Restaurants once were considered a business of pennies, but with pennies going the way of dinosaurs, the new, less pithy phrase being coined is “a business of low margins.”
So while restaurateurs no longer have to watch their pennies, they do need to monitor expenses at that level, by regularly reviewing financial reports, labor metrics, purchasing patterns and guest behavior. Problems will often show up months earlier in these reports than if you’re just looking at revenue, according to Johnessa Hardyman, VP of Finance for Morrissey Hospitality.
When managers are searching for patterns in these four areas, they can act quickly to make course corrections before guest satisfaction and profitability suffer, she said. Over the past 14 years in her role with Morrissey, Hardyman has had the opportunity to work closely with owners and managers in a variety of hospitality businesses. Morrissey Hospitality is a management company that specializes in full-service operational management of independent hospitality brands.
“We’ve seen common threads in clients’ (reports),” Hardyman said. What they’ve found is that 3 to 5 percent net operating income is solid, while 7% is considered very good.
One of the first things they help clients do is control prime costs. “Food, beverages and labor shouldn’t be more than 70 percent,” she said, adding, that it gets much easier when your volume increases.
Companies with more than one restaurant may have an easier time controlling prime costs, while for a lot of smaller restaurants, “it’s harder to get to prime due to the level of service you want to offer.” Staff tend to need to be leaner and food costs higher.
If you have prices under control, Hardyman said, the next step is to watch labor. Even employees clocking in 15 minutes early or after their shift can affect labor costs negatively. While it may not seem like a big deal to the employee, it does add up significantly over numerous shifts.
“The biggest mistake you can make is focusing on your income statement and not looking at cash flow,” a report that shows a fuller picture, she said.
To get a feel for what’s going on in your business, look at:
- The number of guests you have each daypart. Are guest counts staying steady or growing? Ask managers for their thoughts, but also since servers are the ones who interact with guests, ask them for any feedback guests volunteer.
- If your average check is going down, it could be that your prices are too high or that your service score is declining, causing people to order less and exit without adding a dessert or second drink.
- Track complaints and comps and ask for details. Are wait times up because you’re short staffed? Are kitchen and wait staff sufficiently on new menu items being introduced to the menu? Or are servers and bartenders comping without input from managers? Is your food being send back to the kitchen for fixes or having to be comped because it wasn’t prepared correctly.
- Your accounting firm doesn’t necessarily have to have hospitality experience, but if they have other restaurants as clients they’ll have knowledge of other properties to benchmark against. They can be a great asset in finding out what other restaurants are doing to help cut costs.
And most importantly, as the shepherd of low-margin businesses, restaurant owners can’t afford to be complacent. “You have to stay hungry during the good times,” Hardyman said.
