A restaurant measures success in many ways: In kudos from customers, reviews from local media, and return visits from happy customers. But if the business is going to last, it needs some hard numbers, too.
There are at least seven key ratios that can be used to measure the ongoing costs and revenues of a restaurant business. Keeping track of them and using them to make adjustments to the business can help the owner or investor maintain the level of profitability the business needs to thrive.
Prime Costs to Total Costs
In the restaurant industry, prime costs include the expenses for food, beverages, management, hourly staff, and benefits.
- Each of these numbers measures how efficiently a restaurant is operating as a business.
- The costs of food, the control over inventory, and even the use of floor space can be evaluated.
- Restaurant owners use these numbers to identify where changes need to be made.
- Investors use them to measure the real profitability of the business.
A rule of thumb is that the prime costs of a full-service restaurant should equal 66% to 67% of the restaurant's total sales figure. The prime costs of a limited-service restaurant, such as a fast-food place, are typically 60% to 62% of total sales. The ratio is higher for a company that owns the structure in which it operates and does not have rent or mortgage payments to pay.
Prime costs higher than these percentages may indicate that some costs must be trimmed.
Specific Food Cost to Total Cost
Food cost to total cost is used to measure the real expenses of specific products on the menu. This metric is especially useful if changes to the menu are planned.
The food cost that is tracked can be for a specific menu item or for a group of items. For example, a restaurant may find that it is spending 20% of its total food costs on buying the ingredients for hamburgers, even though only 5% of its sales are of hamburgers. Or, 40% of food costs may be spent on seafood, even though fish is not the menu item the restaurant is known for.
This metric is useful in determining if specific menu items should be discontinued. From an investor's standpoint, it helps show whether the company is adhering to its strategic initiatives.
Restaurants depend on perishable goods, making it especially important that their managers maintain appropriate levels of inventory. The inventory turnover ratio is calculated by dividing net sales by the average cost of inventory.
In general, restaurants that handle fresh ingredients want to keep inventory turnover at less than seven days.
A metric materially higher than industry averages may suggest that inventory purchases are insufficient, that quantity discounts are not being exploited, or that the business is risking shortages of supplies.
On the other hand, a calculation that is substantially lower than average might mean that too much food is being purchased, that business has slowed, or that food quality is declining due to a lack of fresh products.
Sales Per Square Foot
Restaurants determine how efficiently floor space is being used by analyzing the sales per square foot ratio. This financial metric divides the total sales for a period by the total square footage of the restaurant location.
This number may lead to improvements in the layout of the restaurant and the use of the available space. It may help identify ways to expand seating or the need to replace bulky or underused equipment.
Revenue Per Seat
To calculate revenue per seat, the total dollar amount of revenue earned on a given night is divided by the total number of available seats in the restaurant.
To an investor, low revenue per seat indicates poor pricing or slow business.
This metric is most useful to management when it plans to reduce or expand the number of available seats. It also can be used to analyze the real benefits of renovation costs that would be incurred.
Food/Beverage Expenses to Sales
The food/beverage-expense-to-sales ratio gauges how well the company is profiting on each item served. It can be broken down to a specific menu item, such as salmon, a food group, such as seafood, or as an aggregate, such as all food served.
By using this metric for a menu item, management and investors can understand the profit margin per item and whether changes are necessary for pricing or the menu.
The current ratio is calculated by dividing assets on hand by liabilities incurred. This metric measures the liquidity of an organization.
A current ratio greater than one indicates that a company can pay its short-term debts using only short-term assets if a liquidation is necessary. It is an indication of the company’s ability to pay for items in the short term, including food, beverages, and staff wages.