Today we are going to talk about one of my favorite topics - FOOD COST!
I already know what you are saying, It’s my only day off and I’m going to listen to a podcast about food cost?
I must be going crazy - I’d rather scratch my eyes out or watch paint dry. What could be more boring?
Well, I say hold on little grass hopper – stick with me for a few minutes, because I’m about to set you free from the shackles of the dreaded monthly inventory…
NOW HEAR THIS - If you want to fix your Food Cost once and for all the best thing you can do is - STOP DOING INVENTORY… That’s Right folks, I said – STOP DOING INVENTORY!
In most restaurants, and I mean about 90% of all restaurants in the world - Inventory is a huge waste of time. The question is should we do inventory? Well, Let’s do the smart thing first – Let’s go back and look at our GOAL, what is our MISSION. Why are we here? My Mission, My Goal in Life is to help YOU earn a 10% Profit – EVERY MONTH and EVERY YEAR!
INVENTORY is simply a tool to help you measure your numbers, Inventory is NOT an end Goal!
Today, I’m going to show you how to achieve the goal without wasting precious time on a bogus inventory…
If you remember back to our riveting episode about the 30-30-30-10.
When I taught you that if you wanted to have a 10% Profit, you needed to run a 30% cost in all three of the major coast categories. 30% Cost of Goods, 30% Labor Cost and 30% Other Cost which would equal a 10% Profit. I taught you that Cost of Goods is the easiest of the three major cost categories to manage, because there is no human element, like we have in labor cost. Cost of goods is a simple black and white science.
Please allow me to insert an important point here: In this podcast I will be referring to a food cost of 33%, this is because most of us sell food and booze.
In my restaurants I run a 33% food cost and a 25% bar cost. This creates a 30% Cost of Goods that we are looking for.
Let’s look how we Calculate Food Cost.
The short answer is Food Sales divided by food purchases = food cost percentage.
If you had $10,000 in food sales and $3,300 in food purchases you would have a 33% food cost.
If you want the long answer, here it is: Opening Inventory, plus food purchases, minus comps and promos, minus closing inventory = Cost of Goods.
Then, we divide cost of goods, by sales, which gives us our Food Cost Percentage.
Now that you know that, let’s talk about the inventory thing.
Inventory: Inventory is an event that happens every week or every month in most restaurants.
Inventory involves the following steps:
Create an excel spread sheet that lists every food item we have in the restaurant.
Enter the cost of each food item, be sure to update the prices every month.
Count all our food items and enter them onto the form
Multiply the amount of each item by the cost of each item to determine the dollar amount of each item.
Then we extend the inventory, which means we add up all the items, to show the total value of the food we have in inventory.
Then we plug this total number into your cost of goods equation, we just discussed above.
Here’s an example of how inventory works, in a weekly scenario.
You start the week with an OPENING INVENTORY of $5,000. You PURCHASE $3,300 in groceries.
We add the $3,300 PURCHASES to the $5,000 OPENING INVENTORY which shows that we had a TOTAL of $8,300 in food available to use during the week. To figure out our food cost for the week, we need to know how much money we really spent or used.
So, we have to do a CLOSING INVENTORY. We re-count all the food in the coolers and on the shelves.
Then we extend the inventory the same as I just described above. Let’s imagine that this gives us a CLOSING INVENTORY IS $5,000. To arrive at our COST OF GOODS.
We subtract your CLOSING INVENTORY of $5,000 from the Total Food available $8,300 which give us a $3,300 COST OF GOODS. Then we divide the COST OF GOODS by SALES and see that our FOOD COST PERCENTAGE is 33%.
Now let’s imagine that our OPENING INVENTORY is $5,000 and our CLOSING INVENTORY is $5,500. We have a $500 Variance between opening and closing inventory. When this happens our food cost will be lower than 33%.
AND if your CLOSING INVENTORY is lower than $5,000 your food cost will be higher than 33%.
Did you get that? Let me say it again. If our opening and closing inventories are both the same, $5,000 we have NO inventory variance. Our food cost will simply be - sales divided by food purchases.
BUT, if our closing inventory is lower than our opening inventory that means we used what we purchased PLUS some of our inventory. So we have to add the variance or difference to our purchases, which will make our food cost go up!
If our closing inventory is bigger than our opening inventory, that means we have MORE food than we started with – our food cost will be lower.
I hope I explained that well enough for you to understand. Don’t worry, I’m about to make it all - irrelevant.
The BIGGEST PROBLEM with inventory is - Inventory is never accurate!
Inventory has three parts, COUNTING, COSTING and EXTENDING. Most chef’s and managers make mistakes somewhere in the counting, costing or extending process. When that happens it makes the whole exercise useless. Why do chefs and managers do this?
Because they simply don’t have time and to be honest they hate doing inventory. The truth is INVENTORY is always WRONG and that makes it a huge WASTE of TIME!
The Food Guru Says - Stop Doing Inventory! It’s the only way to stop the inventory variance excuse.
I believe that inventory is a huge waste of time in 90% of independent restaurants, because it is never accurate. Inventory is usually just a gigantic exercise in fiction. I know what you are saying, good businesses must do inventory. OK, fine one time a year for your CPA and the IRS, the rest or the year forget about it.
I Pay ACH for food because I want to, and pay COD for booze, because the law says I must. If you ask me, this makes the booze guys smarter than the food guy’s, but that’s a whole different can of worms.
Paying COD helps us get the best prices and keeps us from getting behind with our prime vendors. When we receive the goods we spend the money, both literally and from an accounting perspective.
I charge PURCHASES against food cost and bar cost when they are PURCHASED. I do not consider the inventory variance. The money has been spent, the food has been purchased, so it counts against cost. The chef and the manager, can worry about their silly little inventory variance.
I am in my restaurants every day, I see every invoice and I see what the inventory levels look like.
I look at purchase vs sales on the P&L every day.
We use a PAR PURCHASING SYSTEM and only Measure PURCHASES vs SALES.
The PAR PURCHASING SYSTEM replaces the need for inventory.
We set a PAR for every item that we use. If we use 100 pound of chicken every week, we set PAR at 100#. If we use 10 cases of green beans every week, we set par at 10 cases. You get the idea. We never have to GUESS, how much of something we need, we just bring everything back to PAR. Another way to say this is that we RE-purchase ONLY what we used last week.
PURCHASING is simply REPLACING the INVENTORY we used last week.
If your SALES are $10,000, and your cost of goods goal is 33%, you should have used $3,300 worth of food.
YOUR inventory should be reduced by $3,300. Your inventory should go from $5,000 - $3,300 which = $1,700.
Then, you should re-purchase $3,300 to re-fill your shelves. Sounds Simple, because it is!
Sales $10,000 / Purchases $3,300 = Cost of Food 33%
If the chef spends $3,500, the food cost will be 35%. ($10,000 / $3,500 = 35%)
If he spends $4,000 our food cost will be 40%. ($10,000 / $4,000 = 40%)
Simple to understand – Right?
Think about it like this.
You start the week with a $5,000 food inventory on Monday morning.
From Monday – Sunday you had $10,000 in food sales. Your food purchases are $3,300. You must still have a $5,000 inventory for your food cost to be 33%. If you have less than $5,000 in food inventory…
IT will show up – NEXT WEEK, when the chef has to over-purchase, because he wasted food supplies.
It has been my experience that the chef or manager will always have some LAME EXCUSE as to why purchases were high. They will say they had to buy lobster this week or we had a prime rib banquet, or we have two new cooks, blah, blah, blah. Blah, blah, blah, blah…
This process is a never-ending battle between the owner and the chef.
The way to end the battle is to STOP DOING INVENTORY!
Simply divide purchases into sales and get a percentage. If purchases are high, food cost is high, plain and simple.
If I have to write a check, the money has been spent - so that means it counts against food cost. This also saves the chef and managers the time of counting stuff and extending (bogus) inventory reports.
Managers can use this extra time to train, cut production dollars and increase sales. It’s a win/win.
Here’s a FUN game you can play.
Imagine that you paid cash for your groceries. Look at Food Sales for Last week. Tell the chef he can only spend 33% of that amount. Give the chef $3,300 and tell him that’s it for the week. If you need more, I’m taking it out of YOUR paycheck… Wow! That would get everybody’s attention, wouldn’t it!
The point is that every dollar you allow your chef or manager to spend comes out of YOUR pocket.
I’d rather have the cash in the bank instead of lame excuses and excess inventory. Every dollar that you allow your people to have in inventory is a dollar that cannot be used to make payroll or pay rent or buy shoes for your kids.
I hope this little discussion helps you understand the difference between a cost focused business over an inventory obsessed business.