Food and beverage businesses have long been among the most attractive new ventures for fresh entrepreneurs in countries like the Philippines. Factors like rich culinary heritage, the permissiveness of local commercial and residential zoning, and the low technical barriers to entry have contributed to making restaurant ownership a particularly popular path toward financial independence. More recently, the Philippines’ growing consumer spending and positive economic climate has, in turn, allowed innovative banking institutions to offer restaurateurs easy but safe business loan products like the Maya Flexi Loan.
Despite this optimism, it will always be a challenge to build a successful restaurant, even when compared to more technically complex businesses. While the reasons are multifaceted, much of this difficulty has to do with how accessible the restaurant business is. Food businesses are quite easy to open, even if some of the technical and financial challenges are similar to those of other business types. As a result, there’s a greater likelihood of seeing some unpreparedness and overconfidence among hopefuls in the restaurant industry that is not normally seen in other sectors.
The handling of finances is an especially thorny issue. Restaurants can easily bleed massive amounts of capital if the owners don’t have a firm grasp of finance in the first place. This can lead to tragic results given that the initial operating capital for many new food businesses often comes from decades of savings or business loans.
Fortunately, while finance can get complicated, restaurateurs and other food entrepreneurs can increase the survivability of their venture by focusing on the metrics that matter. Learn about how to handle these important metrics to conserve your initial capital and reduce loan default risks:
1) Cost of Goods Sold (CoGS)
CoGS represents the direct costs incurred in producing the food and beverages sold in your restaurant. This includes the cost of ingredients, packaging, and marketing, to name just a few rates. Note that it does not include labor costs.
While you don’t have to be 100 percent accurate when calculating CoGS, you need to have a general idea of what it is so that you can set the right prices and effectively control your expenses.
To calculate CoGS, use the formula: CoGS = Beginning Inventory + Purchases – Ending Inventory.
2) Labor Cost Percentage
Labor costs tend to be a big part of a new restaurant’s expenses. Knowing how much you’re spending on employee wages and benefits compared to your total revenue will allow you to maintain ideal staffing numbers and keep your restaurant profitable.
Calculate Labor Cost Percentage with this formula: Labor Cost Percentage = (Labor Expenses / Total Revenue) x 100.
To get Labor Costs, simply sum up your employee wages, benefits, and other employee-related expenditures.
3) Prime Cost
Prime Cost covers both CoGS and total labor costs. It’s a useful metric for understanding how efficient your inputs are at turning a profit. Knowing your prime costs is also handy for quickly understanding your restaurant’s real budgetary concerns.
To calculate Prime Cost, use this formula: Prime Cost = CoGS + Total Labor Costs.
4) Food Cost Percentage
Food Cost Percentage measures the portion of your restaurant’s revenue spent on purchasing and preparing food items. The main use of this metric is to identify opportunities for savings in your menu.
For instance, an item that has a high selling price but low food cost percentage indicates a high profit margin, whereas an item with a low selling price and high food cost percentage may need to be reoptimized, replaced with a more cost-effective option, or removed altogether.
To calculate Food Cost Percentage, use the following formula: Food Cost Percentage = (Cost of Food Sold / Total Revenue) x 100.
5) Customer Acquisition Cost (CAC)
CAC represents the cost of earning a new customer. It includes marketing expenses and discounts. This metric can be useful for finding out the effects of your marketing strategies, particularly when A/B testing different offline and online campaigns. Upon comparing CACs of different efforts, you can gauge the effectiveness of your marketing efforts and pivot to whichever strategies bring the best results.
To calculate Customer Acquisition Cost, use this formula: CAC = Total Marketing Expenses / Number of New Customers Acquired.
6) Break-even Point
Now, after mastering those critical costs, it will be time to get to something more exciting. The break-even point is the point at which your sales revenue matches your expenses. Figures below this point are losses, and anything above it is profit. Having a realistic idea of your expenses will be key to getting an accurate Break-even Point as a target.
To calculate your Break-even Point, the formula is as follows: Break-even Point = Total Fixed Costs / (Revenue per Customer – Variable Costs per Customer).
7) Inventory Turnover Ratio
A higher turnover ratio indicates better inventory management and reduced risk of waste or spoilage. It can also help you figure out which menu items could be further optimized.
To calculate Inventory Turnover Ratio, use this formula: Inventory Turnover Ratio = CoGS / Average Inventory.
8) Gross Profit Margin
This indicates the percentage of revenue remaining after deducting CoGS. It tells you how good your restaurant is at both keeping expenses low and revenue high. This is not to be confused with your Net Profit Margin.
To calculate Gross Profit Margin, use the following formula: Gross Profit Margin = ((Total Revenue – CoGS) / Total Revenue) x 100.
9) Net Profit Margin
Net Profit Margin reflects the percentage of revenue that translates into net profit after accounting for all expenses. Unlike the similar Gross Profit Margin, this metric serves to measure your restaurant’s overall financial health and performance.
To calculate Net Profit Margin, use this formula: Net Profit Margin = (Net Profit / Total Revenue) x 100.
10) Average Cover
Lastly, Average Cover represents the average revenue generated per customer or table. It helps in assessing the sales performance of your location and can be used to help you fully optimize seating capacity.
To calculate Average Cover, use the following formula: Average Cover = Total Sales / Number of Customers Served.
Build a Beloved Culinary Institution with Metrics-Based Strategies
Success in the restaurant business isn’t always about making the tastiest food. After all, even restaurants with excellent food choices close down all the time. In most cases, success is a function of lasting long enough to build the loyal clientele you need to operate. Pulling this off demands that you’re as handy with the books as you are in the kitchen.
When you’re starting out, you don’t necessarily have to be all that accurate with these figures since, as a food business owner, you’ll have bigger fish to fry. However, regardless of how hectic things get, it’s still important to be sensitive to why these metrics matter.
There are many other financial figures to consider, but if you don’t have a firm grasp on the ten particular metrics mentioned above, it will be very difficult to run your restaurant business sustainably. In any case, even as your restaurant develops into a cherished neighborhood institution, you will need to renew your focus in these areas to ensure its long-term success.
