Let’s be clear – math isn’t always fun. But even in the restaurant industry, knowing how to calculate the right performance metrics is essential to staying in business.
Break even, cost of goods sold, overhead rate, employee turnover, gross profit, food cost percentage, and prime cost are just seven of the numbers you should know about your restaurant. But what are these numbers, why do they matter, and how care they calculated?
Read on for 7 key performance metrics all restaurateurs should know. Or, if math isn’t your strong suit, download the Restaurant Numbers and Metrics Calculator, which will do all the grunt work for you.
Break Even Point
Your break even point is one of the first numbers you should calculate. This number lets you pinpoint how much you must do in sales to earn back an investment. The number can then be used to forecast how long it will take to earn that money back. Break even is a must-have if you’re looking for investors or opening a new restaurant.
You can also use break even to justify a new big purchase, like a commercial kitchen redesign or launching a new marketing campaign. Saying something will cost $20,000 is one thing, but saying it will pay for itself in 3 months is a better way to put that number in perspective.
Calculating Break Even Point
If your restaurant does $10,000 in sales one month, pays $3,000 in variable costs, and $4,000 in fixed costs, your break even point in dollars is $5,714.29 for that month, meaning that you start earning profit after selling $5,714.29 worth of food & drink.
The equation for break even point is:
Total Fixed Costs ÷ ( (Total Sales – Total Variable Costs) / Total Sales) = Break Even Point
In this scenario, $10,000 – $3,000 (sales minus variable cost) equals $7,000. $7,000 / $10,000 = 0.7, and $4,000 (fixed costs) divided by 0.7 gives you $5,714.29.
Cost of Goods Sold (COGS)
Cost of Goods Sold refers to the cost required to create each of the food and beverage items that you sell to guests. In this way, COGS is really just a representation of your restaurant’s inventory during a specific time period. In order to calculate COGS, you need to record inventory levels at the beginning and end of a given period of time, and any additional inventory purchases.
It is important to track COGS because it is typically one of the largest expenses for restaurants. By identifying ways to minimize these costs, like negotiating better rates with your food distributor or selecting in-season ingredients, it’s possible to significantly increase margins. Every dollar you shave off COGS is another dollar added to the restaurant’s gross profit.
If you have $5,000 worth of inventory at the beginning of the month, you purchase another $2,000 during the month, and end the month with $4,000 worth of inventory left over, your cost of goods sold for that month is $5,000 (beginning inventory) + $2,000 (purchased inventory) – $4,000 (final inventory) = $3,000.
The equation for COGS is:
Beginning Inventory + Purchased Inventory – Final Inventory = Cost of Goods Sold (COGS)