Sponsored by HotSchedules.
The restaurant industry faces a growing number of challenges, such as increasing labor and food costs. In order to respond to these challenges, successful operators are drilling down on the basics and focusing on inventory management techniques that may have been overlooked or de-prioritized in the past.
Here, we look at the top three ways restaurants can increase profitability.
1. Calculate (and Interpret) Your Prime Cost
Prime cost is calculated with the following equation:
Prime Cost = Labor Cost + Cost of Goods Sold
“You would be surprised how many quick-service restaurant managers don’t know the importance of this,” says David Cantu, co-founder and chief customer officer at HotSchedules. “Prime cost is the window to a restaurant’s profitability. These are the majority of expenses an operator can control, and it is critical to know the benchmark value at which a restaurant should operate—roughly 62 percent.”
Cantu adds that the usage of inventory is what drives the food part of prime cost. By understanding which types of events affect labor and food costs, managers can budget operations accordingly. In addition, an awareness of prime cost—and a responsive attitude toward fluctuations or variances—will ultimately optimize restaurant operations in front and back of house. This not only ensures customer satisfaction, but also helps in reducing food waste and minimizing over-scheduling of staff during certain dayparts.
2. Invest in Inventory Management Tools
According to Cantu, executing a reliable and consistent counting methodology can be difficult—and time-consuming—for employees who are busy serving customers.
“An accurate food and beverage inventory is fundamental to prime cost calculations, so it is critical for managers to have access to tools that increase efficiency, accuracy, and accountability in the inventory process, especially when it comes to counting,” Cantu says.
Several innovative restaurant operators have found success by implementing back office management systems, such as HotSchedules’ Clarifi, which not only tracks goods on the shelf and their consumption, but also provides guidance on ordering the right amount of food, for example, based on demand and expected usage. Then when the manager receives the order, they must validate the quality, amount, and price of the delivery.
“Ordering and receiving accuracy reduces food waste, which helps to keep prime costs lower,” Cantu says.
3. Review Inventory Weekly
Restaurant costs fluctuate regularly based on consumer behavior, seasonal patterns, economic changes, and other factors. The cost of food in the U.S., for example, increased 1.2 percent in October 2018, according to the U.S. Department of Agriculture, and is expected to grow another 2-3 percent in 2019.
“Calculating prime costs on a weekly basis allows managers to stay on top of restaurant performance,” Cantu says, “so that potential food waste problems and staffing can be addressed more accurately.”
In addition, Cantu says that weekly reviews of product usage can alert managers to problematic variances—for example, if employees are over-pouring soda or cooks prepare menu items incorrectly, food costs for a period of time might exceed expected prime cost and operators would need to address that.
“Prime cost is where the manager can get a bird’s-eye view if operations are off-kilter, and take action accordingly based on expectations,” Cantu says.
By understanding what is driving your prime cost, and implementing modern back office tools to assist with weekly reviews, restaurant operators can perform regular health-checks of their business, ensuring high-level efficiency and increased profit margins.
By Erin McPherson
