A common business trend over the past couple of years, due to the sluggish economy, is that many profitable businesses watched their annual revenue drop….some quite a bit.  The result for many companies was a hard look at their financial statements and operations to see if they could function more efficiently and maintain profitability with lower sales.

In the restaurant industry, the ability to effectively improve the management of food and labor costs (a.k.a. prime costs) is a huge key to maintaining that profitability. Even with lower sales revenues, the improvement in the management of prime costs could actually result in an increase in the bottom line.  We have seen it happen.  It’s unfortunate that operations are not regularly analyzed in better economic conditions.  Imagine what that could do to your profitability without reduced sales.

A decrease in sales revenue is naturally followed by a corresponding decrease in food and labor costs. However, if prime costs can be decreased at a higher rate than the decrease in revenue, then gross profits can improve.  There are a number of things that you can do to improve these costs.  Prime costs need to be analyzed as a percentage of revenue rather than simply looking at them as a dollar cost.  Financial analysis should be performed during both good and poor economic times. The following is a simple taste of some financial and operational analysis, beyond the prime costs, that should be performed throughout the year:

 1)      Recipe Costing – The cost of menu items should be accurately determined to allow for profitable price determination. Recipe costs should be updated periodically to reflect changing food costs…but don’t lose sight of the market price for your product.

2)      Menu item profitability – Analysis of historical sales by menu item is useful to identify which menu items are major contributors to the restaurant’s profit.  Such information will help determine which menu items should be promoted and which you may want to drop.

3)      Menu Engineering – Menu layout should be analyzed.  Studies show that people often remember the first two items or the last menu item in each menu category.  Strategically positioning the items you want to move can improve the bottom line.

4)      Have you considered:

• • • • Trend analysis
      • Accounting controls
      • Inventory controls
      • Comparison of your actual performance with industry benchmarks

Don’t be complacent in the good times, be sure to regularly analyze your business regardless of the state of the economy.