The restaurant business is difficult to succeed in, leaving most restaurant owners wondering, how can I make every dollar work for me, and how much profit can I expect?
Luckily, we got a chance to sit down with Francisco De Vivo, the President of FAJ Consulting Services Inc, to discuss the structure of a successful restaurant and his system for making restaurants profitable.
Mr. De Vivo has been involved in economic development with the City of Los Angeles since 1996. At CHARO Community Development Corporation, Mr. De Vivo was responsible for operationalizing the CHARO Entrepreneurial Training Program and the Business Assistance Program in East Los Angeles. For his advocacy efforts, Mr. De Vivo was named 2000 Financial Services Advocate of the Year by the U.S. Small Business Administration.
In our discussion, De Vivo drew on over 25 years of experience to explain how to optimize a restaurant’s profits.
What a Successful Restaurant Looks Like
In order to make a restaurant successful, you have to first understand what a successful restaurant looks like, or you need to know where each dollar goes when a restaurant is a success.
When looking at a dollar that comes into a restaurant, Francisco said many restaurants he’s worked with “had no idea where that dollar went, and when we measured it, we found it went to the wrong place.” So where exactly is the right place for that dollar to go?
According to Francisco, there are two categories of restaurant expenses, “one we call the controllables and the other is called the non-controllables.”
Your non-controllable expenses are costs that are almost entirely out of your control. “Those are expenses that are fixed and repeat every month,” Non-controllable expenses might include things like your rent, utilities, equipment, or insurance. Short of finding a new site for your restaurant or switching providers, these costs are fairly fixed.
“The one very important non-controllable that we use as a guide is rent,” says Francisco, “and rent determines the level of sales that a place needs. Ideally, your monthly rent shouldn’t be more than 10% of the monthly sales. So if a place pays $3,000 in rent, you should expect $30,000 in gross sales. This simple calculation is what makes a restaurant viable or nonviable.”
If your rent is more than 10% of your sales, you either need to step up your sales somehow or consider relocating, because if this expense is not in order, you’ll never make a profit. All other non-controllables should be held at around 12% of sales.
Controllable expenses, on the other hand, are much easier to manipulate. In Francisco’s method these “are the ones we are going to focus on.” And the three main controllable expenses for our purposes are food, labor, and supplies.
Francisco said that in a successful restaurant, the food cost must be “very close to 32%. That means out of every dollar that they sell, they should spend 32 cents on food. Labor is 26% and supplies is 2%. That’s the standard that we are going to use for fast food or family type restaurants. If you add up those three, that comes out to 60 cents. So the controllables are 60% of the dollar that you receive when you sell. That leaves you 40% for the non-controllable expenses plus the profit.”
Since rent is 10% and all other non-controllables are 12%, that means a successful restaurant nets 18% of their sales as pure profit. That means that if you get to keep 18 cents of every dollar spent in your restaurant, then congratulations! Your restaurant is a success!
If you’re not there yet, though, never fear! This is where Francisco’s method comes in, and it’s time to, “measure and correct.”
Measuring Your Controllables.
If you can track your food and labor expenses in particular, then you can make your restaurant profitable. But how can you do this?
“Labor cost is determined by taking a specific period and dividing the payroll expense by the sales of the same period. That will give you ratio that we call ‘Labor,’” Francisco told us.
“Food is calculated by taking the amount of the purchases of a specific period plus the purchases of the following period and dividing by the sales of each period. We take two periods instead of one because at the end of one period you probably have inventory left and the following period you will buy less to compensate, so the average of the two periods usually gives you a very close estimate of your food cost.”
Take some time to track these expenses in your own business and then look at what you’re spending on each. The answer may surprise you! Especially if you’re paying a lot more than the percentages that will allow you to make that coveted 18% profit. If you’re not quite on track, then get ready, because now that you’ve measured, the next step is to correct.
Correcting the Labor Cost
Francisco explained, “you correct labor cost by scheduling, not people, but hours. That’s how scheduling is done in labor.” After five or six months, most restaurants will see a repeating pattern of sales. For instance you may expect to see about $1,000 every Monday and $5,000 every Saturday, and these numbers don’t usually change very much. In a poorly run restaurant, “you see eight people working on Mondays when they make $1,000 and eight people working on Saturdays when they make $5,000, which means on Monday half of them weren’t doing anything.” If you’re paying people not to work, you’re losing money unecessarily.
“If you know you’re making $1,000 on Monday and you want your labor to be 26%, you know you can only spend $260 on labor. If it’s $260 and you pay $10 an hour, you know that you can only schedule 26 hours. Basically what you’re doing here is forcing that number to be what you need it to be.”
By using this method of scheduling hours and not people, you can get your labor cost to the 26% of sales that it needs to be.
Correcting the Food Cost
“There’s two things that can make food costs be off target.” Francisco said. “The most common one: people steal from you. The second is that your pricing is not according to the cost of the products.”
It may seem scary that your employees would be stealing from you, but it’s more common than you would think. Sometimes cooks will take food from your kitchen or make deals with delivery drivers to skim off the top. But don’t worry. According to Francisco, “Simply by doing this method, whoever is stealing is going to go somewhere else. They’re going to go somewhere where this is not done.” When you start cracking down, the people who want to steal will find another restaurant to steal from, leaving you to make money with your honest employees.
To fix your pricing, simply “take the two or three most popular plates in the menu and measure the ingredients. Weigh them at the cost of the ingredient and divide this number by .32. Whatever you get should be the price at which you sell.” If you find out that your menu prices are far below this number, then you know where your money is going.
Waiting for Your Changes to Deliver Results
To follow Francisco’s method, you need to repeat this process of measuring and correcting every week, which will allow you to track your progress
Reorganizing your restaurant operation may take a little time, and it may be months before you get to that 18% profit. But as your profits go up, a whole world of financing is opened up to you. Since the payment for loans is taken from your profits (from that 18%), if you can show a lender that you are making the money and that your restaurant is in order, they will start to offer you better terms and better loans. Then you can start thinking of expansion and improvement, so that you total sales get larger and that 18% starts to be even more money for you.
If you ever hit a snag in your optimization, like a sudden failure of equipment or a seasonal dip in sales, companies like Mulligan Funding provide short-term working capital loans, with small daily fees that make it easier to retire the debt quickly. This money can help you through a temporary rough patch where everything isn’t exactly where it needs to be financially.
Owning a profitable restaurant is a balancing act of sorts, but it becomes easier when you consider the numbers. You don’t have to be an accountant or an economist to make your restaurant work. You just have to set goals, stick to them, and make sure you can afford to wait while your changes manifest.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.