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Prime Cost Wizard

Spot Food Cost Problems by Knowing Your Ideal Food Cost

Spot Food Cost Problems by Knowing Your Ideal Food Cost

by Joe Erickson

Raise your hand if you know what your target food cost should be, you are pleased with that target, and you are consistently hitting that target. If you raised your hand, then you don't need to read on; you're probably doing all the things that we'll be discussing.

However, if you're not satisfied with your current food cost, then take this opportunity to learn a proven strategy for controlling one of the biggest cost areas for your restaurant: food cost.

If you're like most operators, you may feel like you've already cut costs to the bone. You've shopped for the best deals, raised your menu prices and cut your portions; still, you're left scratching your head as to why your food cost is still high.

In this article we'll show you how to establish your target food cost, explain the reasons many operators can't hit their target and present some basic tactics for controlling food cost.

Key Point 1: Know Your Food Cost Target

The prerequisite for controlling food cost is to know what your food cost should be -- your food cost target. There are three basic steps for establishing your food cost target. First, you must go through the exercise of costing out your entire menu; second, calculate the ideal cost (sometimes referred to as theoretical cost) based on actual menu sales mix; and third, compare your ideal food cost with that of actual food cost expenditures.

Step 1: Cost Out Your Menu

Costing out your menu is an arduous task, but you must know your menu cost before you can make intelligent decisions on cost-cutting. The first step in calculating your ideal food cost is to cost out your entire food menu, including all recipes and prep items. To accomplish this, you'll need a listing of every ingredient that you use as well as the current cost. Hopefully, you already have an inventory listing and are using it to take weekly or monthly inventories so that you can accurately track your food cost from one week or period to the next.

Next, create a menu costing sheet similar to the one illustrated below. Using the inventory listing, record to the menu costing form the quantity and cost of each ingredient used. Add the total cost of all ingredients used to arrive at the menu cost.

<center>Menu Costing Sheet</center>
Menu Costing Sheet
In the example, note the cost for a 12-inch Deluxe Pizza is $2.94, 24.6 percent of the selling price; and that this menu item has a profit contribution of $9.01. It is essential to know the expected food cost percentage for every item on your menu and the profit contribution in dollars. It's a good practice to periodically update your menu cost calculations based on the current purchase price for ingredients. (Download Menu & Recipe Cost Template)

Step 2: Calculate the Ideal Food Cost

Ideal food cost (oftentimes called theoretical cost) is the cost expected for a given sales mix over a period of time, assuming proper portioning and normal waste and yields. It is impossible to know the ideal food cost unless you first know the portion cost for each ingredient of every menu item. Even then, as cost for ingredients change, so will ideal cost.

Sales mix (the number of each menu item sold for a specified period) affects the ideal cost too. If one period you sell a greater percentage of high-cost menu items and the next period you sell more low-cost items, then the ideal cost for each period will differ; for that reason, ideal cost is an ever-changing target.

Your cash register or POS (point-of-sale) system should be programmed to track individual sales for each of your menu items. The sales (product) mix report is a basic feature found in most cash registers; if your register doesn't have this capability then you need to seriously consider upgrading. This report should tell you the quantity sold and total sales for each menu item for a given period. Most all registers will give you this report for daily sales. Some can be programmed to maintain cumulative totals for the week or month.

<center>Ideal Cost Worksheet
Ideal Cost Worksheet

The Ideal Cost Worksheet example above is a simple method for recording the ideal cost of your menu for a given period. Simply list the cost of each menu item and the number of sales for that item. Then, multiply the cost times the number of sales to arrive at the ideal cost for each item. Next, add the ideal cost for all items to arrive at the total ideal food cost for the period.

In this example, the Ideal Cost Worksheet tells us that the expected (ideal) cost for the week ending 3-15-2009 for this restaurant was $4,825. The sales for that same period were $18,046, resulting in an expected food cost percentage of 26.7 percent. (Download Ideal Cost Worksheet)

Step 3: Compare the Ideal Food Cost With Your Actual Cost

 One of the most effective measures for controlling food cost is to periodically compare your actual food cost with the ideal cost. Ideal vs. actual comparisons can be made for overall food cost, departmental food cost (e.g., meat, seafood, produce) or by individual ingredients. Keep in mind; comparing ideal vs. actual cost is equally important for liquor, beer, wine and paper cost; but, for this article we're going to concentrate exclusively on food cost.

<center>Daily Invoice Log
Daily Invoice Log

The Daily Invoice Log provides an easy system for recording actual costs. Simply record the date and expenditure of every invoice received for the week (or period). Note in this example, Paulie's Pizzeria spent $5,142 in food purchases for the week. However, to arrive at an accurate cost-of sales figure, it's necessary to reflect the change in inventory values as well. The formula for arriving at an accurate cost of sales is as follows:

Total food purchases + beginning inventory -- ending inventory = cost of sales

Using the calculations on the Daily Invoice Log, record the actual food cost onto the designated line on the Ideal Cost Worksheet. Subtract the actual cost from the calculated ideal cost to arrive at the variance.

In this example, we see that there is a variance (unaccounted for discrepancy) of $671 between the ideal cost and the actual cost; about 3.7 percent. If the variance is 2 percent or more, then you have a cost control problem. (Download Weekly Prime Cost Worksheet)

Key Point 2: Identify the Reasons You're Not Hitting Your Target -- Then Correct Them

Knowing you have a cost control issue is only half the battle; now you must discover why you aren't hitting your targeted food cost -- and correct it. If you have the proper management systems in place, then identifying the case of rising cost variances should be easier. All cost variances can be attributed to one or more of the following reasons:

Waste. Every restaurant experiences some degree of waste. However, waste is a controllable expense. You should have systems in place to both minimize and record wasted product such as meals returned by the customer, kitchen mistakes and spoilage. Keeping an accurate accounting of the value of wasted product can help to account for variances between ideal and actual food cost.

Portion Control. Poor portion control is one of the leading causes of food cost variances. Think about it; your ideal food cost is based on the premise of exact portioning for each menu item, including the portioning of each ingredient within a menu item. If your prep and line cooks have gotten in the habit of "eyeballing" measurements rather than sticking to the exact recipes, chances are your food cost variance could be as much as 5 percent or more. Proven portion control strategies include the use of portioning scoops, scales and measuring spoons and cups. Preportioning can be effective in controlling costs by using portion baggies and a scale to preweigh product prior to stocking the cook line.

Receiving problems. Poor receiving procedures can lead to increased costs. Use a scale to check weights and be sure to visually count and verify every item on the invoice. Not all delivery drivers are honest; and those who aren't know which operators are checking and which aren't. Another good control for receiving product is to use purchase orders when ordering product. The staff member responsible for checking in orders then matches the items and prices on the purchase order to that on the invoice, ensuring that the price and quantities on the invoice are correct.

Theft. Inventory theft is among operators' biggest concerns -- and one of the hardest things to catch. However, operators who routinely take inventory are more likely to spot inventory shortages. Likewise, when the staff sees that management is counting key item inventories on a daily basis they are less likely to steal if they feel the product will be missed. Poor POS controls also contribute to theft opportunities.

Unrecorded Sales. Another reason for high cost of sales is that oftentimes menu items are served without ever being rung. Requisition printing, the act of sending orders to a kitchen or bar printer, can help reduce food costs anywhere from 2 percent to 5 percent. The golden rule when you have requisition printers is that nothing gets made unless it is rung through the POS or cash register first. This not only prevents unrecorded sales, it also makes it harder for service staff to underreport cash sales.

Accounting Error. Sometimes reported food cost problems are not due to any of the foregoing reasons; rather, they may be the result of an accounting error such as an invoice that was recorded incorrectly, or inventory was counted improperly. Always double-check the math before jumping to conclusions.

Outdated Menu Cost. If you have been diligent in your food cost control efforts and conclude that none of the aforementioned reasons are responsible for a variance between ideal and actual food cost, then you probably need to revisit your menu cost calculations. You most likely have an incorrect cost on one or more items due to either rising vendor prices or a mistake in your cost calculations.

Key Point 3: Changing the Target

You may be one of those operators who have good systems and controls in place and therefore your actual food cost may be very close to your ideal cost. However, due to rising prices in food and labor, your prime cost (the combined expenses for food, beverage and labor) has risen to an unprofitable ratio. You're afraid to raise prices across the board for fear that your guest counts will decrease.

Here are some cost-cutting strategies and menu engineering tips that can help you lower your target cost without the need of across the board price increases.

Prepared or from scratch? Many restaurants pride themselves on preparing everything from scratch. While this may sound good in your menu descriptions, it doesn't always translate into profitable business practice. With the minimum wage due to increase again, oftentimes the labor required to do in-house prep such as cleaning and cutting lettuce, cutting steaks or portioning fillets from a whole red snapper, combined with the raw cost of ingredients may actually cost you much more than if you were to purchase preportioned or ready-to-serve product. Take this opportunity to review everything you do in-house. You may find that you can reduce labor cost and produce the same quality using prepared items.

Less expensive ingredients. Just because your mother used a specific brand in her red beans and rice recipe, it doesn't mean you are bound to a particular brand name. Don't get me wrong, some recipes can only be reproduced by using a specific product brand; however, try experimenting with less expensive ingredients. If the quality doesn't suffer, then the cost savings could be significant.

Offer reduced portions. Many operators are afraid to reduce portions on their most popular menu items for fear that guests will complain. But for some restaurants, the larger portions oftentimes lead to meals being split; thus reducing the amount spent per person. Some operators have found success in combating split dishes, not by changing the portions, but by offering reduced portion versions of their most popular fare. However, the price reduction is not as great as the quantity reduction; therefore, even though they get less money per dish, they typically make a better percentage margin, not to mention that they could now end up selling two entrées instead of one.

Menu engineering. In his article, "Primed for Success: Using Cost/Margin Analysis to Highlight Your Prime Menu Items," Dave Pavesic explains the benefits of classifying your menu items by both popularity and profit rankings. Menu engineering is the art of identifying your most profitable and most popular menu items and placing them strategically on the menu in a manner that will influence the guest to order more of the items you want them to order, resulting in increased profit contributions. Simply by rearranging your menu and by tweaking the prices on select items you can steer your guests toward higher-profit menu selections.

Vendor negotiation. Lee Plotkin, president of L.P. Enterprises Inc., a Dallas- based consulting firm specializing in cost-effective purchasing solutions for growing restaurant companies, offers four key points that he believes can help the operator negotiate a better deal with their vendors.

1. Ask your supplier to put together a volume report detailing what your volume was when your relationship with them started and another report detailing where your volume is at presently. Quite often, an operator's volume increases over time either by having more business at one location or by adding additional locations … and the vendor is still pricing you (markups) at the same level they were when things started out. Pricing may not accurately reflect the operator's growth, and better pricing can be negotiated.

2. Consolidate your purchasing as much as possible. Are you able to put more on that supplier's truck and reduce your pool of vendors? Let your supplier know that you are open to discuss putting more on their truck, which makes things more profitable for them … and then ask them to show you what that would look like for you, in reduced pricing. Reducing deliveries can also result in lower costs, less time spent ordering and receiving on your end, which also costs you money.

3. Set up a "cost plus" partnership with your primary supplier of choice, where you agree to the markups or margins they will be charging you (with audit privileges -- that's where the checks and balances come into play). Strategic partnerships that make financial sense are the wave of the present and the future, and can play a key part in getting that vendor invested in your success. Making a commitment to buy from them should result in lower pricing overall. Remember that anyone can walk in the back door and offer lower pricing, but they can't continue to sustain that level of pricing and remain profitable over the long haul without that commitment.

4. Once you have the primary supplier in place, ask your supplier to go back to manufacturers on your behalf and bring manufacturer deals to the table to further reduce costs. Use their buying power instead of yours. Sit down with the key players at your distributor on a regular basis and get them involved in that process.

It's an Ongoing Process

Reviewing your ideal food cost is not a one-time process. If you want to stay on top of food cost, consider updating your menu costs at least two to four times per year. Likewise, consider calculating your ideal cost weekly. Operators who know where they should be are much more likely to get there.

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