As margins deteriorate in the hospitality industry, some of the common management methods are no longer appropriate. One in particular — calculating cost of goods by the value of monthly purchases — is fast becoming redundant.
The reason we want to calculate a cost of goods is to establish the percentage of each dollar of sales (either food or beverage) that goes to pay your suppliers, in order to maintain ultimate profit margins. In the past, when margins were as much as three times higher than they commonly are now, a coarse control system which gave you a rough idea how you were going was quite appropriate. This is not the case at present.
Many hospitality businesses are operating with single figure profit margins. A disturbing number are operating with margins not much better than bank interest, and you’d wonder why they bother. When you are only making a 5 or 6% margin, a 1 or 2% increase in cost of goods wipes-out a quarter or more of your profit for the month.
Managing food costs is tricky
Food costs are the tricky ones to manage, while beverage costs are much easier because beverage is normally delivered in known portions, by the bottle, litre or the case. Food is normally delivered in an unprocessed state and there are a myriad ways to lose-out on its journey from delivery area, through storage, preparation, cooking and sale.
Accurate control of food costs requires the calculation of stock variances — the difference between stock used (i.e. missing from storage) and stock sold (from your POS system). The difference is your stock which is missing, but not sold. It could have been short delivered, or incorrectly portioned, discarded in preparation, destroyed in cooking, given away or stolen. Establishing your stock variance for all high value stock is a necessary step in controlling food cost. A high variance in an expensive item is the trigger that should alert you that something is seriously wrong.
Stock systems based on purchases only suitable for very small businesses
A stock control system based on purchases can’t do this; the only way to get accurate control is to stocktake at the beginning and end of each month or accounting period and apply what is called the reconciliation formula: opening stock + purchases – closing stock = stock used.
Modern COGS control systems start with accurate food costing of all dishes. Most chefs like to use quality ingredients — and who can blame them? It’s not a problem as long as the dishes are created to a standard recipe and all components are costed accurately to ensure they are making an appropriate margin as a beginning point. It is also important to track price changes after the recipe has been designed to ensure that dishes maintain an appropriate profit. The days are long gone where I would advise a client to have loss leaders on their menu; every item should have an appropriate margin or you are making cost control unnecessarily difficult, and inadvertently running a charity for the dining public.
Is my problem internal or external?
Next, you need to establish what we call an accounting firewall at your back door, where your deliveries are received. An important aspect of stock control is for a trained staff member to carefully check all deliveries against orders and invoice to ensure that what you are paying for has actually been delivered. If you don’t do this consistently, you may find yourself spending a huge amount of time chasing a cost control problem when the cause is outside your business. Over the 35 years I have been a consultant I have found delivery shortages in many businesses.
Once you have ensured that you have received what you have paid for, you need to check that there is no preventable wastage in preparation due to inefficient trimming or technique. Your profits could be going out in the bin. It seems illogical to physically handle all that inbound stock then physically handle much of it back out and throw it in the dumpster and then pay to have your rubbish removed. It is often better to order pre-portioned meat, fish, poultry, etc. and pre-trimmed vegetables, rather than doing it all yourself.
Proper portion control is next on our check list. Think of over-portioning as like a drain out the back spitting-out $5 bills, every 30 minutes, 24 hours a day, every day. Small amounts of expensive ingredients can add-up very quickly.
Next, understand the mathematics of giving food away or consuming it without payment. For every free meal given-out or consumed you have to sell at least four to recoup your loss. I have seen some hospitality businesses completely negate their lunchtime sales by giving all staff and management a free meal off the menu. Giveaways and food consumed without payment must be very strictly controlled. The smaller the business the more profound giveaways effect your bottom line.
Finally, make sure your front-of-house team know which dishes carry the highest margins so they can make appropriate decisions about what to recommend to your customers. In the absence of this information they will tend to recommend the dishes they think are the best value or the ones they personally like — which are usually the ones you make the least amount of money on.