls for Restaurants with Roger Beaudoin (Ep 233)
Cost controls are paramount in maximizing restaurant profitability, and Roger Beaudoin of Restaurant Rockstars joins Jaime Oikle in this episode to emphasize their critical importance. Roger breaks down essential systems for managing food, beverage, and labor costs, including accurate inventory tracking and menu cost analysis. He provides valuable insights on calculating true usage, understanding prime cost, and optimizing menu pricing for maximum profit potential. Don't miss this episode – discover how to implement these strategies and watch your restaurant's bottom line soar!
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Mastering Cost Controls For Restaurants With Roger Beaudoin
Coming up for you, I have a fire segment from our recent full-length 90-minute Restaurant Operator Hot Seat Webinar. My co-host you'll hear from is Roger Beaudoin of Restaurant Rockstars. Tons of tips on deck. Stay tuned.
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The Importance Of Accurate Inventory Management
Running a restaurant is no easy feat. Everybody knows this variety of constantly moving pieces and challenges. I want to dig into costs first because it’s forefront of everybody's mind. These days and all days, it doesn't change. Margins keep getting thinner and thinner. The margin for error keeps shrinking and shrinking, so operators need to be dialed in. What's step number one?
Cost controls in boosting profit are so important. When I owned restaurants, I was obsessed with this. I had double the net profit of the average full-service restaurant in this country because of the systems. We're going to talk about some of those today. Your biggest costs in any restaurant are your food, beverage, and labor costs. We're going to talk all about that. You need to take inventory.
It's so funny. I traveled across the country and met so many operators, and I asked questions a lot. I find out that they think inventory is placing next week's order. It is not inventory. Everyone needs to order, but inventory is about at any given point in time calculating the true value of your food and beverages on hand in your restaurant.
Inventory is really about calculating the true value of your food and beverages on hand in your restaurant at any given point in time.
There's a step to this and it includes creating a template. I have a template available at RestaurantRockstars.com. Essentially, what you want to do is to count your inventory when it's at its absolute lowest levels possible. For most of us, that's usually after a busy weekend because the less inventory you have to count, the easier and the quicker the process and the more efficient it is. When I say a range for efficiency, your template should include all your different storage areas.
Most of us have walk-in coolers and that's probably the biggest storage area, followed by freezers. We have stand-up refrigerators, sandwich units, different lines that have different refrigerators, and we all have dry storage that stores things that are not perishable. Everything should be arranged in the way you would count it.
Maybe you start with the walk-in and you list everything as you walk in the door that walk in. Are there shelves on the left side of the wall, on the back side, or in the middle? Depending on the size of your walk-in, do things methodically and list them as you would count, top to bottom, front to back, and that sort of thing, and then go on to the next. Go to your freezers. Go left to right if you have a stand-up freezer. You get the idea and move on, and then the same with your storage.
Accuracy is so important. It's all about consistent data and processes. It's usually a good idea to have one person that looks at the inventory and counts it, and another person to mark it. Yes, there is software that does this. There is software that does everything today, but I've never been a fan of software because sometimes the onboarding is a little onerous. Whether you decide to use it or not, check it out. That's your decision.
I've always believed that it's so important to understand the fundamentals so that you can calculate things with a pen, paper, and a calculator. That gives you a real intimate feel for your business. What we're looking to do is get a grand total of how much food we have on hand in all those storage areas at any given point in time. My template or yours should automatically calculate what the value of that is on the bottom line if you enter all the data consistently and accurately.
What I didn't mention is Performance Foodservice has an order guide. If you're a Performance customer, you know that it lists every single thing that you order from them and how it comes into your place. Does it come in by the case and the side of beef? You know what I'm saying. There's a price attached to that and the simple math is reverse engineering.
It’s how a case would break down. Is it a case price? Is it several units, and that sort of thing, if you accurately enter all the costing data, my spreadsheet is going to calculate the value. When you type in six units of this times the price, it'll give you a total. If it’s four cases times the case price, it'll give you a total, and then it automatically calculates a value. That's step one in the inventory process.
Calculating Food Cost Percentage: The Inventory Formula
I appreciate that. Let's go further into the F&B component and calculate the food costs more precisely, then we'll go to labor after that. What do you have for F&B?
Inventory is a two-step process. The first thing requires you to take the physical counts and get that bottom line total of how much value you have in all your storage units. If we're talking about food here, it might be $5,000. It might be $10,000. It varies by the size of your restaurant in your weekly purchases. There is a formula for these steps.
For the second step, the formula is simply the beginning inventory. I'm going to explain what each of these terms means in detail, but the formula is the beginning inventory, plus your purchases for the week minus your ending inventory equals usage, divided by sales, and that gives you your cost of goods sold percentage for your food and your beverage. That's a little onerous if you've never seen that formula before and worked with it.
Again, I have a template for this particular spreadsheet. What is beginning inventory? The beginning inventory is the very first time that you do your physical count. You went through your walk-ins and all your storage areas. You typed everything into the computer. It automatically calculated $5,000. You can see it on the left side under the food beginning inventory. That's the first week that you do it.
I recommend you do this process four weeks in a row for a very important reason. You might take your inventory the very first time and get $5,000 and then you're going to go through this whole calculation. One week later, you need two numbers. You need beginning inventory and ending inventory because that represents an inventory period of one week.
You have your beginning inventory of $5,000. Next is purchases from Performance. They're going to come in the door maybe twice a week. Maybe three times a week. You get the idea. Those are your purchases for the week. My spreadsheet will total purchases, and then ending inventory is when you take your physical counts one week later. It's very important.
I mentioned accuracy, consistency, and also taking these counts after the weekend when you're inventory is at its lowest levels. It's usually a good idea as soon as you close for business on a Sunday. Hopefully, it's an early enough hour. Maybe it's 8:00 or 9:00. Maybe you're burnt out after the weekend. You don't feel like doing it, but getting it done is a good idea because if you get deliveries in on Monday morning and the truck shows up at 6:00 or 7:00 AM, now you're trying to count stuff and the deliveries are coming in. You get the idea.
It's okay to take inventory on early Monday morning as long as you know that there's no risk that Performance is going to show up and deliver your goods while you're in the middle of your count. Now you have two weeks of data. You have your purchases. This spreadsheet automatically calculates usage. You don't have to calculate that the template will do it for you.
What is usage? Usage is everything that you sold to a customer at full price, anything you sold to an employee at a discount, anything that got wasted or spoiled or thrown in the trash, anything that got comped or voided off a guest check because they didn't like it or it wasn't what they expected, anything that got stolen out the back door. That represents your true usage for that week or that inventory period.
The next important thing to calculate is sales. If we're talking about food inventory and you go to your point of sale system, you're going to get a week's date range there for sales, but you do not want total sales. You only want your food sales or else that's going to artificially skew this number and it's going to be inaccurate. You don't want to count retail merchandise and you don't want to count beverages because that's a whole separate calculation, which follows the same formula on the right side.
Here we go. We got $5,000 the first time you counted your goods. Let's say you took in $3,200 in purchases for the week. Your ending inventory is the second count. One week later, Sunday night, or early Monday morning, and now it's $4,550. It automatically calculates your usage because it's beginning inventory plus those purchases minus ending inventory, equals $3,650. Now your food sales were $11,750, divided by that and it gives you a 31%.
You might be happy with 31%. That's a good food cost by today's standards. You have to do this several weeks in a row because let's say you go through this process and you get this 31%. A week later, we counted again and we went through this formula for the second time. Now you have a 34% and you're like, “What happened?” You then do it a week later and now it says you have 29%, and then you do it a week after that and you're back to like 30% or 32%. You're like, “I don't know what food cost is. It's all over the place.”
You need consistency and that's why you're seeking to hit that 31% next week, 31% or 31.5% is okay. If you can get that four weeks in a row, you're psyched because you don't have to do this process every week anymore, then you can go to a 30-day count every 30 days and that's important. What if you don't do this every week and you do it once a month? You could be losing money every single day and then find out 30 days later, “My food cost is 35% when I want it to be 31%.” That's cost you a whole lot of money. The same process follows through for beverages. The same formula. The same inventory count procedure.
It's a lot of homework. It's a lot of work.
It’s a lot of homework upfront.
Restaurant Labor Cost Control: Finding Your Sweet Spot
If you stay on it, you identify the components that you ran through. It makes a gigantic difference. You don't want to find out a month later that you've lost a whole bunch of money for no reason, other than you're not not being on top of it. Let's go to the next big component. That's the next big bucket. That's labor cost.
This has been increasingly complex to manage for restaurants with the wages spiraling out of control in a lot of marketplaces, some would say. Combine that with finding good people. We're going to hit on people later in the show today, but labor costs. What's this magical sweet spot you like to talk about?
I love the word sweet spot because just like the food cost, you might be happy with a 31%. If you can hit that with consistency, I would call that your sweet spot. The same with labor. Labor can swing wildly and we all know that kitchen labor is more expensive than front-of-house labor. We need to zero in on that. What I used to do every single week and I had a template for this as well was to look at my labor cost in two different ways.
On the top, you'll see the total payroll. I think it's says $9,850. Maybe that was my payroll cost last week if I'm doing it every single week, then we have a total weekly sales number. I said earlier when we were calculating food costs, we didn't want to include non-food sales. In this case, we do. Let me explain the total payroll. If you pay yourself a salary as an owner or a GM plus all the wages that you have.
Anybody who is on that payroll report includes the total payroll, but then you have payroll expenses, Social Security, state taxes, and all this stuff and the FICOs. We've seen all of this. The last expense is what you pay your payroll company to process all this stuff unless you use software for that, but you're paying QuickBooks if you do that, but you get the idea.
Your total payroll cost would be the report that you get with the checks if you're still doing it that way and the bottom line number includes everything. That's your total payroll dollars, and then go to your point of sale system and accurately enter those seven days of total sales and plug that in. The simple math is total payroll dollars divided by total weekly sales and it gives you 30%. That's a sweet spot. I would be happy with that.
I mentioned kitchen labor is more expensive. The second thing I would track every single week would be kitchen payroll as a percentage of food sales only. That's a whole separate calculation. Again, you can look in and isolate your kitchen staff and all the expenses associated with that, and then type in your point of sales system food sales for that week. You get your 22,100 number.
Do the math and there you go, the template automatically calculates the math and divides this by sales, but now we have 31%. I'd be happy with that. If my kitchen labor was 31% and my labor costs today overall were 30%, I'd be psyched. A lot of restaurants listening and even out there in restaurant land have a much higher cost than these. We're going to get into prime cost. The lower these numbers are, the lower your prime cost is going to be. We will explain that coming up.
What Is Restaurant Prime Cost And Why Is It Important
The popular question is, “What should my cost be, Roger? What's a good target to have?” The answer is it depends. It depends on your location. It depends on your concept. It depends on a lot of things, but going through some of these guideposts will help so people can say, “If Roger is saying 31% is good and I'm at 37% or he's saying my labor cost is nice if it's 30% and mine is 20%, am I special? Am I doing something?” Maybe you are. Maybe you're running a quick service and you have very low labor costs. It does vary considerably, but this is the one that matters the most. When you put both things together, what do you have?
It's so vital to calculate this and to know what it is week to week. Prime cost is the magic formula and number that you need to be aware of and understand. It's the sum total of your food beverage and labor costs expressed as a percentage. Notice at the top, there's a math formula, a very simple formula. What we're doing is we're averaging our food and our beverage costs. Let's say in the prior slide, we got a 31% food cost that we calculated and a 23% beverage cost. We add those together and you can see it's 54%. An average is dividing those two percentages by two and we're going to get a 27% average for food and beverage costs.
Prime cost is the magic formula and number that you need to be aware of and understand.
Next, we're going to add that labor cost to that 27% of 30%, and the big number or the prime cost is 57%. What does that mean? Imagine everything is expressed as a percentage of one dollar. 57% of $1 means that for every $1 of sales in your restaurant, $0.57 gets taken away from every dollar of sales to pay your food, beverage, and labor costs. That's scary because as you know, there's a long laundry list of expenses in every restaurant.
We have the lease or mortgage on the property. You have property taxes if you own the property. You have insurance, utilities, repairs, maintenance, internet, telephone, dumpsters in the parking lot, linens, and all this stuff. Think about that. What does that mean? That means you have $0.43 left over from every dollar of sales to pay all those other expenses. The lower this prime cost number that you can achieve, the more likely you are to have money left over to pay all your expenses and yourself.
The rule of thumb is your prime cost should be somewhere between 55% and 60%, or $0.55 or $0.60 from every dollar if you have a prayer of making any money. The lower you can make this number, the more money you will have leftover in terms of profit or cushion in your bank account. This number is absolutely critical and so many restaurants don't calculate this regularly. It's so vitally important to keep this number as low as possible.
You already went through some of the laundry list of other expenses that start to deduct. If you were to go to our site and I'll be remiss in not having this handy, but on our site a long time ago, one of our authors had this great simple article that talked about this concept in a way that you could meet with your staff. It was as simple as this. You put a dollar on the table. You sit down with the staff. It’s a kind of open-book management.
You sit down with the staff and you put a dollar on the table. You can do it with coins, and then you start to take away the money. In this case, we're taking away $0.57, and now you take away the rent and more change goes, and you take away all the other costs. Sitting there at the end is $0.06, $0.08, $0.09, $0.10, and the staff goes, “Holy crap. What are you talking about?” You're not a millionaire. You're not a zillionaire. You are a restaurant operator. The answer is no, you're not, but the public thinks you are and your staff thinks you're raking in the money.
If you don't explain it to them in a very simple format with dollars and cents, they will continue to think that. We're going to hit on this later in the show, but until they have a mindset of being an operator and caring where every penny goes, your restaurant can't be as effective as possible. Take that little exercise and do it.
You're bringing up so many past memories from my restaurants before I put these systems in place 30 years ago. You're right. Back then 30 years ago, I was selling steak for $20 or $22. Every time Roger sells a $20 steak, Roger puts $20 in his pocket. He's living in the fancy house and driving the nice cars and all this kind of stuff. They had no idea that it was all about being careful, processes, procedures, and understanding that every one of these things costs money.
I remember losing a ton of silverware. We opened this brand-new steakhouse. We had nice silverware. I think every fork, knife, and spoon in the place costs $4 or $5 apiece. We had hundreds of these things. Three months later, I look in the silverware drawer and the dish pit, and half of it is gone. I'm like, “What happened to my nice silverware.” I noticed it was ending up in the trash. Sloppy bussers on the play, “It fell in the trash. No big deal.” Over the course of months, we lost lots and lots of silverware. That was an eye-opener.
We had these fancy dinner plates. I think every dinner plate costs $7. All of a sudden, the dishwasher or somebody slips in a plate and smashes it on the floor. That $7 plate cost came off the profit of the next steak I would have sold for $20 for what we charged the customer. Not even thinking about the food cost, the labor, and all those other expenses. This is something you need to train your staff in. Process, procedure, and understanding that everything has a cost. You should treat everything as if you owned it and had to pay for it. We're going to get into that next or coming up because it's part of this.
Everything has a cost. You should treat everything as if you owned it and had to pay for it.
Menu Engineering: How To Maximize Restaurant Profits
I'm a big fan of opening the eyes of your staff. The other thing that I find amazing is you go to a restaurant and you open the menu. The variety of things can be amazing. You're like, “How can they serve all these things? There's a delicate balance between having too many and not enough, and finding that sequence where you're selling enough things and they're profitable. Do you know what's profitable?
Do you know where the profit comes from? Are you selling stuff that's losing money? This is a big pet peeve. What do you get?
It's scary because I see so many restaurants on the verge of losing their life savings or their property. Many restaurants have during the pandemic and after simply because the cashflow isn't there. The profitability isn't there. These systems or calculating these things aren't necessarily there. Just as important as prime cost is costing out each and every item in every category on your menu is so important. That's a process unto itself. It takes a little homework to do all this, but once the system is in place, you have a system and then you don't have to reinvent the wheel again week to week, month to month.
There's another template for this. There are a couple but costing out your menu involves figuring out what each ingredient goes into every appetizer, every entree, and every other item in different categories. Again, from invoices, your order guide from performance with a calculator, figuring out of that case that came in the door, what portion of that case goes into pizza, a burger, a steak dinner, or whatever it is, but you have to list every single ingredient.
A lot of restaurants, once they do this, they forget about the takeout containers. Before the pandemic, I used to charge that off to supplies, take-out containers, pizza boxes, and all that kind of stuff, but then the pandemic hits and everything goes to online ordering, curbside delivery and pick up, Uber, and Doordash, and all this kind of stuff. Just about every meal leaves the restaurant either in take-out form or how many guests don't finish their meal at a sit-down restaurant. They're like, “Can you box this up?” Hundreds of boxes a week go out the door if not more. You should include that in your ingredient costs for every single item.
Once you've cost out every item, it's going to tell you a couple of things. It's going to list all your ingredient costs with a grand total, which is called the plate cost. Let's say a pizza for instance. If you add up all the ingredients that cheese, the dough, the sauce, the toppings, and all that kind of stuff. Let's say it's $2.50 Ingredient costs. Don't even worry about labor. This has nothing to do with labor. It's only food costs that go into a dish.
Let's say you charge $18.50 on the menu for this pizza. What's the profit? The profit is simply what you charge the guest, minus the cost of the ingredients. In this case, it's $16, and then this template also calculates the food cost on each and every dish because it takes the plate cost number, the $2.50, it divides it by what you charge the customer $18.50 and that gives you the percentage of food costs.
Once you have a whole bunch of spreadsheets, I don't care if it's in your computer, in the cloud, or a three-ring notebook, I don't care. What you do next is look at each category one by one. All these are arranged together. All your appetizers are together and all your entrees. You get the idea, and then you rank them. This is the most profitable. This is the second most profitable, the third, the fourth, the fifth, and so on. You look at the difference.
This is an amazing piece. Most restaurants have a large spread or profit difference in each category of what those items contribute to the profit contribution. In many cases, it's several dollars. That means if you're selling this appetizer might contribute a $3 profit. That one might be a $4.50 profit and so on. Entrees, this one might contribute an $8 profit. Another might contribute a $12 profit. You get the idea.
In the second template I have ranked all those things from most profitable to least profitable in each category, and then from the point of sale system, we have a date range of data. I love using lots of data. If you don't change your menu once a year, you get twelve months of data. If you change it twice a year, you have six months of data, and so on and so forth. That will tell you the popularity or the volume of sales of all these items.
Now, you press the Go Button and this calculation does its magic. It shows you that of all the dishes you're selling in each category, how much money in potential profit you're losing because in many cases, and I see it happen all the time, lower profit items are bigger sellers’ more popular than higher profit items. It doesn't necessarily have anything to do with price or cost, but you get the idea. The first question is not everyone wants to buy the most profitable item. I get that, but the point I'm making here is it's very possible to re-engineer your menu where every single item in each category is $1 or within $1 or even less in profit, not $3, $4, $5, $6, $7, $8, $9, or $10.
Lower-profit items are often bigger sellers and more popular than higher-profit items, and it doesn't necessarily have anything to do with price or cost.
Let me cap this with an example. I do this consulting with clients. If they can give me a recent cost sheet that their chef or kitchen manager has come up with, I'll plug all this into my template and I will show them where they lost profit every single week in their restaurant. Imagine one of my recent clients is a $3 million restaurant. They're busy for lunch and dinner. Of that $3 million, I showed them that in every one of their categories for lunch and dinner, just about every category, lower profit items were bigger sellers taking sales away and they're losing dollars every single day.
Over the past year, that $3 million restaurant left a potential profit of $363,000 on the table simply because lower-profit items were bigger sellers and that profit spread was not a dollar. It was several dollars. That's a dangerous thing. What an eye-opener. You show that to an owner and they're like, “Oh my gosh.” There are several things that we can do and it's on the list here.
We're going to talk about some of the sales pieces of it, but it's a weird thing to think about that I sold something but you could have sold something better. When you talk about re-engineering the menu, it becomes a situation where you don't matter as much what you sell because they're all similar profit margins. Like most operators, if you have a menu that has various things, then your staff needs to know that appetizer A equals $6 to the restaurant and appetizer B equals $1 to the restaurant. Which one do you want to suggest? Hopefully, they're suggesting the one that throws off $6 to the restaurant.
First of all, if you're not telling them, they can't tell the guests. It's a multi-step process that breaks down in a lot of cases. There's this whole system that has to get out. I know Roger works with folks to do that.
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That was a clip from our recent webinar I hosted with Roger Beaudoin of Restaurant Rockstars. You can find the 90+ minute session on the RR site in its entirety by searching for Restaurant Operator Hot Seat Webinar. Please do us a favor and like us or subscribe or review the podcast wherever you happen to listen or watch. That's a big help for us and we appreciate it. We'll see you next time.