There are a few management essentials every restaurateur needs to know to run a successful business. Tracking your exact food and beverage costs, actual usage and sales—and analyzing the differences between them—is top of that list.
Known as variance, the differences in your expected versus actual costs, usage or sales is a reliable tool for running a successful, efficient business, and can also act as a red flag identifying where you are losing money.
With modern accounting software, tracking your expenses and profits to calculate your variance is easy. With the right inventory software, just a little effort to count your inventory, cost your recipes and review your variance reports, you’ll have everything you need to maximize the benefit of this fundamental restaurant management tool and put more money onto your bottom line.
The scoop on variance: the what, why and how
In the most general terms, variance in the restaurant industry is a term for the difference between what is expected and what happened. A variance occurs most often when your expenses or usage are either more or less than what you planned and budgeted for.
For example, you can use variance to analyze budgeted expenses vs. actual, real sales or your theoretical vs. actual usage of any item in your inventory, giving you insight into your expected and actual cost of sales. We all have that magic number we want to run our cost of sales at, but it’s essential that your number is correct and based on accurate sales mix values.
Further, if there is a variance, it will help you determine exactly how much the difference is affecting your profits. If a variance is negative, it means your actual costs or usages are higher than expected, while a positive variance indicates your actual costs and usage are lower than expected.
In a nutshell, using variance takes the guesswork out of tracking your costs and usage, and allows you to understand and explain any differences. By knowing where the differences are between what you budgeted for and what you actually pay for, use and sell, you’ll have a razor sharp way of keeping on top of any problems in the management of your kitchen or bar, potentially saving yourself thousands of dollars along the way.
Save more money in your restaurant
I always tell my clients to use their variance reports to look for red flags. If you get a variance, you need to sit back and ask yourself, “Does this make sense?” and then start looking for the problem.
For example, if you know you sold 100 hamburgers in a day at your restaurant, then you expect you have used 100 buns and 100 patties (your theoretical usage). But if you count your ending inventory for the day, and find you actually used 125 buns, you’ll have a variance. This is your clue or red flag to figure out what happened to the extra 25 buns: were they stale, torn or squished and had to be thrown away; did your staff eat some during their break; did you receive less than you paid for in your last delivery?
Likewise, if your recipe for those hamburgers is designed to yield 500 patties from 125 lbs. of ground beef, but your kitchen actually used 150 lbs. of beef to make that yield, you’ll have a negative variance on that usage. Again, the variance is your clue to look into what’s happening in your kitchen: are your staff consistently measuring the right portions and producing the right yield to support your desired profits?
In either scenario, don’t be fooled into thinking 25 missing buns or 25 extra lbs. of beef in one shift doesn’t make a difference to your business. If you add up this small variance in usage and cost over a couple months or an entire year, the loss of inventory or over-portioning can add up to thousands of dollars of lost revenue.
About is not the same as exact when it comes to good management
Calculating variance, and using it to make more money, isn’t magic. Variance tells you where to look, but you have to put in the right numbers to get reliable insight.
If you want your variance reports to work for you, you have to put in a little work counting your inventory. Like, really counting. Open all the boxes, count each item, make sure the quality is good and the items are usable, and input every number into your sheets or software. Same for your costs: gather all your receipts, input all your invoices and record all your sales.
Estimating these numbers doesn’t count—you have to be exact if you want to really see what’s going on with every dollar you make and spend.
It’s also recommended that you run your variance reports on a regular basis, so you can spot any problems before they become big losses. From there, you can rest assured that any variance you find will pinpoint the places you can streamline your business to save and make more money.
Solutions to the common problems you can find with variance
Once you have found a variance, your next step is identifying the underlying issue and making strategic decisions to stop the leak in your revenue stream. If you don't, you’ll be left to rely on guesswork to guide your business decisions, which will very rarely work out in your financial favour.
For example, a small variance usually points to simple problems in your inventory management. For example, to find the source of a small negative variance you could start by checking:
- inventory loss, waste or over-portioning during recipe prep
- overpaying your suppliers for out-of-season or expensive ingredients
- small and incremental price increases on your regular orders that add up over time
Bigger variances can point to bigger problems in your restaurant operations. For a big variance, I always start by looking at inventory and purchases. First, make sure you’ve accounted for and inputted all the right quantities, prices and invoices; don’t leave anything out.
If a big variance is still there, it’s time to look into the prices your suppliers are charging you, your food and recipe costing, and your inventory management practices like rotation, FIFO (first in, first out) and inventory turnover ratios.
Use inventory management software
The days of having to use paper and pencils to track and analyze your restaurant’s performance are long gone. There are plenty of digital solutions that will save you time and hassle while returning high levels of detail, accuracy and insight.
Investing in an inventory system designed for the hospitality industry means you’ll have all the tools you need for calculating variance—and every other restaurant management essential—at your fingertips. And while a basic POS system, or even an Excel spreadsheet, can certainly track all your costs, a complete inventory management software system actually shows you where you can put money back into your bottom line.
With all your current and historical data on purchases, expenses and sales tracked and stored in one place, you can quickly and easily run more powerful reports on just about every aspect of your business.
If you haven’t upgraded to a restaurant inventory management software system yet, look for restaurant-specific software that can scale with your business, is easy for everyone in your establishment to use, and offers a complete and reliable software solution in one package. It always helps if the software you choose is also compatible with your POS, supplier and accounting systems.
In short, restaurant inventory apps and software make using tools like variance easy and accurate so you can you optimize your business decisions to make more money.
Remember, good restaurant management isn’t magic, but the right restaurant software certainly comes close.
Jeff Hands is the President and Chief Visionary of TracRite Software Inc., the producers and designers of Optimum Control restaurant inventory management software (www.tracrite.net). Jeff is also a former restaurant owner and operator, and is passionate about helping other restaurateurs attain simple, accurate ways to reduce costly inventory errors, save time and maximize their profits.