Business is often a game of numbers, and the restaurant business is no exception. And while you may not picture a restaurant owner or worker parked at a desk to work, it's a huge part of restaurant manager responsibilities.
Numbers can give us insights into everything from profits and losses to average customer spend to how often employees cycle through. If it's not measured, it won't be managed. But what should be measured, and how?
In this article, we'll go into 15 key performance indicators and financial ratios for restaurants, why they're important, how to calculate them, and more.
Operational metrics and Ratios
1. Cost of Goods Sold
What is cost of goods sold?
To put it simply, your cost of goods sold is how much it costs you to produce a menu item. As you add together all of your menu items, you can determine the total cost of everything (to you) that you sell to your guests.
Why is cost of goods sold important?
Your costs of goods sold should make up about a third of your total expenses and has an impact on all areas of your business. Your CoGSs is an essential number to have when determining your menu prices, inventory and impacts your net profit margin.
How to Calculate cost of goods sold (COGs)
To calculate your COGs, you need the following numbers:
- Beginning Inventory, or the value of the inventory you start with.
- Purchased inventory, or the value of newly purchased items in a given period.
- Ending inventory, or what you have leftover
Once you have those numbers, you can plug them into the following equation:
Beginning Inventory + Purchased Inventory - Ending Inventory = Cost of Goods Sold (COGs)
Let's plug some numbers into that equation to see how it may look in your restaurant. For last month, your restaurant had a $1,000 leftover inventory. You purchased $7,000 in ingredients for the month and ended with $2,000 excess inventory:
$1,000 + $7,000 - $2,000 = $6,000 cost of goods sold.
You can now determine what percentage this is off your overall sales to get a picture of your restaurant's financial health. According to Orderly, your ideal CoGS depend on your type of restaurant. For fine dining, around 30 percent. For bakeries and pizzerias, you should aim in the low-to-mid 20s, and for all other kinds of restaurants, mid-to-high 20s.
2. Labor costs and labor cost percentage
What is restaurant labor cost?
Labor cost includes all labor-related categories:
- Employees, both hourly wages and salaries
- Payroll taxes
- Health care
- Vacation and sick days
How to calculate it
Once you tally up all of your labor-related costs, you can use the final number to determine what percentage labor makes up of your total costs on your bottom line.
- Total revenue data, or all of your revenue from income statements or POS sales reports. For this example, let's assume your sales were $800,000 for the year.
- Total labor costs, or the sum of all applicable cost categories like wages, salaries, bonuses, and overtime. For this example, we'll assume your total labor costs for the year were $240,000.
(Total Labor Cost ÷ Total Revenue) x 100 = Labor Cost Percentage
In our example, this gives us 0.3 ($240,000 ÷ $800,000). Multiply by 100, and we arrive at 30% labor costs
What Percentage Should Labor Cost Be In A Restaurant?
Most restaurants will target a percentage of 20 to 30% of sales, though percentages do differ by industry:
- Quick service: 29.4%
- Fast-casual: 28.9%
- Casual: 33.2%
- Upscale casual: 30.4%
- Pizza: 31.3%
How Can 7shifts Help Calculate Labor Cost Percentage
Calculating your labor costs can be tedious. 7shifts' Labor and Budget Tool makes it easy. In the 7shifts app, just scroll to the bottom of the Schedules page to view the tool, and there you will find the daily employee worked hours, as well as the corresponding labor costs associated with those hours.
The total labor cost sums individual wages and salaries, applying necessary overtime and bonus pay according to your company settings. The Labor and Budget Tool populates daily sales, a tool available with 7shifts POS integration with our trusted partners.
Recommended Reading: How to Manage Your Restaurant Labor Cost Percentage
3. Food Cost Percentage
What is food cost percentage?
Food cost percentage is the ratio of the cost of food inventory to the revenue.
Why is food cost important?
Food and beverage is one of the largest expenses next to payroll on a restaurant's balance sheet. It costs a lot to buy the inventory to sell, and proper tracking and management of your food costs can help ensure you're ending the month or year in the black. It also plays a key factor in pricing your menu. 52% of restaurant professionals named high operating and food costs as one of their top challenges, according to Toast's 2019 Restaurant Success Report.
How to Calculate it
Remember the Cost of Goods Sold formula? Time to break that out again. It's one of the most important numbers to have on hand for many calculations. That number, divided by your revenue is your food cost percentage.
For example, let's say your total food cost is $10,000 for the month, and you generate $30,000 in revenue. That places your food cost percentage at 30%.
What is a good food cost percentage?
Your ideal food cost percentage depends on your restaurant. Whereas a bakery or pizzeria's most costly ingredients may be cheese or chocolate, a fine-dining restaurant could be shellfish and top-of-the-line beef. It's generally accepted that keeping food costs around 28-35% is what it takes to run a profitable restaurant.
To calculate your maximum allowable food cost percentage for your restaurant, you can use the following steps.
- Tally labor costs and overhead expenses (exclude food costs)
- Convert labor costs, overhead expenses, and profit goals to a percentage of total sales
- Subtract these percentages from 100
- The final number is your (Maximum Food Cost) MFC percentage
For example if your costs are as follows:
Labor costs = $15,000
Monthly expenses= $10,000
Profit goal = $7,000
Total sales = $45,000
Then, your can calculate your maximum food cost percentage as follows:
100 - (($15,000 + $10,000 + $7,000) ÷ $45000))
100 - (0.71 x 100) = 29%
4. Prime Costs
What are the prime costs for a restaurant?
Prime costs add together your costs of goods sold with your total labor costs. Prime cost doesn't include equipment, utilities, marketing, or any other costs unrelated to creating what you sell to guests. It's food + labor.
Why are prime costs important?
Prime costs represent the two largest expenses that you have control over in your restaurant. If either of these is too high, your restaurant is likely not profitable. Luckily, they are two of the costs that can be controlled through many measures like optimal scheduling, revenue management, and inventory control.
How to calculate prime costs in a restaurant
To calculate, it's easy. Add up your total labor costs and cost of goods sold.
To view this as a percentage, do the following:
Prime Cost Percentage = Prime Cost ÷ Total Sales
For example, if any given month's sales are $65,000, then your prime cost is 0.49 or 49% ($32,000 ÷ $65,000 x 100). This means that 49% of your revenue is used to cover the prime costs. Anything below 70% is ideal.
5. Inventory Turnover Ratio
What is the inventory turnover ratio?
Your inventory turnover ratio tracks how often you sell out of your entire inventory over a period. Usually represented as a whole number, it gives you insights into what's going in and coming out of your restaurant.
Why is the inventory turnover ratio important?
When you keep track of your inventory turnover, you can ensure you're not overordering ingredients, which can lead to high food waste, akin to throwing money away. You can also be sure you're not underordering, which may force you to '86 a top menu item and leave customers upset. It's an important metric to track the freshness of your ingredients, too.
How to calculate it
Your COGs come into play again when calculating inventory turnover. For this metric, you'll need
- Costs of Goods Sold (CoGS), which for this example will be $20,000.
- Beginning Inventory, which for this example will be $8,000.
- Ending Inventory, which for this example will be $1,000.
Inventory Turnover = CoGs / ( (Beginning Inventory + Ending Inventory) / 2)
In this example, your inventory turnover will be 1.1, meaning you sold out of your entire inventory once during this period.
If your inventory turnover ratio is low, it could be a sign of over-purchasing or a slump in sales. It may not be restaurant-wide either; it could be that a few menu items are underperforming. Take a look, see what menu items aren't selling and are costing you significant inventory space, and consider making adjustments.
A high inventory turnover rate is likely a marker of great sales, but running too high can put you at risk of running out of inventory and lead to failure to keep up with demand.
Recommended Reading: Your Go-To Guide for Restaurant Inventory Management
6. Break-Even Point
What is a restaurant break-even point?
At the end of the day (or week, month, year), perhaps the most telling number in your restaurant is the big one: how much do I need to make to stay in business? What's your break-even point?
Why is a restaurant's break-even point important?
Your break-even point tracks how much you need to make to pay for your expenses and turn a profit. If you're not exceeding it consistently over a long period, your restaurant will likely close or find more funding.
How to calculate your break-even point
To get your restaurant's break-even point, you'll need the following:
- Total fixed costs, like rent, salaries, and insurance
- Total variable costs, like hourly wages, inventory, utilities, and more
- Total sales, from your POS. Basically the restaurants revenue levels
Break-Even Point = Total Fixed Costs ÷ ( (Total Sales - Total Variable Costs) ÷ Total Sales)
7. Gross Profits & Gross Profit Margin
What are gross profits and gross margin?
Your gross profits and margin track how much you make after deducting your CoGS. It can be displayed as a number or as a percentage.
Why is gross profit margin important?
Your gross It tells you what's left after inventory to pay for payroll, rent, and other variable expenses. To operate a healthy business, this number should not exceed 70%.
How to calculate gross profit margins
To calculate, you'll need the following information:
- Total revenue, from all income streams
- CoGS or cost of goods sold
Gross Profit = Total Revenue - CoGS
Gross Profit Margin = (Gross Profit / Total Revenue) x= 100
8. Ideal Menu Price
What is ideal menu price?
The ideal menu price is the markup you should charge for any given dish or drink to ensure you're making money. This varies from restaurant to restaurant, and it is based on what you pay for the ingredients as well as your total food cost.
Why is ideal menu price important?
Every restaurant wants to make money, so by pricing your menu thoughtfully, you can optimize your revenue on the food you sell.
How to calculate it
You'll need the following to calculate the ideal menu price:
- Plate cost, or the total cost of ingredients in a given dish. For this example, say a burger and fries cost you $2.75 to make.
- Food cost percentage, which for this example we'll use 30%.
Ideal Menu Price = Plate Cost ÷ Food Cost Percentage
$2.75 divided by 0.30 = $9.16 per serving is your target menu price. Other factors go into this as well, such as demand, location, and style of service. For more on proper menu pricing, check out this guide from our friends at Toast.
9. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
What is EBITDA?
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a measure of a company's financial performance that is used to evaluate its profitability and efficiency.
Why is EBITDA important?
EBITDA is an important metric because it represents earnings from your core operations—serving food and drink—without the effects of financing or accounting decisions. By tracking EBITDA over time, restaurants can see how their financial performance is changing. Additionally, EBITDA can be useful when comparing the performance of different restaurants in a group.
How to calculate EBITDA
To calculate EBITDA for a restaurant, start with total revenue for a given period of time—a quarter or year works. Then, subtract the restaurant's operating expenses, such as food and labor costs, from this amount to find the restaurant's operating income. Next, add back any non-cash expenses, such as depreciation and amortization, to find the restaurant's EBITDA.
For example, if a restaurant had total revenue of $500,000 and operating expenses of $400,000, its operating income would be $100,000. If the restaurant also had non-cash expenses of $50,000, its EBITDA would be $150,000.
Performance Metrics and Ratios
10. Employee Turnover Rate
What is employee turnover rate?
Your employee turnover rate tracks how often employees are no longer employed over a period, due to termination, quitting, or retirement.
Why is employee turnover rate important?
Hiring is one of the most challenging parts of the restaurant industry and not something that you want to have to do often. But every time you lose an employee, it costs your business an average of $5,864. By tracking your turnover rate, you can get a picture of your team's morale, and see if you need to work to retain your current team. The average employee turnover rate for restaurants was 72.9% in 2016, compared to just 42% for the whole labor force. The restaurant industry has a turnover problem. But you can't address it if you don't know how your restaurant is faring.
How to calculate employee turnover rate
To calculate your turnover rate, all you need is the number of employees you have and the number that has quit, been terminated, or retired over a given period.
Employee Turnover Rate = (Employees Departed ÷ Number of Employees) x 100
So if you have 20 employees, and 9 left, your turnover rate is around 45%.
You can't keep everyone around forever nor would you want to. But shooting for a turnover rate as low as possible is the best course of action. This can be achieved by offering a living wage, the best benefits you can afford, and by implementing a great employee retention program.
11. Table Turnover Rate
What is table turnover rate?
Table turnover rate tracks the number of times you “turn tables” or reset them for a new party over the course of a period.
Why is table turnover rate important?
Knowing how many seatings you're getting out of the tables you have gives you insights into everything from your operating hours, staff, and efficiency in the kitchen.
How to calculate the table turnover rate.
For table turnover rate, you need the following information:
- Number of parties served in a given period
- Number of tables in your restaurant. This can be as a whole or segmented by indoor/outdoor, bar/dining room, or whatever fits your restaurant
Table Turnover Rate = Parties Served ÷ Number of Tables
Divide the number of parties served by the number of tables to calculate the table turnover rate. For example, if you have five tables in your restaurant and you serve 20 parties over the lunch hour, then your table turnover rate is 4 turns per table during the lunch hour. If your turnover rate is low, consider extending your hours, increasing kitchen efficiency, or coming up with a way to deal with “campers” to get more out of what you've already got.
For example, if you have five tables in your restaurant and you serve 20 parties over the lunch hour, then your table turnover rate is 4 turns per table during the lunch hour.
12. Sales per labor hour
What is sales per labor hour (SPLH)?
Your sales per labor hour is a method of tracking employee productivity. It can tell you how much revenue employees are helping bring in per hour worked.
Why is it important?
Sales per labor hour can help make sure that your staff is bringing in enough revenue for your business.
How to calculate sales per labor hour.
To calculate sales per labor hour, you need the following:
- Total revenue, from all sources
- Total labor hours worked, from your schedule
Sales Per Labor Hour = Total Revenue ÷ Total Labor Hours
According to the National Restaurant Association, the median total sales for a full-time employee is around $45 per hour. By tracking this number, you can make sure you're scheduling effectively and making the most of the team you have on the floor.
7shifts weekly budget tool can help you track sales per labor hour by integrating your POS.
13. Average Customer Headcount
What is the average customer headcount?
Simply put, your average customer headcount tells you how many customers are served in a given period.
Why is it important?
You can use your average customer headcount to determine the busiest time of day and the busiest days of the week in your restaurant.
The best part? There is no calculation required. This number can easily be pulled from your mobile POS of choice, and filtered to view by the hour, day, week, month, or year.
You can then use this number to make adjustments to help save money or bring more in. During your busy periods, you may opt to bring in more staff to help burdened staff. During slow times, you may opt to cut shifts and run specials to bring more customers in your door.
14. Customer Acquisition Costs
What is customer acquisition cost?
Customer acquisition cost is a metric used across all types of businesses to measure the effects of marketing efforts. In the restaurant industry, it can be applied to social media ads, local print advertising, coupons or deals, and more.
Why is it important?
After all of the other expenses in your restaurant, marketing dollars may not represent the same gravity as something like prime costs. But it's important to manage all of your budgets, and marketing is no exception. If you're doing any restaurant marketing efforts, use your customer acquisition cost to ensure it's money well spent.
How to calculate your customer acquisition cost.
To calculate your CAC, you'll need
- Marketing Expenses, like Facebook ads. For this example, let's say you spend $1,000 on paid ads in a month
- Total New Customers, from your reservation tracking system. Let's say you had 50 new customers that attributed your ad.
Customer Acquisition Cost = Marketing Expenses ÷ Total New Customers
For this example, we can divide 1,000 by 30 to get a CAC of about $33. Is this good? That depends on your check average (more on that below). If your customers are spending more than it costs to get them in the door, then your marketing efforts are working!
15. Average Revenue per Guest / Check Average
What is restaurant check average?
Simply put, the restaurant check average is what you can expect each customer to come in your door to spend on a meal over a certain period. You can track it overall, or separate it by lunch or dinner to see the check averages during those meal periods. You can also track this by team member, to see which of your team has the best upsell technique. Otherwise known as average revenue per guest or average over, this is one of the most important key performance indicators (KPI) you can track in the restaurant.
Why is it important?
Your check average can tell you a lot about your customers, menu pricing, and more. Combined with your average headcount, you can also use this number to estimate sales for certain days or hours to make sure you're scheduling effectively-not overworking staff or overstaffing.
How to calculate check average
- The number of covers, or how many guests in a given period. This can be day, week, hour, or even by the server.
- Total sales, over the same period
Check Average = Total Sales ÷ Number of Covers
Once you have your check average, you can use it to make adjustments to your schedule, find out where you need to improve, see what changes you need to make in your restaurant. Here are some tips from our friends at TouchBistro for increasing your check average.
Customer Metrics and Ratios
16. Customer retention rate
What is customer retention?
Customer retention refers to a restaurant's ability to retain or keep, the existing customers that it has. Rather than spend all of your time (and money!) trying to put new people in seats, a customer retention strategy seeks to spend time bringing existing customers back.
Why is customer retention important?
Customer retention is important because it measures how good your restaurant is at making your customers happy and bringing them back in the door (or ordering delivery). Customer retention is one of the most cost-efficient ways to grow your business. A study conducted by Bain & Company determined that a 5% increase in customer retention rate can lead to an increase in profits from 25% to 95%. It's a large range, but even at the low end a significant amount of money back into your business.
How do you measure customer retention?
Customer retention is measured by a customer retention rate. Simply, your customer retention rate is determined by active customers at the end of a certain period (a month or a quarter), minus customer acquired and divided by how many customers at the end. Here's a formula, courtesy of HubSpot:
Customer Retention Rate = ( (# Customers at End of Period - # Customers Acquired During Period) ÷ # Customers at Start of Period) ) X 100
Say you have 100 regular customers at the start of the year, gain 40 new customers, and have 10 regulars churn, or not return. ( (130 - 40) /10 ) ) x 100 = 90% retention, which would be insanely good. A 2015 study found that nearly 70% of customers don't return to a restaurant after their first visit, putting the average restaurant customer retention rate at about 30%.
Recommended Reading: [Data] Restaurant Staff Turnover Playbook + Study
Frequently Asked Questions
What metrics may a general manager (GM) be responsible for?
A restaurant GM may be responsible for a variety of metrics, depending on what your restaurant deems important. You don't need to track all of these, but essentials like profit margins, labor costs, and check average are important to track. Food costs, inventory, and menu pricing are often handled by an executive chef.
How should I track these metrics?
You can track these metrics in spreadsheets to keep good records and be able to update easily. However, there are many restaurant tech tools that can help with everything from inventory management to audience management to labor costs, restaurant employee scheduling and more.
Simple to set up, easy to use. Give your restaurant the team management tools they need to be successful. Start your free trial today.
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