This is where we take all the data from reciProfity and put it to work.
If you've been running restaurants for years, you're likely already profitable and are using reciProfity to cut down on your admin work. But if you're newer to the game, these articles will teach you how to conquer the profitability puzzle.
Here's a quick primer on restaurant math: Spend 30% of your revenue on food and drinks to sell to your customers. Spend another 30% on your staff. Spend 20% on everything else: rent, electricity, gas, insurance, taxes, linen, maintenance, repairs, and light bulbs. Roll 10% back into the business to make it better and put 10% in your pocket. You've earned it.
To get this math right, it's absolutely essential to have an accurate Food Cost. This is the most basic purpose of reciProfity. In other businesses this is called the Cost of Goods Sold (COGS) or Cost of Sales. Your Food Cost can be expressed in two ways:
- As a number: exactly how much money do you pay for the ingredients in a recipe?
- As a percentage: what percent of a recipe's sales price goes to paying for its ingredients?
Here are some other terms you should know before we get into menu pricing strategies:
- Fixed Costs, or Overhead, are the expenses connected with opening and operating your business everyday. This includes rent, electricity, gas, insurance, and anything else that stays the same (or almost the same) regardless of your sales volume.
- Variable Costs are expenses that change directly proportionally to your sales volume. For our purposes, these are the same as Food Cost.
- Payroll exists somewhere between Fixed Costs and Variable Costs. Even though your payroll costs vary depending on how busy you expect a service period to be, they can't be expressed as an exact proportion of revenue so it's not really a variable cost.
- Gross Margin is the difference between revenue and food cost. In other words, it's your profit AFTER paying for food but BEFORE paying your fixed costs. Also called Contribution Margin or Gross Profit.
- Net Income is your profit after paying BOTH fixed and variable costs. From your accountant's standpoint this is the same as your EBITDA: earnings before interest, taxes, depreciation, and amortization.
- Breakeven Point is the amount of revenue you need to exactly cover all your fixed costs, variable costs, and payroll. In other words, it's the amount of sales that results in exactly zero net profit/loss. Here's how to calculate the amount of sales you need to do in order to hit your breakeven point:
Breakeven Sales=Fixed Costs/Gross Margin %
Simple Example to illustrate these terms:
You pay $10 for a rib-eye steak and sell it for $30.
Food Cost: $10
Food Cost%: 30%
Gross Margin: $20