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Creating recipes and setting your initial menu pricing is Restaurant 101. Managing what happens afterwards, when the rubber of your cost assumptions meets the road of real-world operations, is where it gets more complicated.

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The reality that most restaurateurs know is that food cost and food usage are variables — not constants. Accounting accurately for your food usage and cost — and the relationship between the two — is an ongoing exercise that even the most experienced can struggle to get right. Here are five tactics used by restaurant owners to increase profitability that will help you keep up.

1) Monitor Your Food Costs Closely

Your recipe costing is based on specific ingredient prices, and those will change frequently even if you’ve negotiated set costs with your suppliers. To stay on top of this, you’ll need to constantly compare your assumed or negotiated costs against current invoices.

If you’re using a manual system or some combination of manual and computer-based management, time constraints may mean you can only track a shortlist of key ingredients or menu items: your biggest sellers, the most margin-sensitive or both. When costs change, you can go back to the vendor for missing discounts, negotiate lower pricing there or elsewhere, tweak a menu item to reduce costs as described by The Tavern at Ivy City Smokehouse  or perhaps even drop a dish from your menu if necessary.

But in the past few years, technology has evolved to help forward-thinking businesses manage food costs and make proactive and smart menu decisions on the fly.  If you utilize the most innovative restaurant management system (RMS) software, your invoice line items and prices will be captured daily, so you can monitor your invoices in real time and receive alerts when prices increase. In that case, you can keep your entire menu constantly in check without it becoming a full-time job.

2) Decide How Much Volatility You Can Handle

Pricing on some ingredients is innately volatile because of seasonal availability or market forces. Even relatively stable commodity items can occasionally yield a nasty surprise, as 2018’s record high prices for vanilla beans demonstrated. For flagship items like lobster or truffles, you can compensate by simply listing them at “market price” or offering them as one-off daily specials, but that is not a practical option for most dishes on the menu.

When it comes to variable-cost items that can’t be priced this way, make volatility part of your cost monitoring process. For Todd Enany of NYC’s acclaimed Sunday in Brooklyn, it was exactly that long-term analysis that showed black cod to be a drag on his menu and led him to subsequently drop it. When the restaurant started tracking price changes in his RMS, Enany immediately saw what was making a profit, and what wasn’t, “Every moment along the way, we were gaining new information . . . it opened up a conversation about costs and pricing that wasn’t there before.”

Decide how much slack you need to build into your menu price to compensate for price fluctuations and – just as importantly – how much variability you’re prepared to tolerate. For some dishes or ingredients, that variance might price you out of your local market. Adding trendy foraged ingredients to your menu might work if you’re foraging your own, for example, but could be out of reach if you’re competing with other chefs for the services of a skilled freelance forager.

3) Verify Food Usage Against Your Sales and Ordering

Even the most experienced chefs can find that they’re using significantly more of an ingredient than their sales would suggest, and that can point to an operational difficulty of some kind. It could be theft or a portion control issue, or it might simply be a problem of perishability and waste.

In quick-service restaurants, with a high turnover of sometimes minimally trained staff, video monitoring can help identify and prevent theft or portioning issues. In fast-casual and full-service environments, scrutinizing plates as they come across the pass, or having a manager check prep and line cooks’ waste can help identify portioning and prep issues. In fine dining restaurants, turning trimmings and other forms of food waste into new menu items in their own right is a hot trend.

Whatever the root cause, the first step in fixing it is knowing that the problem is there. To really understand actual ingredient usage compared to the expected usage based on sales, you need detailed sales information cross-referenced against your plate recipes and ingredient prices. While this is very difficult to do regularly by hand, the best restaurant management software systems will combine all this information and provide valuable reports highlighting ingredient usage issues.

4) Actively Manage Your Inventory

The complement to verifying food usage is comparing inventory against what the books show you should have on hand. Full inventories are valuable, though time-consuming, so for inventory management many restaurants choose to focus on high-volume and high-value ingredients and count those physically on a regular basis.

Verifying what’s on hand is important but only the starting point. The real value comes from analyzing what those numbers tell you. What are you ordering too much of? Too little of? How old are the prepped portions in your walk-in and how many are written off before they’re sold? The answers to those questions can have a big impact on your margins.

Also important is to use the inventory information to highlight usage issues. Ideally, your RMS will contain your detailed recipes, pull your sales figures from the POS system and incorporate your inventory counts. With all of that data combined, the system can then highlight where your usage and inventory are different than expected.

5) Don’t Forget About Restaurant Overhead

One other cost factor that can be overlooked by even seasoned chefs and restaurateurs as they get swept up in a new project is a restaurant’s overhead: lease, taxes, utility costs and so on. These don’t fall under the classic definitions of food and beverage costs, but they are important nonetheless.

Each plate you sell — or each cover if you work from a set-course menu — has to pay its share of the restaurant’s overhead. Established operators know approximately how many plates they can expect to sell in a given week, month or year. Additionally, new operators have the projections from their business plan to work from. But expectations can differ from reality. Adding a fixed amount to the cost of every dish or calculating a varying amount based on price and popularity are two ways to ensure you can cover overhead costs. Revisit those numbers at lease renewal time, or whenever you face an increase in taxes, utilities or other fixed costs.

Improvement Never Ends

The restaurant business attracts creative people, and creative people are natural problem solvers. No matter how long you’ve been operating, there will always be more to learn and new approaches to the old challenges of managing food costs and restaurant cogs.

MarginEdge’s cloud-driven restaurant management software is one of those new approaches, offering the only industry solution that fully automates the flow of invoice and sales data and combines that with a full suite of powerful food and beverage cost management tools.

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External References:

  1. Accounting Tools: Perpetual Inventory System
  2. AgronoMag: Vanilla Price Hits All-Time Record in 2018
  3. St. Louis Post-Dispatch: Rob Connoley’s Long-Awaited Restaurant Bulrush Opens in Grand Center
  4. Vice: New York Restaurants’ Best-Kept Secret – the Luxury Forager
  5. QSR Magazine: Why Loss Prevention Is an Under-Utilized Profit Strategy
  6. Fast Casual: Waste Not, Want Not, Profit More
  7. Restaurant Hospitality: What Restaurants Can Do to Reduce Food Waste