The restaurant business is a fast-paced, competitive industry, and not every new location that opens survives. In fact, a study(opens in new tab) using data from the Bureau of Labor Statistics found that the medium lifespan of a restaurant in the western US is only 4.5 years. To make it past the five-year mark, restaurant owners must regularly assess the state of the business against internal goals and industry benchmarks. The best way to do this is through a study of a restaurant's KPIs. The metrics listed below offer insights into a restaurant's positive performance, while also highlighting areas that need improvement.
Sales are one of the most critical indicators of success for any business. In the restaurant industry, sales impact many key metrics such as break-even point and gross profit.
Break-even point measures the sales volume required to make back an investment. Break-even point is a crucial metric when opening a new restaurant or considering any substantial investment, such as buying new equipment or purchasing a building for a new location.
Break Even Point = Total Fixed Costs ((Total Sales - Total Variable Costs) / Total Sales)
Gross profit tells you how much money your restaurant is making after the cost of goods sold. To calculate gross profit, subtract the cost of goods sold from your revenue.
Gross Profit = Total Sales - COGS
2. Historical Sales
Historical sales data tracks how a restaurant is doing over time. It’s best to track this KPI by day, week, month and year. Historical sales help identify trends, measure against past performance and point out your busiest times of the year. Long-term sales data can also produce more accurate forecasting, planning and reduces costs.
3. Labor Cost
The cost of labor is a considerable expense for most restaurants. Labor cost includes wages, as well as taxes, discounts and any employee benefits. According to Chron(opens in new tab), the typical labor cost is 30-35 percent of a restaurant’s total revenue. Measure your labor costs carefully and be aware of the cost of labor in relation to prime cost (see below for a definition).
4. Cost of Goods
To increase your restaurant's bottom line, look for ways to decrease the cost of goods sold without sacrificing quality. RestaurantOwner.com(opens in new tab) suggests strategies such as carrying a leaner inventory, taking daily inventory on key items and having a plan to ensure maximum usage of all purchased products.
Food is a substantial cost for any restaurant. One good way to keep food costs under control is by tracking your food cost percentage.
Food cost percentage determines the difference between the cost of making your items and the price your customers pay. Most successful restaurants have a food cost percentage between 28-35 percent(opens in new tab) and keeping food costs under control is an essential element of your restaurant's profitability.
To determine food cost percentage, we must first find food cost.
PC or COGS = (OI + P - EI) S
In the formula above:
- OI (Opening Inventory) is the cost of food you have at beginning of period.
- P (Product) is any new food you buy during the period.
- EI (Ending Inventory) is the food left over at the end of the period.
- S (Sales) is the total amount of food sold during the period.
Now, you can calculate the food cost percentage.
Food Cost Percentage = Food Cost Total Sales
Liquor cost is also a component of your cost of goods sold. So if you sell alcohol, your beer, wine and liquor costs must also be calculated.
Liquor product cost, or PC, can be determined with by the following formula.
PC or COGS = (OI + P - EI) S
In the formula above:
- OI (Opening Inventory) is the cost of alcohol you have at beginning of period.
- P (Product) is any new alcohol you buy during the period.
- EI (Ending Inventory) is the alcohol left over at the end of the period.
- S (Sales) is the total amount of alcohol sold during the period.
Liquor cost percentage varies by type of alcohol(opens in new tab), with liquor at 18 to 20 percent, bottled beer at 24 to 28 percent, draft beer at 15 to 18 percent and wine at 35 to 45 percent.
Here’s how to calculate the liquor cost percentage.
Liquor Cost Percentage = Liquor Cost (By Type) Total Sales (By Type)
5. Prime Cost
Prime cost is one of the most critical KPIs to study, because it makes up the majority of any restaurant’s variable costs. Prime cost is found by adding total labor costs to the cost of goods sold. According to TheRestaurantExpert.com(opens in new tab) founder David Peters, the ideal prime cost in the restaurant industry is around 60-65 percent.
Figuring out how to decrease prime costs without sacrificing quality can lead to higher profits for restaurant owners.
Prime Cost = Labor + COGS
Prime Cost as % of Sales = Prime Cost Total Sales
6. Turnover Rate
High staff turnover is another challenge facing the restaurant industry. According to 7Shifts(opens in new tab), the average restaurant employee lasts approximately two months and restaurant managers last approximately four months. Even more staggering, the Center for Hospitality Research at Cornell found that turnover costs for an average front-line employee are $5,864 per person.
Analyze total labor costs as well as employee turnover during labor reviews. Also, keep an eye out for ways to decrease costs of labor while increasing retention.
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7. Server Benchmarks
Servers are an essential segment of any restaurant team. They act as brand ambassadors for your business and directly impact key business elements such as sales and customer satisfaction.
There are many ways to track server performance that can help evaluate productivity, identify server strengths and weaknesses and improve your bottom line.
According to Chefs-Resources.com(opens in new tab), you can measure server productivity in a variety of ways.
Per-Person Average (PPA)
A server’s per-person average, or per-guest average, is a way to track the volume of sales generated by a server. It's important to track this data to see which servers drive the highest sales for your business.
When reviewing a server’s per-person average, you must also take into account other elements such as customer service, table turn-time and number of guests served per-hour.
Per-Person Average = Total Server Sales Total Number of Guests Served by Server
Number Of Guests Served, Per-Server, Per-Hour
Tracking the number of guests (not tables) served per hour will offer insights into the efficiency of each staff. It’s also helpful to compare the number of guests served alongside customer comments.
Top servers will score high in both categories. If a server has a high number of guests but poor guest feedback, consider more scaling back customer volume and offering that server more training.
Number Of Guests Served
Per-Server Per-Hour = Total Number of Guests Served Number of Service Hours Worked
Server Errors Per-Guest
It's a good idea to track a server’s errors to discover how often mistakes occur as incorrectly rung items in a POS system lead to inflated costs, unhappy customers and poor team morale. By identifying the number of server errors, management can take steps to address the problem and reduce the number of mistakes.
Server Errors Per-Guest = Total Number of Server Errors Total Number of Items Wrung In
For more on Restaurant KPIs, check out this video.
The Key to Reducing Turnover in Your Restaurant is a Well-Defined People Plan
Track Your Restaurant’s KPIs With NetSuite
In the fast-moving restaurant business, up-to-date information about business performance is vital for success. NetSuite’s role-based dashboards and reports provide real-time visibility into key performance indicators (KPIs), helping you track operations and quickly respond to problems and trends.
With NetSuite, analytics are integrated into a unified set of business applications that help restaurants, franchisors and hospitality businesses increase revenue and cut costs. That integration ensures instant access to KPIs that track sales, costs and profitability in real time, eliminating the need to manually consolidate and reconcile information from multiple sources. Role-based, customizable graphical dashboards ensure managers and other authorized users can easily track the data they need to make better informed business decisions. A guest service dashboard helps restaurants better understand guest behavior, resolve issues and improve the customer experience to drive business success.