Hang the cost, throw the cat another canary

This article looks at how to control the main costs in a hospitality business in a logical and methodical manner.

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How are your key staff performing? One of the most common complaints I hear about senior staff from hospitality business owners concerns their ability to manage costs. They say things like: ‘our wage costs are off the planet’ or ‘our food costs are too high’, and the concern is mostly justified. I see a lot of monthly financial statements that make me shudder and wonder what the hell the people running the business are doing.

What should your costs be? Well, how long is a piece of string? It all depends on a long list of variables, but I can make some generalizations based on experience. Before I do, I should point our that all costs are relative to income and that there are two ways to tackle a cost problem: either increase your income or decrease your costs. There is generally more scope to increase your income, but this can take some time to achieve. Costs can be reduced quite quickly but you run the very real risk of damaging your business in the process if you don’t know what you are doing or you are not careful. I generally find that a coordinated program to increase income and reduce costs at the same time works quite well.

I’ll start with the income side of the equation. There are only three methods you can use to increase your income — they are: by putting your prices up (risky); by increasing your customer numbers (gaining new customers or increasing repeat trade); or by increasing your customer average sale (selling and merchandising). You will probably have to review both your recruitment and your staff training to make the most of these opportunities, and in doing so you may bump your labour costs up for a short time and can make a poor profit even worse in the short term.

The logical place to start managing your costs is by beginning with your labour costs because these are often the largest and most volatile cost you have to deal with. Your wage percentage will depend on the type of business and the systems of service and food production you use. To give you a guide, for a pub we would look for a wage percentage between 19–26% of total income; for a cafe or bistro 25–30%; for a restaurant 30–35%. The higher you go up-market the higher your labour costs become. Hands up those who want to run a fine dining restaurant.

It’s not unusual for us to see labour costs in excess of 40% of total income. So far 63% is my all time record in an established business. The way I view it, these businesses are running a charity for their staff and for the customers. No matter how you look at it the mathematics remain the same — for every percent your labour goes above 35% you take one percent off your bottom line profit, and it doesn’t stop when your profit reaches zero — I’ve seen quite a few hospitality businesses that have allowed their costs to blow-out to the point where they require massive injections of cash to keep them running.

If your labour costs are too high, your natural reaction may be to get out your red pen and slash your rosters. Be careful — there are seven different ways to correct high labour percentages and the problem may not lie with the number of staff you have rostered on a shift. Your seven options are: by increasing pricing; increasing sales; simplifying service and production systems; reducing rostered staff levels; increasing staff productivity; reducing average rate of pay; reducing staff turnover and reducing absenteeism.

Your food and beverage costs are also the result of the management of a number of different issues, and not just the result of your wastage or portion sizes. I’d expect food and beverage costs to be about 25% in a cafe or down market bistro; 33% in a restaurant and 50% in a pub. Pubs generally have lower prices and rely on low labour costs and high turnover to produce a profit. Fine dining restaurants are particularly prone to high F&B costs if they are not selective about their purchasing and very strict in their production systems.

The way we tackle a food or beverage cost problem is to follow the flow of product from the time of negotiation with the supplier, through to delivery, storage, preparation, cooking or dispensing, portioning and pricing. I’m not one of those people who advocate having ‘loss leaders’ on your menus or beverage lists. We get the argument that ‘we have to have our old favourites on the menu’ quite often. I’m not impressed by this argument.

Everything you sell should deliver an appropriate margin. If you sell one dish or drink at a loss, you have to sell another one just to get back to square one. Do this too often and you expend a lot of time and energy for no profit and high food costs.

Aside from wages and F&B costs, I expect good managers to control the other costs in their businesses as well. Everything from the cost of energy to the cost of flowers can be reviewed and reduced by you or your staff if they simply take the time to do so. It’s normally easy to find a few percent among these costs. This may not sound much, but if your business is turning over $2,000,000 per year, 2% amounts to $40,000 — and that’s enough for a new car or a very indulgent holiday.

The possession of effective cost control skills is one of the capabilities we expect from managers who ask us for top salaries. These people usually pay for themselves many times over.

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