CHAPTER
17

Understanding Costs

In This Chapter

• How to determine the cost and profit of each dish
• Why you need to do a weekly food and liquor inventory
• Why spreadsheets are a vital tool in controlling costs
• How to run the numbers to make sure your costs are on budget
• How much should you pay your staff?

Success in the restaurant business depends on managing food and beverage costs. To keep their blended costs within 25 percent of sales, you need to take several steps before and after your restaurant opens.

In this chapter, we’ll show you how to run yield tests to cost out each dish on the menu. You’ll learn about building up data in spreadsheets on product costs. We’ll also discuss how to keep food costs on budget by monitoring vendor deliveries and doing weekly inventories.

This is your money; you have to be involved. You need to run the inventories. It also shows the staff and vendors that you’re in control and you run a business with an eye on the bottom line.

Food and Beverage Costs

You begin managing food costs during pre-opening. You’ll start by running the yield tests of your recipes on your menu, and then determining the exact cost per plate.

DEFINITION

Yield is the difference between how much a food item weighed when it came in the door versus its edible weight. It’s the net weight of food after it has been processed.

The goal is to build up a database of tested standardized recipes that will express your restaurant concept, while staying within budget.

Liquor is even more of a profit center, and you’ll run your drink recipes through the same series of tests, as well as use several inventory methods to monitor use, cost, and profit, and prevent waste and theft.

Inventory Template

Your food costs will be determined by your yield tests. Menu item costs are built from spreadsheets listing each ingredient amount and the cost per unit. From that listing, we determine the cost per dish.

You’ll add this data to your inventory template—a spreadsheet that will calculate your yields and costs. You can purchase spreadsheet programs for offices or build your own if you’re well-versed in creating software. Be sure you understand your software well or have someone tutor you in working with it.

The components of your inventory spreadsheet are listed in the following table. Examples of these spreadsheets can be found in Appendix D.

The Inventory Template

The spreadsheets for the plate costing index, recipe template, plate template, and plate 1, 2, 3, etc., contain a category titled Method, which refers to the steps to create each dish, recipe, and plate. This comes in particularly useful when evaluating dishes according to the profitability, production, and popularity (PPP) test we talked about in Chapter 5. How much time is it taking to make? Can you streamline production to make it more profitable?

Determining the cost mix of menu items and the profitability of each dish will give you an overall average of food profitability. Each item must lose value in order to create value. A bell pepper might weigh 8 ounces and cost $0.50 or $0.0625 per ounce. After you take out the core, stem, and ribs, you might be left with 5 ounces of bell pepper. Now you see that you paid $0.50 for 5 ounces of bell pepper or $0.10 per ounce. When you transform the bell pepper into your Mediterranean ratatouille—a medley of eggplant, peppers, tomatoes, and onions—it contributes to the cost of the dish. It adds value.

Waste Not

Get yourself a pair of long, thick rubber gloves and look through your garbage for waste. This is how you ensure your staff is maximizing the yield of all of your food products. The fortunes of many a famous successful chef have been built on braving the black plastic bag to find food waste. Cutting off and tossing out too much of an onion, tomato, asparagus, or bell pepper decreases the amount of useable product you can sell. It increases your cost per plate. Yes, you want your staff to fear you going through the garbage.

Another way many restaurants prevent waste is to buy larger cuts of meat and cut their own steaks and chops. Pre-cut steaks and chops are more expensive to purchase than the larger piece of meat you cut yourself, but the weight of each piece is verified.

The trimmings and bones can also be used in many ways. Trimmings can become meatballs. Bones are the basis for deep-flavored stocks.

Portion control is essential, especially with your most expensive ingredients, proteins, and liquor. If each steak or chop is supposed to weigh 12 ounces, but if the chef cuts the steaks a bit thicker, you might end up with a 14-ounce steak. You’re giving away your profits. Likewise, if the steak gets cut to 10 ounces, you can’t sell that steak; it has to be used for a different purpose, most likely at a lower profit margin.

Food Costs to Sales Percentage

We talk a lot about percentages in the restaurant business. Food costs should be 30 to 35 percent of sales (the lower the better). One aspect to keep in mind is that some food items might not have a large profit margin, but that doesn’t mean you’re not making good money on it. Steak is a good example. Your cost per steak is $25 and you’re selling it for $48, so your food cost is 52 percent. However, you get a higher revenue on that steak than you would have with a hamburger, which at 25 percent has better food percentage (cost is $1 and it sells for $4). If you sell just one steak, you make $23. You’ll have to sell eight hamburgers to make $24. The point is that some items will not only have a higher revenue, but also a higher cost percentage.

This table shows that even though the steak has a much higher food ratio of cost to sales than you’d like to see, you make $23. Compare that to the burger, which has a low ratio of cost to sales (which you like to see) where you only make $3.

If you sell 2 steaks and 10 burgers, you profit $46 from the steaks compared to $30 from the burgers.

Another thing to take into consideration is the blended cost of each plate. If you’re adding a baked potato to the steak dish, for example, it’s a low-cost item at around 8 percent. Steakhouses often charge extra for sides, and they make a good profit on the creamed spinach, the iceberg wedge, and the tomato salad. A steakhouse has higher food costs, but the revenues are also higher.

It’s the same with wine. You can multiply a bottle of $10 wine four times to sell it at $40. But if you paid $30 for a bottle of wine, you can’t really sell it for $120—especially if the bottle is one the customer can purchase at the liquor store for $40. (Liquor stores and restaurants buy liquor at the exact same state-regulated price.) If you sell a $30 bottle for $75, your margins are less but you just put $45 into the bank. That’s like two steaks and a whole lot of hamburgers.

When costing out a plate, don’t forget to add wrap-around costs—the freebies you give away, such as steak sauce, hot sauce, lemons, and candies at the end of the meal.

Some restaurants just bring an obligatory basket of bread and foil-wrapped butter, but others serve artisan breads and pour expensive olive oil. Depending on the gesture, the cost can range from low to high but it’s important to recognize the incremental effect on food costs. Imagine if a burger joint didn’t take into consideration the cost of ketchup.

The same applies to beverages—while a mojito might have a fixed cost, the expense of fresh mint is potentially significant in the actual cost. Wrap-around costs include take-home “doggie-bag” packaging. However, if takeout is a significant part of your business, packaging would be listed as a line item in your P&L, rather than being included in wrap-around costs.

The best way to calculate wrap-around costs is to track the overall category of this expense and divide by total covers for the month. In a spreadsheet, plug in this number per guest, and then repeat the exercise for two more months. The three-month average can be used, until there’s a material change in the cost of an item or two. This exercise might make you reconsider your menu price or the level of generosity your concept can afford. Warning: if you let your chef be in charge of welcoming freebies, it can get expensive.

Market factors affect food costs, and thus your food cost percentages. Your actual food cost percentage of your food sales will vary based on market factors such as weather, drought, crop infection, import restrictions, seasonality, etc.

POTENTIAL PITFALL

Don’t tie your food specifically to a special imported item or brand. When imported brands grow popular, U.S. producers of that product can bring unfair trade cases against the company. This means your special imported pasta could soar in price because the International Trade Commission placed a tariff on it.

As menu items become less profitable due to these market factors, either your prices will have to increase so your profitability stays the same, or your menu items might need to change to keep your profits.

Back in 2014, the price of limes tripled in a few short weeks. Restaurants sucked up the additional cost, raised their prices, switched to another citrus, or changed the menu item. However, some menu items like guacamole and margaritas can’t be made without limes. Most restaurants that couldn’t substitute for limes simply ate the additional cost. Luckily, the lime shortage was short-lived. The USDA publishes a market news report for fruits and vegetables. Use this report to keep a pulse on prices. Talk to your suppliers regularly to stay on top of any price shocks or anticipated shortages.

When Jody was buying for 12 restaurants, he paid attention to how an unexpected freeze in Brazil was affecting coffee prices. Yet he was mindful of his competitors, and before raising prices, he thought about what it would cost his restaurants in pricing and posture, and what the market would bear. Be mindful about what other restaurants charge, which is how the guest is going to judge your restaurant.

Don’t raise prices in response to a food shortage when you’re establishing a new restaurant, because that’s what customers will remember. Once you’re established, you can get away with it. In response to the increase in the price of limes, you could bump up prices a little, but try to misdirect the customer by serving the margarita in a different glass, and dip the rim in fancy red sugar. You should work a little harder for that extra money.

Inventory

Your inventory is the cost of your food and beverages you haven’t sold yet. Although food and beverage items in your inventory are considered an asset on your balance sheet, they’re expensive and they can spoil, be damaged, or get stolen.

We recommend you perform a weekly inventory. Your staff will try to convince you that you can do it monthly, but managing your food costs is such an important part of your business that you really need to do it weekly. In the future when your food and beverage costs are completely steady, you might be able to perform it monthly. For now, do it weekly.

Inventory has to be done at a time when business comes to a close. It’s a freeze-frame moment. Restaurants are like a moving body, so you have to find the rare moments when it’s at a standstill. It can be at the end of a Sunday night or at 7 A.M. on Monday. Note, the restaurant must be closed. You must be disciplined and should allot time for this process. We suggest you block out from 10 P.M. to midnight on Sunday. You’ll need one staff member to help. Make it more fun by ordering a pizza, making some coffee, and turning up the music.

Your inventory lists should be arranged to correspond exactly with how the food is stored in the walk-ins and freezers, and the way your bar is set up. (A noticeable vacant spot in your bar setup lets you know what’s needed at a glance.)

Keep a clipboard on the door of your walk-in with an inventory list of your premium products, so your chef can mark down every time he uses a protein. At the end of the night, he should do an inventory count of his proteins to ensure a lobster, for example, doesn’t end up in someone’s bag and become the entrée for a staff member’s romantic dinner at home, rather than a customer’s meal in the restaurant. The chef will check his proteins again at the beginning of the day and mark the inventory. As a result, he knows that when he has only six lobsters left, it’s time to order more. You have to establish a par stock, which is the amount at which you need to order more.

DEFINITION

Par stock is the minimum amount of any food or beverage item you should have on hand before ordering more. Defining your par stock will keep you from running out of food or ordering too much. It varies vastly according to food category, and your inventory will reveal your restaurant’s usage patterns.

Running a careful weekly inventory system prevents theft and spoilage, and it makes ordering orderly and organized.

Your par stock should be equal to three to four days of usage. That means if you’re doing $40,000 in food sales weekly, it comes out to about $10,000 to $11,000 of food usage. If orders come in Monday, the lowest point of food in your kitchen will be Sunday. At that point, if you’re doing $40,000 in food sales weekly, you should have only $4,000 to $5,000 in food inventory. Those figures will help you keep a meaningful inventory.

If you’ve bought two and a half weeks’ worth of food, you can label everything all you want but it’s likely that when a cook rushes to the walk-in during service on a busy night, he’ll grab newer inventory instead of inventory that should be used first. These days, you can get deliveries two to three times a week, so there’s no need to load up on supplies.

There’s a fine line between keeping inventories low and running out of ingredients. A sous chef, who was filling in for the vacationing head chef, was so intent on showing the owners how good he was at keeping costs down, he focused on keeping the inventory down. He did such a great job keeping inventory low that the restaurant was running out of vegetables, meats, and cheeses. Then he started substituting ingredients without telling the customers. He was making himself look good to the owners at the expense of their business. It was a bad situation.

A restaurant running a weekly inventory soon gets into a rhythm, with deliveries coming every week, and that keeps you from running out of food.

SMART MOVE

Running out of food isn’t something that should be happening in a well-run restaurant. But sometimes it does happen. Make sure you know the locations of your closest grocery stores, and use them for emergency purposes only.

You shouldn’t be running out of chicken, for example. But if you’re prepping and discover you don’t have enough, send someone out to a store to buy it. If there’s a shortage, one of those “Oh, man!” moments, discover it during the afternoon, not during service. It’s disappointing for guests to look at a menu and imagine eating a dish, and then be told it’s not available. That’s the sort of disappointment that can put your guests out of sorts, especially if they came there craving your oven-roasted chicken.

Now, if you run out of a special, that’s okay. It was a special, after all, with the purpose of moving something you bought too much of or need to use by today. But your staple inventory items shouldn’t be so volatile.

Inventories also help you keep your chef on top of what food needs to be used before it expires. Making soup on a Monday is a good way to keep the food in the walk-in moving on out. Specials are also good ways to move product. At Baang, a restaurant Jody opened in Greenwich, duck was on the menu. Leftover duck was featured in spring rolls, pancakes, curries, and staff meals.

Remember that it’s illegal to marry liquor by pouring the contents of one bottle into another. Everyone tries to do it, but it’s a bad idea. Even though it seems to make sense to fill up a bottle that’s only 25 percent full, you shouldn’t because it’s not legal.

Think about it from the perspective of someone who’s less honorable than you. If the law allowed you to fill a bottle of quality vodka from another bottle of the same vodka, what would prevent you (or some devious member of your staff) from filling it up with well vodka—or water?

DEFINITION

Well liquor, also called “rail,” is a generic or lower-end brand of distilled spirits, such as gin, vodka, whisky, or tequila. There’s been a resurgence of interest in distilled spirits, with status brands, flavored spirits, and craft spirits capturing more of the market.

Perpetual Bottle-for-Bottle Inventory

This inventory accounts for every bottle of liquor used daily. Every day, every single empty liquor and wine bottle is saved in a dedicated trash can in the back of or under the bar. At the end of the shift, they’re all placed on top of the bar and counted and logged into an inventory sheet.

Then you run the POS mix—the printout that shows how many of each product has been sold during a shift—and verify that all the empty wine and liquor bottles have been rung up. Once the empties have been verified, they’re removed, destroyed (broken), or recycled (marked with an X across the label to make sure it will not be refilled).

Another function of the perpetual liquor inventory is that you’re giving a visual message to the entire staff that you check every bottle against the POS system’s reports.

The inventory sheet is then given to the manager for requisitioning from the stockroom the next morning. When the bottles are delivered from the stockroom the next morning, you can mark the labels with a special black light signature stamp. A sweep of the bar with a black light will show you if any foreign bottles have been brought in.

You set a par stock for liquor just as you do for food. You’ve got the same bottle in the same place every day. You keep your back-up in the cabinet. And in the middle of a busy Friday night, when you run out of the bottle on your speed rail, you won’t have to leave the floor to retrieve a back-up bottle from the locked basement storage, because you’ve already got a bottle in the cabinet beneath the bar.

You should never have to go to a liquor store during the middle of a shift. You need to stay in the restaurant, so send a staff member to the liquor store in an emergency.

POTENTIAL PITFALL

Liquor distributors are going to offer you deals. Resist all offers in the beginning until you realize what’s moving and selling at your restaurant. If you’re not careful, you could end up with a case of peppermint vodka you can’t sell.

Don’t tie up or deplete your cash flow on anything you can’t move. This is a cash-flow business, so be sure to always keep that in mind. Don’t commit to bulk purchases, even if they’re being offered to you as a “deal.” Wait until you know the flow of what products you’re using the most of and when you need to reorder. Once you know that further on down the road, you can then take advantage of those discounted deals.

Having enough is part of the system of running a successful restaurant. Think about glassware, for example. You need enough to set the tables and enough to fill your waiter stations, while one set is with the dishwasher and another is in storage. If and when the manager decides to pull another case from storage and move it into the working inventory, he must put a note on his clipboard to order another set of glasses to ensure you never run out. Remember, your storeroom is your back-up, not your working inventory.

For accounting and tax purposes, inventories may be calculated differently. You’ll need to speak with your accountant about how to cost your inventory. There are three methods to cost inventory:

1. First-in, first-out (FIFO)

2. Last-in, first-out (LIFO)

3. Weighted average

Whichever accounting method you decide on with your accountant, that method will be applied from year to year.

Note: none of the methods of costing inventory has any bearing on the actual flow of how your items are used from inventory. You’ll probably finish the tomatoes from yesterday before you open the box that was delivered today. Of course, you want to minimize your inventory to reduce the costs associated with it.

SMART MOVE

Consider putting a big, intimidating scale by the inside receiving area. Vendor drivers need to know that you check weights. Be a stickler up front and check weights right from your first delivery. You want the driver to pass the word to the warehouse that your restaurant checks weights.

Count bottles and check the vintage on wine. If it’s incorrect, send it back. Drivers hate having to return stuff. They get paid for deliveries, not for returns. Send things back right then and there, and they’ll put more effort into making sure your order is correct from then on.

Once again, it’s a chess game of strategy. Don’t worry about being liked by suppliers. Be respected as an honest business person, with a smile and a handshake for all.

There are many tricks of the trade for increasing your beverage sales, from training your staff to make suggestions to offering drinks at the right moment in points of service. These days, people enjoy pairing drinks and food. What started with wine, matching the qualities and flavors with the flavor and texture palette, has now moved on to beer and distilled spirits.

Depending on your restaurant concept, your servers could suggest starting the meal with a glass of (high-profit) cava, the Spanish bubbling wine, and tapas. After the table has finished the appetizers and before the entrées are to be served, a server might suggest to the customer that a bottle of a light red wine will work with the fish and meat dishes ordered by the table. After dinner, your servers could recommend pairing a scotch with your chef’s special chocolate truffles made with estate-grown cocoa beans.

Aligning your food and beverage programs will help you increase your profitability.

All the information that you gather and enter into your spreadsheets, along with the information generated from your POS system, will help you begin to understand the flow of your business throughout the day, week, month, season, and year. It also helps you run your restaurant every day. These spreadsheets tie into your ordering, inventory, scheduling your labor, and adjusting your menu.

Operating Costs

Your operating costs are the same as your selling, general, and administrative (SG&A) expenses. These are the costs that are not directly related to making food. They include management salaries, benefits for nonproduction employees, accounting expenses, legal fees, office supplies, property taxes, rent, advertising, and more. Of your operating costs, only your rent is fixed. All the other operating costs are variable. Keep a close eye on the variable components to see how they’re affecting your profits and cash flow.

Many of these costs are paid once a month. We highly recommend that you set up an accrual account into which you put the balance of income, after you subtract your weekly expenses for labor. Then at the end of the month you will have enough money to cover your rent, property taxes, insurance, and the estimated cost of your utilities.

Remember, restaurants are a business where you bring in $20 at a time and you receive bills for $10,000. Be prepared to cover your monthly expenses, while putting away money for maintenance and so on. Cash flow is the tipping point for success or failure. Having an accrual account set up so you’re ready to write really big checks is a good idea. Not having an accrual account is what gets most of the restaurant guys. Their restaurants become a pervasive climate of chasing their tails. And then all the special things, the details that made the restaurant such a hospitable experience, start to disappear. They start cutting back on the special cardamom-spiced soap in the men’s room and the roses are replaced with mums in the dining room.

Linen is also an area to watch closely. Most linen companies try to get you to agree to pay a stocking fee, which means that regardless of how many dirty aprons and napkins they pick up to launder, they charge your restaurant for a set amount. Try to hire a usage-type linen service where you pay for what you actually use. Linen companies also send a phantom invoice for damage every now and then. You should always ask for the damaged ones to be presented before you pay.

The relationship between the linen driver and the restaurant can be good. If you offer him and his wife a free meal once in a while, he might bring back the ton of forks and knives that end up in the linen bin each week. (Dishwashers have magnetic rims to reduce silverware being tossed. But usually, silverware ends up entangled in the linens.)

Paying Your Employees

Restaurant employee pay is determined by the market rate. It varies according to the cost of living in your part of the country. The Labor Board of Statistics is a good resource for information on pay rates for restaurant jobs (see Appendix D). You should also have enough contacts and experience in your local market to learn what the going rates are. If not, start talking to people about the different pay rates according to the employee’s role.

The Manager. Jody’s approach is to spend money on key roles, such as the manager, who is salaried and rarely gets overtime. For managers, hours aren’t measured as much as results. Owners should focus on making managers effective, rather than having them just hanging around the restaurant.

The Host or Hostess. You might want to spend more money on your host or hostess. They’re the first person to greet the customer, and that first impression is very important. A host can be the face or identity of a restaurant. You want to ensure you pick the right personality and style that goes with your restaurant’s concept. Of course, having a host with too strong an identity for hospitality can have its downsides. When he’s off-duty, guests will have a very different experience in your restaurant.

POTENTIAL PITFALL

Your investors might say, “I’ve got an idea that’ll save you money. My daughter will be home from college this summer. She’ll work as the hostess for minimum wage.” The answer is always no. You need a professional who will be around for months to come.

In Jody’s neck of the woods in Fairfield County, Connecticut, the going rate for a host/hostess ranges between $10 and $12 an hour. But Jody will pay $100 a night for a good hostess who smiles at the guests and makes them feel genuinely cared for.

Servers. Servers get what is called a “special” rate, which means the base salary is lower. They also receive a meal allowance and tips. So what they earn relates to how many tables they have, what nights they work, how many times the tables turn, and whether or not they have to pool their tips with others.

We don’t recommend pooling tips in the beginning, when you open a new restaurant. Pooling the tips kills the motivation of the talent. It’s smarter to let all the servers keep the tips they earn individually (paying back a percentage to runners and bussers), and hope the less-experienced servers will pick up the experience and skills that will make them more valuable team members who can work the best tables on the best nights.

The meal allowance is more of a technicality, so restaurants can pay below the minimum hourly wage to servers who make tips. It’s a payroll factor mechanism. Staff doesn’t pay for the chef’s family meal, which is not from the menu, but almost always a different style of food from what the restaurant serves, to break up the routine. Most restaurants offer an option where staff can order off the menu for a considerable discount (50 percent).

The chef’s family meal, which is offered to the entire staff, is a quick moment when the staff breaks bread together, thus reinforcing the team spirit while discussing particular details of the night ahead.

At the end of a successful shift, some restaurants let the staff toast with a cocktail. However, it’s a bad idea to do so because it can create many compromised situations. If your staff worked extra hard and you want to reward them, find an affordable nearby tavern and meet there to unwind while you buy them a round. It’s better to move the situation of staff sharing an after-shift drink offsite.

Another reason you don’t want staff drinking onsite is because you don’t want that image seen by the customers. Say a staff member gets off early and goes to the bar for his drink. Now he’s standing there, drinking next to customers he might have waited on earlier. It’s a confusing message to all concerned. Require staff to change their uniforms and leave the restaurant when their shift ends.

The Bartender. The bartender gets an hourly salary and he or she keeps tips. (The numbers of female bar staff are strong and growing, and women make great bartenders.)

Back of the House. In the BOH, most of the salary goes to the main talent—the executive chef and the sous chef. Cooks are paid market rate.

One of the most important roles in the kitchen is the dishwasher. A good dishwasher is key. Without him, the whole system bogs down. He works for a low salary and shows up every day. This guy’s watching your back. Jody buys the guy’s loyalty by finding something to do for him. Is he walking to work? Buy him a secondhand bike or a pair of headphones to listen to music on his way there. One time Jody rewarded a dishwasher with a metro pass for the train he was taking to work.

Jody also highly recommends that an owner spend one evening working the dishwasher station. We don’t know how many owners will be up to the challenge. However, that’s where Jody learned that the reason he had to keep replacing wine glasses—was the waiters were throwing them in the bins and breaking them. He also learned how soon the dishwasher ran out of hot water. The dishwasher had just accepted it, instead of letting the manager know.

Employees don’t get rich working in a restaurant kitchen. What you can offer them is a great place to work and a stimulating environment. Jody hires the kind of people who’d love to come to his restaurant as a guest. You’ll get more out of your employees by inspiring them, since you can’t pay them more because their actual pay rates are locked into the business P&L and market rate average. They love being part of the ensemble and the vibe. They love being respected and working in a well-respected restaurant.

The Least You Need to Know

• Your inventory is your cash. Keep a daily inventory on your proteins and liquor, and do weekly Sunday inventories on all food and beverages.
• Deliveries represent cash. Check your invoices and make sure you get what you pay for.
• Food percentages don’t always tell the whole story; food revenues can wildly vary your food profits.
• Know the market rate for restaurant staff and be prepared to pay extra for key positions such as manager, hostess, executive chef, and sous chef. Reward your loyal lower-paid employees with perks.