Starting a food business is hard, so much that 60% of them fail within the first year. There are so many moving parts that it is not easy to understand what went wrong soon enough. Trust me, I’ve been there myself.
My first business failed, but with the learnings I had, I was able to make my second business (a B2B one) profitable within the first 6 months. My name is Shreyash and I’m the co-founder of Rockstar Chef. We provide online order management for restaurants and cloud kitchens.
Today, we’ll see what metrics can help owners understand the health of the business better.
Unit Economics Metrics
CoGS (Cost of Goods Sold)
This is a measure of how much inventory your restaurant is consuming. You add the inventory at the beginning of the period, what is purchased in that duration, and deduct what is left over. Formula is:
= (Beginning Inventory of F&B) + (Purchases) — (Ending Inventory)
Do this exercise weekly (ideally), or at least once a month to have a better grip on the costs. This should be your main job as the owner of the restaurant.
Actual Menu Item Cost
This is the total cost of ingredients used as per your recipe. With this, you can calculate menu item profitability, which is basically how much profit you generated from each item in your menu. Do this to know which items you can use to make a combo because people like it.
Menu Item profitability:
= No. of units sold X Item wise profitability
= Number of Items Sold x (Menu Price — Item Portion Cost)
Prime cost is the sum of labor cost (salaries) and the cost of your goods (CoGS). This is the restaurant’s biggest expense and the one you can control. It should be around 60%, if not adjust your margins accordingly. Formula is
= Labor cost + CoGS (for a period)
Company Level Metrics
Gross profit and gross margin.
Gross profit is the difference between the revenue generated and the material cost incurred. Gross margin is the ratio of gross profit to revenue.
Gross Profit = Total Revenue — CoGS
Gross Margin = Gross Profit / Total Revenue
The contribution margin is the gross profit generated by a dish. It is simply the difference between the selling price of the dish and the cost of ingredients.
= Selling Price — Cost of Ingredients
Net Profit Margin
It is the money your restaurant makes after deducting all expenses from the revenue. For the first couple of months, it is ok if you are not making any profit. But after 6 months, and making good marketing efforts, you should be able to make the profits.
= (Gross Sales — Operating Expense) / Gross Sales
It is the minimum amount of sales required to cover expenses. There are many ways to calculate it. Once you’ve become good at relevant numbers, you can estimate this in less than a min, anytime!
= Fixed Costs / ( ( Total Sales — Total Variable Cost ) / Total Sales )
= Fixed Costs / (1 — Gross Margin)
The following metrics are specific for a food establishment where your employees serve your customers within your restaurant’s premises. This may not be applicable for cloud kitchens.
You can imagine this as the number of times you have to reset your table to serve new customers. The objective here is to increase the restaurant’s efficiency. The accurate formula is to divide the number of customers by the number of seats. You can also learn the time it takes to turn each table.
Table Turnover = Number of guests served / Number of seats
This metric highly depends on the type of setup. Fine dining restaurants have low table turnover numbers whereas QSR should have a high one.
Rev PASH (or revenue per available seat hour)
In simple terms, this is the utilization of your restaurant. You can get these numbers for every hour of every week, and you can offer discounts during non-peak hours.
Seat Hours = Number of seats X Hours Open
RevPASH = Revenue / Seat Hours
The average cover is what revenue you can expect per “occupied” seat. Formula is:
= Total Sales / Number of Covers
This is the measure of fixed costs that you incur per open hour during a particular time period. Formula is:
= Total Fixed Costs / Total Amount of Hours Open
It is a simple measure of how frequently your employees depart. Formula is
= ( employees departed in a period / number of employees ) X 100
Try not to have a toxic work environment, it shows in the employee’s attitude towards customers. If you are measuring this since you have high employee churn, something has gone horribly wrong already.
Customer Acquisition Metrics
These metrics are applicable for all types of businesses, from Google to your restaurant or cloud kitchen.
CAC (Customer Acquisition Cost)
It is the cost incurred to acquire new customers. Every marketing channel has a different spend and different conversion ratio. You can combine all efforts and results to calculate this metric. One way to measure this is:
= Marketing Expense / Total New Customers Acquired
It is the % of new customers that you were able to retain over a period of time. The flip side is called churn rate and it should be as small as possible. An easy way to measure retention is:
Retention = (( total customers — total new customers ) / total customers ) X 100
Churn = 1 — Retention
Customer Lifetime Value
This is the average amount you make from your customers over the lifetime of your business.
= CAC / Churn Rate
Customer acquisition metrics are fairly advanced topics. I’ll cover these in later blogs.
Inventory Turnover Ratio
It is the number of times your restaurant inventory was sold out. Keeping optimum inventory is very important, and this metric measures exactly that. You’ll be surprised to see a bump in your profitability if you just increase this ratio a little bit, and change nothing else.
Inventory Turnover = Cost of Goods Sold /Average Inventory Cost where
Average Inventory = Inventory at ( beginning + end ) / 2
Measuring a restaurant’s performance metrics, if done soon enough can save your restaurant from inefficiency, bad customer experience, and also possible closure. It is important that you should always work towards gaining as much data about the performance as possible and make informed decisions to identify and improve poor performance.
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