One of the biggest problems we find when we’re trying to help struggling restaurants is that they can’t really “see” their business. Their managers work hard, often 70 to 80 hours per week. They enact policies to cut staff when its slow or they endlessly pursue cheaper ingredients and/or portion control, but efficiency often proves elusive. Owners or GMs rough up their teams and throw down gauntlets like “food cost should be 30%!” or “labor should be 28%!”…but they often have no idea what their food or labor costs should be relative to sales. For self-preservation, Managers and Chefs scramble to please, and end up on the hot seat after months of failing…only to become dejected, or worse, lose their jobs.
The problem isn’t that they’re not trying hard enough. It’s that they don’t have enough information to make informed decisions. Everyone knows that the two most expensive categories on a restaurant’s income statement are Cost of Goods and Labor…yet many owners, CFOs, and many managers – super smart folks mind you – are often either not slicing the information they have the right way or they’re drowning in irrelevant information that obscures the important stuff.
For starters, let’s stabilize the calendar. Your CFO or Bookkeeper or CPA…whoever takes care of your accounting and tax returns… is not in your operations. Their focus is on clean numbers and “to-the-penny” accuracy to make tax-time easier and to keep the IRS out of their sandbox. They often use QuickBooks which includes a “P&L” report (Profit and Loss…the Income Statement). It houses every cotton-picking category that a restaurant could possibly spend money in: utilities, rent, salaries, insurance, dues & subscriptions, credit card fees, etc. … x about 100 to 150 categories. That P&L is sorted by calendar month. It is mostly useless as a steering mechanism…as a measurement tool on which to base decisions and track progress. In a calendar year, the chances that the first day of the month will land on the first day of the restaurant’s week (usually Monday) is exactly 1 in 7. The only month in 2023, for example, whose month begins on a Monday is May. The same goes for the last day of the month ending on a Sunday. In 2023, only April and December will end on a Sunday. And NO month begins on a Monday and ends on a Sunday…which means that no more than three weeks of every month in ANY year are full weeks. Let’s clean that up. Keep your CFO out of this so you don’t upset their world and go internal with your tracking. Get your GM close to the numbers and have them build a tool that tracks the vitals (COGS, Labor, and about 8 to 12 Direct Expense categories like maintenance, linen, and smallwares) things that can be budgeted, tracked, and controlled.
Set up a calendar where each month begins on a Monday and ends on a Sunday, which means some months will have 5 weeks and some will have 4 (you can set it up so every week is 4 weeks but then you have an extra month which adds a different layer of complexity that we don’t like). January is 5 weeks, February is 4 weeks, March is 4 weeks. Every quarter is the same and the first month of every quarter is 5 weeks long. Your first day of January is the closest Monday to it…so it could be the 30th of December or the 2nd of January. You don’t care because the purpose of this tool is so you can compare apples to apples… one week to the next…one quarter to the next…and so you can take inventory on Sunday night whenever you take inventory instead of whenever the month ends (say, on a Wednesday).
Once your calendar is stable, let’s build this tool to track only the stuff you care about. On the typical calendar year P&L that comes from your accountant, they normally record information only when it is paid for…so labor is coded only when the checks are cut, and that labor happened a couple of weeks ago. Sales are coded in almost real time… so the two-week-old labor on the QuickBooks P&L is recorded and measured against sales that just occurred in the past period. What good is that to a manager who is trying to understand their labor cost as a percent of sales? Same goes for food – invoices are recorded when paid not when the food is used to make a dish. This is called “Cash Accounting” – when entries are made only when items are paid, not when they are incurred. The other way is called “Accrual Accounting”, which is what your GM is going to do with the tool. We call the tool an “Operating Statement”, so it isn’t confused with a P&L. With an operating statement, the managers can strip away silly expenses they have little-to-no control over like rent, salaries, credit card fees, and equipment rentals. Your accountant will tell you when your electric bill is getting out of control, and you can address it periodically through them. The idea is to strip down your P&L to only the essential items that your managers have direct control over, create a report that shows this information week to week, then create systems that allow you to forecast expenses while holding department heads accountable for beating or failing to beat those expectations.
Your 5/4/4 calendar is internal and shouldn’t concern your accountant other than year-end inventory when they want the year to end and begin at midnight on Dec 31…so you might have to do an extra inventory then just for your taxes. Otherwise, let your accountant just be a support system for making sure everyone is recording invoices the same way (coding items to the right account) and helping spot macro problems that the manager won’t catch through the operating statement. With this internal, real-time information at your managers’ fingertips, you can build many other structures like labor discipline, bonus plans, and purchase order functions, and inventory control. Don’t look to expensive software to solve your problems. I’ll put these very simple structures against complex enterprise software solutions any day of the week…because while the data managers of your competitors are troubleshooting a fat-fingered inventory scan or the new button for the new special that didn’t get set up correctly, your managers are in control and cooking calm.
Ray Camillo – Founder & CEO, Blue Orbit Restaurant Consulting