Make Butchered Inventory Perpetual

The majority of the cost of most entrées comes from the “protein” component – meat or fish.  Chefs try to maintain a consistent portion size, usually based on weight.  Despite consistent portions, the cost will fluctuate depending on the raw purchase cost and the butchering yield.  Even if you don’t have recipes fully documented and costed for every menu item, as a bare minimum, you should know the portion cost of the protein component of every plate.  Also, you need to track the number of portions in inventory at all times.  This will allow you to identify major cost problems that may be occurring.

Butchering Yield

Some proteins are purchased pre-portioned, but you pay a premium, because the supplier has done the butchery work for you and there is no waste.  Most chefs prefer to do the butchering in-house, to reduce the cost per portion.  The butchering process removes the unwanted portions of the meat or fish, such as bones, excess fat and gristle, and cuts the meat into pre-cooked portions.  The weight of the butchered portions divided by the total purchased weight is the called the yield percentage.  The cost per portion is equal to the total purchase cost divided by the number of portions.  The yield will be different for each type of meat and fish.  Since each piece of meat or fish is unique, the yield will vary each time butchering is done.  Good suppliers deliver consistent product, which give consistent yields.

Monitoring Yields

In my restaurant, we maintained a rolling average yield for all major proteins.  The last five yields were averaged to determine the average cost of the protein component of the plate cost.  The average portion cost automatically updated the recipe cost, which was maintained in an Excel spreadsheet.  At a glance, we could see deviations from the normal yield and identify the causes – substandard quality, short-weight, inaccurate portioning or poor butchering.

Perpetual Proteins

Because the protein component represents a large part of the plate cost, it makes sense to keep track of each portion held in inventory.  If the butchering process yields 20 striploin portions, you want to make sure that every one was actually sold.  Here, we want to keep track of the units (portions) at all times.  This is called perpetual inventory recordkeeping.  It is quite easy to do using an Excel spreadsheet.  Yesterday’s units, plus today’s butchered units, less today’s sales equals the number of units that should be on hand.  A quick (daily or shift) count of the units on hand will reveal any shortages that need to be investigated.

Shortages can occur from sales not being rung-in.  The kitchen should never be permitted to prepare a plate without a chit from the POS system.  Ever.  Not even for owner meals.  This needs to be monitored by management at all times.  It is a great idea to test this control (by trying to place an order verbally) from time to time, too. 

Be aware that this control only works if there is no collusion among your staff members.  If one of the chefs colludes with a server, the control will break down.  For example, the chef cooks a steak dinner for a server in return for a “free” beer.  Or, a server sees a chef taking food home and threatens to tell the owner unless he gets free food.  Lots of variations on this type of situation.

Sometimes the “void” key is used to delete sales transactions, instead of a discount key.  For example, a customer may change his mind after ordering and the item is being made.  If the void key is used to remove the item from the bill, most POS systems will not show the item as part of the ingredient usage (or as part of the sale quantity).  I prefer to see such transactions recorded as discounts, ideally with categories that explain the reasons for the discounts.  This way, the POS maintains an accurate count of the quantities sold and the reasons why sales dollars were less than the expected (standard) sales – i.e. Quantity x Menu Price. 

Sometimes portions go “off” before they can be sold.  These should be documented in a Spoilage log.  If this is a regular occurrence, it needs to be investigated.  Either sales volumes are very volatile, making it difficult to accurately forecast inventory quantities, or the chef needs to adjust ordering quantities.

If the chef improperly cooks the protein, such as burning a steak, this should be recorded in a Wastage log.  Excessive entries in this log indicate a chef that needs to take more care or be replaced.

After taking into account sales usage, spoilage and wastage, the remaining shortage must be theft.  If the kitchen never prepares a meal without a POS chit, the food items are being taken after butchery and prior to being sold.  You may need to install locks to prevent further losses or cameras to catch the culprit(s).  Any persistent problems with one food item are likely to be accompanied by problems with many other food items.

Bottom-Line

Keeping track of the quantities of your high-value proteins in inventory will identify expensive shortages and dictate what needs to be done to minimize the losses in the future.  It is a very easy, simple check that will yield a quick payoff.

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Cooking the Books

Rest assured, today’s post is not about tax evasion.  But, it does have a very important implications.  If your food recipes use any alcohol, it’s important to account for it properly.

Proper Accounting

Your food cost of sales should include all of the costs that are incurred in preparing the food menu items.  Sometimes, restaurants forget to include the costs of liquor, wine and beer that are used in food dishes.  Food costs are understated and alcohol costs are overstated.  No big deal to the bottom-line, but it does affect the margins for each category, which are considered in your decision-making.

But there is a far more important reason.  Any restaurant that sells alcoholic beverages is going to be faced with future sales tax audits.  Tax auditors use indirect audit methods to project the sales that were likely to have been generated, based on the actual purchases of alcohol.  The assumption is that all alcohol is purchased for resale, not for cooking.  If you don’t keep records of alcohol used in cooking, the auditor will have no way of verifying this during an audit.  Consequently, mark-ups will be applied to the cooking alcohol costs, and the projected sales figure will be higher than it should be.  Your restaurant will appear to be under-reporting its sales, and sales taxes will be reassessed for this deficiency.  These reassessments can be very significant.  For more information about the effects of cooking alcohol in tax audits, read this and this.

Tracking Cooking Alcohol

There are two main sources of alcohol used in cooking.  Some alcohol is purchased specifically for cooking use.  Examples might include 1500ml bottles of wine for making stock and kirsch, marsala and liqueurs for sauce flavourings.  These items can be identified from the purchase invoices.  Each invoice should show the items that were purchased for cooking purposes. 

The other source of cooking alcohol comes from the bar.  Restaurants that serve wines by-the-glass will often have wine in open bottles that is not saleable.  Usually, this wine will be transferred to the kitchen for use in making stock or sauces.  Occassionally, small quantities of liquor may be taken from the bar stock to make various food sauces, too.

Restaurants should maintain a log showing the description and quantity of all alcohol transfers from the bar to the kitchen.  Ideally, these should be dated and initialled by the chef and bar manager.  For each reporting period, the cost of the transfers should be determined and a journal entry should be made to reallocate the costs from liquor, wine and beer to food costs.  The log should be kept on file to support the kitchen use of alcohol during the period.  This log will also be used to account for part of the alcohol variances for the period.

Bottom-line

Keeping track of alcohol used in cooking will help prevent costly tax audit reassessments, help explain alcohol variances and provide more accurate food costs.  This kind of “cooking the books” is a good thing!

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Cost Control is the Key to Survival

While there are some signs that we may be emerging from the recession, I think you’ll find that consumer behaviour has been changed, perhaps for many years to come.  Even your “well-off” customers are much more price conscious that they have ever been before.  Actually, they are more value conscious.  In order to “survive and thrive”, you have to continuously monitor your restaurant’s value proposition.

While there’s more to the value proposition than your menu and prices, these are the two aspects that can be adjusted fairly easily in the short-term.  These are also the two areas that most restaurateurs fiddle with first, when times get tough.  We could probably add labour into the mix, too.

Recessions always harm the restaurant industry.  People lose their jobs (or worry that they will lose them), cut back on meals outside the home, and spend less when they do go out.  Most restaurants experience a drop in both volume and check averages, often severely reducing (or eliminating) their profits.  To cover their fixed costs, restaurateurs will try everything to keep the customers they have and steal their competitors’ customers.  Most start with price reductions, either through coupons and discounts or with across the board price reductions.  It doesn’t take long to realize that quality or portion sizes have to be reduced to maintain profitable margins.  Easier said than done! 

The Role of Cost Control

If your competitors are reducing their prices, you may have to do so too, just to keep the customers you have.  The restaurant with the best cost control is going to win this competition.  If your cost controls are superior, you will be better able to maintain quality and appropriate portion sizes, offering a better value proposition relative to your competitors.  They will have to serve smaller portions and use cheaper ingredients. 

We all know (or at least you should know)  that the surest way to kill your business is to debase your quality standards in order to maintain margins.  Your “regular” customers will quickly realize the change and start to reevaluate your value proposition or they will sense a consistency problem.  Either way the burning desire to come back soon will be lost.  All of the past marketing efforts to brand your restaurant with a particular quality/value will be destroyed, too.  You need to do anything but lower the quality of your menu offerings. 

You do this by doubling your efforts at cost control – food, beverage, labour and operations – every dollar saved, that doesn’t reduce your value proposition, allows you to keep your customers, win new ones and still be profitable.  Minimize waste and spoilage – they have no impact on quality.  Make sure inventory follows the FIFO principle.  Request new quotes from major vendors (they’re hurting too).   Scrupulously monitor portion sizes for food and alcohol.  This will also help improve the consistency of your menu items.  Redo your staff schedules.  While you may be able to reduce your labour cost, at the very least, you should be able to transfer hours from slower periods to busy times, to improve the quality of service. 

Restaurants that fail to heed this advice will find it increasingly difficult to pay their suppliers on time.  They’ll start to receive inferior quality ingredients, which will lessen their quality.  Their customers will reevaluate their value proposition and find better alternatives.  Their volume will drop.  They won’t be able to maintain staff levels and service or pay the rent on time.  They will be the ones going out of business, and in this business, it doesn’t take that long for bad decisions to bring an abrupt end.

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Counting Inventory a Waste of Time?

I’m sure all restaurant consultants and accountants advise their clients to count inventory regularly.  Depending on how many menu items and ingredients in use, and how many times you count inventory, this simple procedure can represent a very significant time commitment.  Let’s take a closer look at inventory counts and see whether they’re worth the time and effort. 

It Takes Time… a Lot of Time

Most restaurants have hundreds of items in inventory from small food ingredients to bottles of wine.  Some are measured by volume, others by weight or units.  Purchased units may be different from inventory units, which may be different from recipe units.  Each stock item needs to be counted, accurately, and costed using the correct cost per count unit. 

Almost all restaurants use a periodic inventory method.  Cost of sales is determined by adding the opening inventory to purchases during the period, and deducting the ending inventory.  In order for this method to yield an accurate cost of sales figure, the ending inventory must only count items that  have been recorded as purchases during the period.  That is, the physical receipt of the stock items must be in the same period as the invoice for those items, and the invoice needs to be recorded in the proper period.  We call this having proper cutoff. 

The shorter the period between inventory counts, the more accurate the count must be.  Why?  The error as a percentage of a month’s cost of sales will be much greater than that for a whole year’s cost of sales.  You can just imagine how accurate you must be, if you are taking daily inventory counts – even a slight error will appear to be quite significant.

Now, rather than do this at the end of each year, do it every four weeks.

Is There a Return on This Time Investment?

Even though you have already done a lot of work, it serves only one purpose.  It gives you a reasonably accurate, overall cost of sales figure for the financial statements.  While you may get a general idea how costs and margins fluctuated during the various periods of the year, these fluctuations are highly unlikely to be accurate or detailed enough to be useful for making profitable decisions.  Many factors affect the overall margins, including the sales mix, discounts, spoilage, waste, portion control and theft.  Failing to consider these factors means that you cannot know whether your restaurant’s performance was good or bad or whether it was getting better or worse.  So, an awful lot of work for very little benefit!

There’s A Better Way

If you are prepared to do a bit more work, you will finally get much more useful information from your periodic inventory counts.  Note that food costs involve a much more complicated process.  To get really useful cost information, you have to do a lot of extra work.  However, alcohol inventory and costs can be analyzed in detail with a reasonable investment of time.  In this post, we’ll look at alcohol inventories and costs.  The following describes a better way.  Of course, this can be refined further, if necessary.

Use Sub-categories

You probably summarize your inventory by major categories, such as wine, beer and liquor.  Go a step further and group similar items within these categories, based on the theoretical mark-ups.  Beer may be separated into domestic, premium and draft sub-categories.  It is always a good idea to keep draft beer separate in the analysis, because it has a much different spillage factor than does bottled beer.  Liquor may be kept as a category, or you can add appropriate sub-categories, such as premium, well and regular brands.  Since liquor can be served as shots or mixed in cocktails, more detailed analyses of margins may be required.  I will cover this in a subsequent article.  Wines can be segregated by pourable wines, regular wines and premium wines.  Ideally, the distinction between regular and premium wines should be based on their standard mark-up percentages and turnover rates.  Now, count the inventory and summarize by sub-category.

Accounting System

You need to keep track of your purchases by these sub-categories.  If you maintain logs for things like, tainted stock, kitchen transfers, tasting use, you should assign costs to these items, by sub-category, and make journal entries to allocate the cost to the various expenses.  This will give you the true cost of sales related to each sub-category.  If you don’t maintain these logs, you should.

POS System

Most POS systems will provide a few useful reports.  Here are the ones you need:

1. Sales Items Report for the period, providing sales quantities and dollars, by item. 
2. Discounts Report for the period, providing quantities and dollars, by item
3. Menu Prices Report for all items sold during the period

Recipes

We need recipes to determine the theoretical (also called ideal, expected or standard) cost of each menu item.  While most POS systems will allow you to maintain recipes within the POS system, this isn’t necessary for our purposes.  Calculate the cost of each menu item, using the quantities in the recipe and the costs from the inventory list.

Sales Price Variance

For each sub-category of menu items, you should calculate the standard sales that would have been generated, had there been no discounts.  Add up the quantity of each item sold times the menu price for all items in each sub-category.  The difference between the actual sales and the standard sales for the sub-category is your sales price variance.  It is your “loss” of profit related to sales discounts (customer comps, discounts and coupons).  Only you will know whether the amount of price discounts is reasonable for your establishment.  This difference should equal the total from the Discounts Report for each sub-category.

Cost Variances

You can calculate the actual cost of sales for each sub-category using this formula:

Actual C.O.S. = Opening Inventory + Purchases – Ending Inventory (all figures in dollars)

Now, we can put it all together and calculate margins for each sub-category, and you will be able to calculate sub-category variances, which will be useful for identifying problems. 

Most POS reports can be imported or copied into Excel.  Start with the Sales Items Report, listing the menu items sold and the total sales for each item.  Sort these into the sub-categories you chose, earlier.  Alternatively, prepare a standard list of menu items and enter the quantities of each item sold during the period.

Add the recipe cost for each item.  The sum of all of the quantities sold times the recipe costs will give you the Theoretical C.O.S.  The difference between the theoretical and the actual COS is the Total Cost Variance (by sub-category). 

Now, we need to analyze the Total Cost Variance.  We can do this using the logs for Kitchen Use, Spoiled/Tainted Items and Tastings.  Each of these should be summarized by sub-category and expressed in dollars.  These represent documented causes of the Cost Variance.  There is another “normal” reason for a variance – Spillage/over-pouring.  Based on the amount you consider reasonable, for each type of pourable product, calculate the amount of variance attributable to normal spillage and over-pouring.

Putting it all together, the Total Cost Variance will be explained by each of the causes (Kitchen use, Tainted, Tastings and Spillage/Over-pouring).  The remaining variance must be caused by excessive over-pouring and theft.  If any sub-category is showing an unusually large remaining variance, there may be errors in the calculations (which should be checked again) OR you have a significant theft/over-pouring problem that needs to be addressed.

If you find significant theft or over-pouring issues in particular sub-categories, you know where you need to focus your cost control efforts.  You may wish to perform more detailed variance analyses in the future, by analyzing individual menu items, rather than sub-categories.

Bottom-Line

As we have seen, for a little bit more work than you already do, you can gain a lot of useful information to help you properly manage your costs and margins.

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Wine Cost Control

Wine inventory is different from food inventory in one very important aspect.  Wine turns over a lot slower than food.  In other words, it stays on the shelf longer.  While food must be sold quickly, or it perishes, wine often improves with age.

The size and composition of a wine list depends on the type and style of restaurant.  Higher priced, fine dining restaurants tend to have larger wine lists and include higher priced wines, while casual dining restaurants feature a smaller selection of reasonably priced labels that appeal to a larger audience.

We usually categorize wines by varietals, countries and price, and often show the wines by-the-glass separately.  This is helpful for the customer trying to make a selection, but it is much less useful to the owner/manager.  There are at least four different categories of wine, and each has its own unique profit profile and implications for analyzing costs.

Pourable Wines

Two words:  Spoilage and Over-pouring.

Most restaurants provide a reasonable selection of wines that are offered by-the-glass, especially those operations that have a separate bar.  The customer benefits by being able to try new wines, without having to buy the whole bottle, and individuals in a party are not locked in to drinking the same wine. 

Cocktails and glasses of wine are similar, in that they both involve a serving of alcohol from a bottle.  The difference is that the remaining contents of the wine bottle start to spoil as soon as the bottle is opened.  Such wines have a much higher spoilage factor than wines that are only offered by the bottle.  As the number of wines by-the-glass increases, the spoilage increases.  All open bottles of wine should be re-corked quickly and consideration should be given to employing a wine keeping system to minimize spoilage.

Offering higher priced wines by-the-glass can be risky.  These wines  tend to be ordered less often than the lower priced glass offerings.  More open bottles will become tainted.   The amount of wine that remains unsold from each bottle will tend to be higher, and of course, the cost of the tainted wine will be higher.  Often, an excellent alternative to offering high priced wines by-the-glass is to offer half-bottles instead.  Most patrons that choose high priced glasses of wine are not price conscious.  It is a fairly easy up-sell to move them to a particularly good half-bottle, which often sells for about twice the cost of a good glass of wine.  It can be an especially good choice if two people wish to enjoy the same wine.  This concept allows the restaurant to improve its wine offerings without suffering high spoilage costs.

Each pourable wine has a “recipe” for serving.  It is a simple one, but it is still a recipe, expressing the portion as 5 or 6 ounces of a particular wine.  I generally don’t generalize, but in this case I will.  All bartenders over-pour wines by-the-glass.  Maybe not every single one, but on average, they all over-pour.  Your job as the owner or manager of a restaurant is to minimize the amount of over-pouring.  You do this through proper training and strong supervision. 

Many restaurants sell a high volume of wines by-the-glass.  A small amount of over-pouring results in very significant losses over the course of a year, and these losses fall straight to the bottom-line. 

These wines tend to have similar gross margin percentages, so mix changes will not have much of an effect on margins for this category.

Regular Wines

Customers like variety, so they have as many choices as possible.  While these wines do not involve losses from over-pouring, there is a greater potential for theft, as they sit on the shelf for a longer period of time.  Many of these lower volume bottles are more likely to be “corked” or otherwise tainted, especially if they are improperly stored.

The owner/manager needs to balance the customer’s desire for selection with the inventory cost.  Each wine added to the wine list requires an investment in the stock of wine.  Many wines, especially those purchased from agents, must be purchased in case lots.  If you’re lucky, a case will only  be six bottles.  Most are in cases of 12.  These types of wines, with costs ranging between $10 and $25 per bottle involve an investment of $120 to $300 for each wine on the list.  Given the number of varietals, countries and price ranges, the inventory cost can be very significant, and with a greater number of wine bottles comes a higher risk of theft.

These wines tend to have similar mark-up percentages, so changes in the sales mix within this group will not affect overall margins significantly.

Premium Wines

Many wine lists include a few higher priced wines that appeal to well-heeled clientele and wine aficionados.  These are important for attracting and keeping such clients, but again, they come at a high cost.  These wines can involve individual inventory investments in the hundreds of dollars.  Such wines are more likely to become tainted, because they will sit on a shelf for much longer periods than will the regular wines.

Corked wines may be returned to the vendor for credit, but “cooked” wines (tainted from improper storage) are your cost and can take a hit out of the bottom-line.  If one bottle of wine is tainted through improper storage, there are likely many more that were stored nearby.  One mistake can have a very large cost.

These wines will have a wide range of mark-up percentages.  Generally, the higher priced the wine, the lower the mark-up percentage.  However, investment wines that enter the wine menu may have higher mark-up percentages.  Measuring the theoretical wine cost for these wines requires that the sales mix be taken into account. 

Investment Wines

These wines are similar to the premium wines, except that they are purchased for ageing.  The expectation is that the wines will improve with cellaring and become rarer commodities, which will command higher prices and greatly enhanced profit margins. 

The higher priced the wine and the greater importance of ageing means an even larger investment in wine storage.  Typically, these wines require a constant, climate-controlled environment.  Failing to maintain a proper storage environment may turn a potentially great wine into expensive vinegar. 

Some of these wines are held in storage for years before becoming drinkable.  It is especially important to maintain proper security, so that there is no “shrinkage” during the ageing process.  These wines will be included in the inventory, but will not have any impact on the wine gross margin until they start selling, at which time they should be treated like premium wines.

 

The Bottom-line

Grouping all wines together to analyze mark-ups will not be particularly useful.  Spoilage and over-pouring in pouring wines will be hidden by the volume of bottle sales.  Changes in the sales mix of all categories and within the premium wine sub-category will distort the mark-up percentage from one period to the next.  If you don’t take the sales mix into account, cost problems are likely to go unnoticed and continue to be problems.  Investment wines should be excluded from the cost analysis until they are put on the wine list and made available for sale.

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