Restaurant Cost Control – Part 1: A Nickel-and-Dime Business

Author: Christine Letchinger, Associate Professor at Kendall College | July 2017

• Cost control is a thoughtful practice that evaluates actions in light of their impact on the business
• Operators should pursue incremental savings throughout the business, which requires constant attention to detail
• Cost control has its limits and should be combined with the goal of increased revenue

WHAT IS COST CONTROL?

Restaurant cost control consists of maximizing profits by establishing realistic financial benchmarks, comparing them to actual performance, and then eliminating the factors causing the variance between the two measurements. One can apply this methodology to any cost that can be controlled, but this article will not address labor costs because that topic is broad enough to be the focus of Part 2 of this article, which I plan to publish by early 2018.

Cost control is not cost cutting

When faced with a sudden but temporary drop in revenue, the temptation to slash staff, diminish product quality, and reduce spending on advertising and maintenance is powerful. These moves may protect profits at first, but they eventually diminish the customer experience, reduce the customer base, and erode the bottom line. Such knee-jerk reactions are what I call “cost cutting,” and they are distinct from the more thoughtful practice of cost control, which has a goal of maximizing profit and evaluates initiatives in light of their implementation cost and their impact on food quality, service, and the guest experience.

Cost control is often misrepresented

Despite the benefits of cost cutting and its strategic importance in the general business world, it is not a well-understood activity within the restaurant industry. The reasons for this include the following:

1. Too often in hospitality media, cost-control proponents inflate its benefits by mathematically demonstrating its financial advantage while failing to point out limits in its ability to increase profit and overlooking the need to simultaneously pursue revenue-enhancement strategies.

2. Industry consultants and talking heads tend to limit their focus to food and labor costs, ignoring the myriad of other items on the income statement that together offer tangible savings opportunities.

In this article I will present a more pragmatic and thorough view of non-labor cost control.

The financial benefits of cost control can be significant

The average profit margin (net profit divided by revenue) of US restaurants is only between 3% and 4%, and because restaurants are not very profitable, a small reduction in costs can have a significant impact on profitability. For instance, the non-labor costs that I will be discussing in this article can account for 50% of sales, and all else being equal, a 2% reduction in these costs would lead to a 29% increase in profit.

• A restaurant with $2 million in sales and a 3.5% profit margin has $70,000 in profit.
• If this restaurant cuts 2% out of a $1 million cost base, that frees up $20,000, which immediately goes to the bottom line (i.e., profit).
• ($70,000 original profit + $20,000 cost savings) / $70,000 original profit = 29% profit increase

The other consideration is that it takes more revenue than you probably think to make up for the stolen goods, the wasted food, and the broken dishes that result from questionable cost-control systems and practices.

The amount of revenue required to replace a broken mug
Guess how much additional revenue a restaurant has to generate to replace a broken $8 mug while maintaining its profit level. Most answer that only $8 in additional revenue is needed, but, in fact, the answer is nearly $23, because each additional dollar in revenue implies additional expenses in the form of food, labor, utility costs, etc.

For this example, we assume 35% for these additional expenses: $8 ÷ 35% = $22.85. Thus the actual mug replacement cost is $22.85, showing that it is easier to prevent a loss than to produce the additional revenue required to recoup that loss.

THE NEED FOR ACCURATE COST STANDARDS

Cost standards are yardsticks against which actual performance is measured. They are achievable goals based on planning, analysis, and calculations, and they assume that the operation is error-free – no waste, no theft, no mistakes. You can think of them as a tool for comparing “what should be” to “what is.”

Cost control should follow a simple methodology: Establish cost standards, monitor operations to evaluate actual performance, investigate variances between the standard and the actual performance, then eliminate the errors and/or waste causing these variances.

Any cost over which management has a direct influence must have its own standard and be clearly stated as a percentage, ratio, cost per unit, etc.

Any cost over which management has a direct influence must have its own standard and be clearly stated as a percentage, ratio, cost per unit, etc. Setting these standards requires detailed analysis, but unfortunately most managers are confident that their quick, back-of-the-envelope calculation or guess will be satisfactory. Regrettably, these methods are often inaccurate.

Inaccurate cost standards are deceptive and have significant consequences
On the basis of a questionable calculation, the manager of a restaurant with $1.5 million in annual revenue determines that the standard cost of goods sold should be 31% — that is, for every $1.00 of revenue, $0.31 should be spent on food and alcohol. Yet, had he done a systematic computation using menu prices, recipe costs, and menu mix, he would have realized that the real standard cost-of-goods-sold percentage is just 29%.

If the restaurant is operating at a 31% cost-of-goods-sold percentage (equal to the inaccurate standard cost), the manager is most likely satisfied but unfortunately unaware that $30,000 a year is being wasted or stolen.$1,500,000 in revenue x 2% (i.e., the difference between 31% and 29%) = $30,000.The restaurant may be profitable but management is not maximizing profits because it is unaware that the standard cost percentage estimate is overstated. Consequently it does not take necessary corrective actions and the loss persists.

Other industries reject defective parts, track production errors, and develop solutions to avoid their recurrence. In contrast, we as an industry are too accepting of errors and consider losses par for the course, when we should instead track losses, question their causes, and fix the problems we find.

COST CONTROL FOR COST OF GOODS SOLD

The benchmark: Computing the standard for cost of goods sold

“Cost of goods sold” (commonly called “food cost”) is the term used to identify the cost of the food and beverages that a restaurant uses to produce its food and beverage revenue. In other words, if a restaurant uses $10 in food and alcohol and then sells them to a customer for a total of $33.40, the cost-of-goods-sold percentage is 30% ($10 / $33.40). The term “standard” simply refers to a benchmark, and you will be comparing your actual results to this benchmark as part of the cost-control process.

The cost of goods sold is critical for a restaurant because it represents a significant portion of revenue. These costs, expressed in terms of percentage of total revenue, can range from the low 20s for a pizza joint to the low 40s for a steak house, and it is helpful to know that cost of goods sold is one of the top two cost categories for restaurants (the other is labor costs).

Computing the standard cost of goods sold is not easy

Arguably one of the most difficult standards to establish is the cost of goods sold, which is the aggregate of all individual menu item costs. Broadly speaking, we calculate the cost of a given dish by adding the cost of each ingredient based on recipe and product specifications, and then dividing the total cost by the dish’s price and expressing the result as a percentage. In this calculation, we assume that there is no waste or theft.

Reminder about the standard COGS percentage
Remember that the standard COGS percentage is an aggregate of all menu items sold. Contrary to what many operators believe, calculating the cost-of-goods-sold percentage for a single dish is of limited use for cost-control systems.

Calculating this standard is a complex procedure. To begin with, the cost, cost percentage, and market price of each menu item vary. It is possible to have a standard food cost percentage of 15% for one item and 36% for another, and it is helpful to know that within the wide range of possible values, the cost percentage of entrees is generally higher than that of appetizers, desserts, and bar items. Another factor is that not all menu items sell in equal and consistent quantities, so the standard cost of goods sold increases if the restaurant sells more entrees or more expensive entrees, and it decreases if it sells more desserts, appetizers, and booze.

In the face of these complexities, you need to forecast the menu mix by using sales data collected during a “typical period” that is lengthy enough to capture daily fluctuations in guest preferences (often one month’s worth of data is enough). For new operations – where data is inevitably missing – management has to estimate the menu mix. In such cases, prior experience and familiarity with similar operations are of great value.

The impact of menu mix

To illustrate the impact of menu mix on a new operation’s cost of goods sold and its standard cost calculation, let’s consider a very unusual restaurant with only two items on the menu. The forecast conducted during the planning phase was based on data from similar restaurant concepts and suggested the following menu mix.

If all the employees are doing what they are supposed to do and there is no waste or theft, the cost of goods sold should be 30% ($1,158 / $3,900 = 30%).

A common calculation error
In this example, we computed the standard cost of goods sold by dividing the total cost of goods sold into the total sales to arrive at the 30% standard. Most chefs rely on a shortcut and simply add the cost percentages for each item (20% + 38%) and divide that amount by the number of items (2) to arrive at a cost of goods sold standard of 29%. In doing so they compute a simple average that overlooks the weighted impact of the sales mix, understates the cost-of-goods-sold percentage, and overstates potential profits.

Assume now that the restaurant is open. While the number of dishes sold is comparable to the forecast (180 vs. the forecasted 175), the sales mix is off the mark: More steaks are sold than originally forecast, and thus the standard cost of goods sold has increased to 32%.

Given that the 30% standard cost percentage was based on a forecast and not actual purchase patterns, you need to scrap the forecast and make the reality (i.e., the 32%) your new benchmark.

It just so happens that the change in this case is not alarming. While the cost of goods sold is higher than anticipated by $208, the additional revenue of $360 more than compensates for the difference (remember, you pay your bills in real dollars, not in cost percentage points). Unfortunately this is not always the case – costs can increase while revenue stays relatively flat. For example, consider the following scenario: The cost of filet suddenly rises by $1.71 to $12.35, and strong competition precludes an increase in menu prices to compensate for the higher cost.

The new standard cost-of-goods-sold percentage has increased to 36% — which is higher than the previously calculated standard cost of 32% — and the additional revenue of $360 from the higher mix of filets is not enough to cover the additional $382.50 in costs. Assuming there are 300 operating days in a year, the daily deficit of $22.50 will amount to $6,750 for the year.

The significantly higher standard cost percentage threatens profitability and requires corrective action. For instance, one could reconsider some of the menu offerings to encourage the sale of higher-profit items, reduce portion sizes to counteract the higher costs, or increase pricing after changing a dish’s presentation and accompaniments.

Calculating the cost of a dish (and obtaining the menu price)

The computation of standard cost of goods sold requires you to calculate the cost of individual dishes and their menu price, and these calculations, in turn, require the following information:

• Standard recipe
• Yield percentage (if applicable)
• Cost of ingredients – necessary to compute dish cost
• Desired cost percentage – necessary to compute menu price

Let’s take a look at these elements and see how they fit into the calculation.

Standard recipe. A standard recipe is a necessary blueprint that ensures that the preparation and presentation of a dish are consistent regardless of who prepares the dish. It lists the ingredients, outlines the preparation method, and stipulates the portion size, the time necessary for preparation, the presentation, and the plate or glassware to be used.

Yield percentage. For menu items such as prime rib roast and whole fish – where there is shrinkage in cooking or waste byproduct (e.g., skin, scales, trimmed fat, etc.) – the standard recipe must specify the “yield.” Yield is defined as the raw-product weight minus the waste, and it is expressed as a percentage of the raw-product weight.

Cost of ingredients. We calculate the dish cost by adding the cost of each ingredient – using the invoice price for each ingredient times the quantity used – plus a few pennies to account for incidental waste (for some context, even for an expensive item I would only add 25 cents).

Most ingredient costing is that straightforward; but when it comes into play, the yield input is critical. An error in the yield or its omission impacts the cost of the dish, the menu price, and by extension the cost-of-goods-sold percentage.

About yield
Accurately asessing yield is critical. Let’s assume we want to serve 4 ounces of cooked brisket. The operative word here is “cooked,” because brisket notoriously has a 30% shrinkage rate. This means that the yield is 70%. At $5 per pound, a five-pound brisket costs $25, and after cooking, it yields 14 four-ounce servings.5 pounds x 16 oz. x 0.70 yield = 56 oz. of cooked brisket
56 oz. of cooked brisket ÷ 4 oz. per portion = 14 cooked portions
$25 brisket cost ÷ 14 cooked portions = $1.79 per portionIf the yield is ignored (this occasionally happens), the cost per unit is calculated on 80 ounces instead of 56 ounces, which leads to a cost per portion of $1.25 (31% lower than the correct cost). As noted earlier, ignoring or miscalculating yield leads to an erroneous recipe cost, menu price, and standard cost-of-goods-sold percentage.

Desired cost percentage. The desired cost percentage is based on a chosen level of profitability, and this percentage changes for different menu items (as indicated earlier, the cost percentage for entrees is usually higher than it is for appetizers). The determination of these cost percentages should be part of the restaurant’s financial projections.

We use the inputs above to calculate the menu price as follows:

Dish cost ÷ Desired cost of goods sold % = Menu price

Restauranteurs must monitor invoices regularly and adjust menu prices as commodity costs fluctuate, and an online purchasing/real-time food and menu costing system can easily perform this function.

Computing actual cost-of-goods-sold percentage

Maximizing profits suggests that the cost-of-goods-sold percentage is monitored closely and that management compares the standard cost percentage to the actual cost percentage to identify variances and investigate their causes. Remember that while the standard cost assumes flawless performance from all employees, the actual cost reflects reality, and in doing so it includes the waste, errors, and thefts that may have occurred at various stages of production and service.

Remember that while the standard cost assumes flawless performance from all employees, the actual cost reflects reality, and in doing so it includes the waste, errors, and thefts that may have occurred at various stages of production and service.

The calculation for actual cost is straightforward. As an example, to obtain the actual cost of goods sold for the month of June, you start with the ending food and beverage inventory for May, add the purchases of food and beverages for the month of June, and then deduct the value of the ending food and beverage inventory taken at the end of June. This calculation provides the exact dollar amount of food and beverage used, but to arrive at the cost of goods sold, you must take the last step and deduct the cost of employee meals and complementary meals – as the product used for this was intentionally not sold (and we are looking for the cost of goods sold).

Beginning inventory + Purchases – Ending inventory – Employee meals and comps = Actual cost of goods sold

The next step is to divide the actual cost of goods sold for the period by the revenue for the period to obtain the actual cost-of-goods-sold percentage.

Actual cost of goods sold ÷ Revenue = Actual cost-of-goods-sold percentage

Comparing standard cost to actual cost

Even under the best of circumstances – proper pricing, no errors, no theft, no waste – there is always at least a small difference between the standard cost-of-goods-sold percentage and the actual cost-of-goods-sold percentage. The discrepancy should be less than one percentage point, and I should mention that some operators consider ½ percentage point the limit of what is acceptable.

The causes of cost-of-goods-sold variances

Investigating the variances and finding their causes is tricky because a cost spike is rarely attributable to one singular cause. Instead, a spike is more likely the result of multiple reasons, including the following:

1. A sudden shift in menu mix
2. Incorrect portion sizing by kitchen or bartending staff
3. Employee theft of revenue (cashier and wait staff)
4. Employee theft of goods (mostly by kitchen employees)
5. Vendor theft (i.e., overbilling by dishonestly raising prices or by “shorting” quantity delivered while billing for the full amount)
6. Guest non-payment (i.e., “Dine and Dash”)
7. Commodity price spike unaccompanied by matching menu price increase
8. Food overproduction, which leads to excessive leftovers
9. Computation errors in purchases and/or inventory valuation

Some remedies for cost-of-goods-sold variances

Many of the causes noted above can be remedied with simple operational changes, and below is a list of specific remedial actions that you can take for each of them:

1. A sudden change in menu mix is often due to a menu change. In the absence of menu changes, many factors may be causing this shift. You will need to examine your recent history, investigate what prompted customers to alter their buying habits, and possibly adjust the menu to shift purchasing patterns.
2. Portion control issues can be solved by spot-checking the portions of a few menu items on a daily basis and by retraining employees and/or providing the necessary equipment.
3. Employee theft of revenue can be mitigated in a number of ways:
   • Implement a manual guest-check control system: For each meal period, log the starting and ending numbers on servers’ paper guest check books and confirm that all checks used have been retrieved at the end of the meal period. Missing checks may have been thrown away and the meals given away to customers or the cost of the meals pocketed by servers.
   • Use a POS system to log sales electronically, thus making it difficult for dining room staff to pocket the cash paid for a meal.
   • Hire mystery shoppers to observe bartenders and servers for evidence of theft.
   • Audit liquor bottles by counting both full and empty bottles. Because it is easier for bartenders to enter an establishment with their own bottle than it is to leave with the same bottle, this audit makes it more difficult for bartenders to “steal” your customers by bringing and selling their own liquor (if they do so the audit will reveal too many empty bottles).
4. Employee theft of goods can be mitigated by keeping strict control of your inventory. Keep your liquor room, wine coolers, freezers, and refrigerators locked. For high-ticket items, count your inventory daily. Have a strict policy whereby only managers or stewards can issue food, and then only after the chef submits a written requisition.
5. Strict purchasing, receiving, and storing procedures impede both vendor and employee theft. For example, compare invoice costs with purchase order quotes, and systematically examine deliveries for quantity and quality.
6. Guest non-payment occurs most often in bar operations with outdoor seating and in specific markets such as college towns. This problem is tough to control, but you can secure outdoor areas and/or limit the number of exits. Also, you can insist on payment every time a new round of drinks is served, instead of running a tab.
7. You can identify spikes in commodity prices by reviewing invoice prices or using a back-of-the-house software system. Such spikes should trigger a menu price adjustment or dish modification/elimination.
8. A production schedule based on guest and menu-mix forecasts mitigates the level of overproduction and leftovers.
9. Purchasing and inventory tend to have constant dollar values, so you can address computation errors in these items by looking for numbers that are out-of-the-ordinary. In addition, you can track the ratio of inventory to revenue, which should be relatively constant.

It is naïve to think that you can eliminate all thefts and errors, but the goal is to use efficient procedures and training to stop as many of them as possible before they occur. This is advisable because cost control is most effective when it is preventive as opposed to reactive.

COST CONTROL FOR CONTROLLABLE EXPENSES

While it is important to track food cost (cost of goods sold), do not underestimate the saving potential presented by a separate category of costs called “controllable expenses.” These are non-food expenses that management has the ability to adjust in the near term (I will ignore long-term efforts such as moving to a cheaper location to reduce rent cost). Examples include laundry/linens, breakage, trash removal, extermination, music and entertainment, marketing, utilities, administrative costs, and repair and maintenance. Some labor costs are included in controllable expenses, but, as noted earlier, we are not addressing labor in this article.

Individually, most controllable expenses amount to just 1% to 3% of revenue and are consequently often overlooked.

Individually, most controllable expenses amount to just 1% to 3% of revenue and are consequently often overlooked. In total, however, these expenses represent 20% to 25% of revenue, and they are well worth digging into (just compare this range to the roughly 20% to 40% range noted earlier for food costs). For instance, for an operation with $3 million in sales and controllable expenses of $750,000 (25% of sales), a 2% reduction in these expenses adds $15,000 to the bottom line.

We use exactly the same methodology to control these expenses as we use to control the cost of goods sold: Establish a standard cost, compare actual performance to this standard, investigate the variance, and then adjust procedures to eliminate the error, waste, and/or theft.

Industry data compiled by the National Restaurant Association is an adequate starting point for obtaining baseline standard cost percentages, and you can also use this data as a resource when creating a list of controllable expenses that apply to your particular situation. The standard cost percentages in the Restaurant Operations Report are statistical averages based on restaurants’ type, level of service and geographical location. The 2016 edition costs $100 for members and $200 for non-members, and the link to purchase it is here:
Restaurant Operations Report

Simple standard: How many cloth napkins should be used on a daily basis?
What is the cost standard for cloth napkins? Preferably it should reflect one napkin per customer. Occasionally a napkin is dropped and replaced, but as a rule we evaluate napkin use by comparing it to the number of guests.

If napkin usage exceeds the number of customers, it is because napkins are misused as kitchen towels, pot holders, or table stabilizers. Worse yet, an increase in napkin costs may be explained by the napkin vendor invoicing for a specific quantity but failing to deliver the entire order – a clear but not unusual case of vendor theft.

Below are examples of how you can address two very different controllable expenses: breakage and shrinkage, and trash collection.

The importance of measuring: Breakage and shrinkage

It’s a fact of life – table attendants and sanitation workers drop dishes and glasses, and silverware vanishes. Our industry’s tolerance for such breakage and shrinkage (i.e., the loss of inventory, largely due to employee and customer theft) is high, but you should be spurred to corrective action once you realize that replacement costs are also high. Note that the standard we are reaching for here is perfection – no breakage or shrinkage.

Why do dishes and glasses break, and why does silverware disappear? There are multiple reasons: items can break due to careless mishandling by staff while clearing tables, washing, or storing the items, and silverware can disappear as both customers and staff take it home for personal use (dessert and soup spoons are especially prone to “desertion”).

When it comes to breakage, start by making employees aware of the cost of these losses in very concrete terms through initial and ongoing training. Management needs to say, “Last year we bought seven cases of water glasses at a cost of $x per case, and in the last two months we lost two cases.” Also, review busing, washing, and storing procedures to uncover the root of the breakage, then retrain staff and modify the equipment as needed.

As for shrinkage (largely theft), I addressed employee theft in the section entitled “Some remedies for cost-of-goods-sold variances”; to reduce customer theft, try offering commonly stolen items for sale so that visitors have another way of acquiring them.

The importance of measuring: Trash collection

Many operators ignore the cost of trash collection, even though with some effort one can lower this cost. Most trash-removal contracts are based on volume, not weight, so it is possible to reduce the cost of collection through compacting, recycling, and purchasing products that use minimal packaging. Also, management must inspect the contents of trash bins and dumpsters to identify problems, and train employees to reduce trash volume and dispose of waste properly.

When it comes to trash collection, it is very difficult to have a standard cost per customer before you start tracking your costs. That said, once a systematic data-tracking process is in place, operators can establish a benchmark cost by correlating actual waste volume with customer count. By comparing future waste volumes to this benchmark, management can assess the effectiveness of the compacting and recycling initiative, and the level of employee compliance.

An indirect benefit of the inspections noted above is theft prevention, as the best way to get stolen merchandise out of a restaurant is through the trash. Employees “throw away” the item they want to steal, then return after closing and remove the item from the dumpster. In a routine trash audit during my consulting days, we found two frozen shrink-wrapped beef tenderloins in the dumpster.

EFFECTIVE COST CONTROL SHOULD BE PART OF AN OPERATION’S DNA

Management is responsible for establishing systems and procedures and for training and monitoring staff, but management and employees must work together to foster a culture of cost control. Employees can offer substantial contributions, as they have a unique perspective on work processes and understand guests’ expectations.

Successful cost control requires continuous monitoring of operations by all: Check the refrigerator for overstocking, check the garbage for waste, and check the number of slices the prep cook is getting out of a tomato. Check for accuracy and consistency in portion size, and check that employees have and use the proper portion-control tools (i.e., scoops, ladles, portion-control scales, pie slice markers, etc.). Check for goods missing from inventory, audit the cashiers, count the steaks, and check the quantities included in vendors’ shipments and the accuracy of their invoices. Check, check and recheck, and always compare actual performance against established benchmarks.

Finally, recognize that the cost-control system itself must be cost effective. Don’t spend a buck to catch a nickel.

Finally, recognize that the cost-control system itself must be cost effective. Don’t spend a buck to catch a nickel.

New initiatives should be vetted from the cost perspective

A culture of cost control requires that every new initiative – such as extending the hours of operation, introducing a new promotion scheme, or purchasing a new piece of equipment – be vetted. You must anticipate its costs and compare them to its potential benefit to determine if the cost of the initiative is worth the investment. It would be impossible to address every potential restaurant initiative in this article, but the key is to remember that for every endeavor you must answer three questions:

• Is the initiative cost effective?
• If not, can it be done better, faster, and/or cheaper (what I like to call “BFC”)?
• If an initiative is costly and at first glance not expected to be cost effective, is it justified because it provides a competitive edge or is intrinsic to the brand?

Both management and employees should benefit from cost control

Profits increase when losses are reduced, and owners always benefit from higher profits (monetarily and/or through the ability to recruit more qualified employees via higher wages). But owners must remember that it is a two-way street: When employees successfully contribute to cost-saving initiatives, the restauranteur should compensate them. Owners can accomplish this by tying pay raises to specific cost-reduction targets, or by giving cash rewards to those who propose initiatives that result in substantial waste elimination.

The reality: Cost control is often ignored

Most restauranteurs are just paying lip-service to cost control. The crisis-driven and seat-of-the-pants management styles common in the industry, the limited amount of planning done before opening a restaurant, and the types of personalities that are attracted to the business all contribute to this lack of enthusiasm.

Restaurant owners are passionate about food and the guests’ experience, and this passion often eclipses the mundane research and groundwork necessary to establish cost-control procedures and performance benchmarks. Only when revenues prove insufficient, cash becomes scarce, and a fresh infusion of money from investors is necessary do restauranteurs accept the necessity of cost control. Regrettably, when cost control is an afterthought, it is less effective, and operational design flaws that could have been avoided with proper planning are difficult to fix.

To most restauranteurs, near-term savings measured in nickels and dimes seem inconsequential.

Even when operators do consider cost control, their good intentions are often thwarted by the mistaken belief that time spent on cost control and away from more important tasks such as recipe development or menu design can only be justified if the savings are measured in thousands of dollars. To most restauranteurs, near-term savings measured in nickels and dimes seem inconsequential. They don’t realize that there is no quick-fix – the payoff results from a daily attention to details.

The impact of repeat savings
Let’s say that a restaurant wastes an average of one out of every eight slices of pie because management has not provided employees with the proper tools and training necessary to cut identical and unbroken slices. Assuming that a slice of pie costs a restaurant $1.00 and that it uses 18 pies a day, the restaurant will waste $5,616 each year.(18 slices at $1/slice) x (6 days a week) x (52 weeks) = $5,616With the proper tools and training, $5,616 in costs will be saved and added to the bottom line.

CLOSING THOUGHTS

The other side of the coin: Revenue enhancement

Cost control will only get you so far, as the most comprehensive cost-control system is of little help if revenues can’t cover costs. To achieve robust profitability, management must work on two fronts simultaneously: controlling costs and enhancing revenue.

To achieve robust profitability, management must work on two fronts simultaneously: controlling costs and enhancing revenue.

The two sides have different dynamics: While cost savings have an immediate impact on the bottom line, efforts to increase revenue (e.g., changes in food quality, improvement in service, marketing initiatives) take more time, are more complex, and involve more trial and error. That said, note that cost control reaches a point of diminishing returns as waste is eliminated. It can only go so far, and at some point operators tend to go from “cost control” to “cost cutting” (remember that we define “cost cutting” as actions performed without regard for their impact on the business). Conversely, the potential benefits of revenue enhancement are virtually unlimited.

Cost control is an unsung hero

Cost control does not make for great reviews or media accolades. What makes it rewarding is its potential to shape a restaurant’s bottom line and compensate management and employees for many years to come. Developing a concept, designing a decor, or creating a menu is more thrilling than planning a cost-control system, but successful operators understand that the only way they can fulfill their responsibilities to their guests, investors, and employees is if they are as good with money as they are with culinary skills, menu design, and service.

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About the author

Christine Letchinger received a B.A. in history in her native France before earning an M.B.A. from Southern Methodist University. She began her hospitality career by overhauling financially troubled operations and in 1988 began teaching at Chicago's Kendall College. Her teaching focus is on accounting, cost control, and finance, while her interests encompass feasibility studies, financial sustainability, and the reasons behind restaurant failure. She received the United Methodist Church's Exemplary Teacher Award in 1990 and the Kendall Outstanding Student Commitment Award in 2009. Until recently she served as Interim Dean of the Hospitality Management program at Kendall College.

Chris can be reached at Kendall College:

• Email: chris.letchinger@kendall.edu
• Phone: 847-668-5532