How Four Overlooked Numbers Cost You Money

By  David Scott Peters

As an Assistant Manager of a full-service restaurant and  bar, I was taught how to complete the standard Cost of Goods Sold calculation, the same calculation every new manager is shown: Beginning inventory plus purchases equals total available. Total available minus ending inventory equals total product used. Total product used divided by sales equals Cost of Goods Sold percentage.

That was easy to master, but I had a challenge. As I climbed the ranks of management into an operations role, my kitchen managers were creating good numbers on paper, but our bank account did not reflect those positive numbers. And I learned quickly that profits on paper do not pay the bills; CASH PAYS THE BILLS.

I learned to look deeper into the Cost of Goods Sold calculations to take back control of the checking account and improve the bottom line.

Looking Deeper

The basic Cost of Goods Sold calculation is where most management stops. I discovered that there was more analysis to be done when we were rewarding managers for achieving numbers, yet we didn't necessarily have the dollars in the bank to reward them with. Let me share with you four additional numbers you must look at that allow you to drill down deeper into the numbers. They are Average Inventory, Inventory Turns, Change in Inventory and Budget Variance.

    A. Average Inventory. This is the average dollar value in inventory you carry any day during a given period. This is vital to being able to measure how efficient your managers are with product and your bank account. Why? I will shed some light on that next.

    B. Inventory Turns. This is how many times the dry storage and walk-in shelves were stripped clear of product and then re-stocked. In real-world terms, when we refer to an inventory turn, we are really referring to the number of times the dollar value on the shelves turns. The benefit is that this number measures how efficient a store is with its cash and inventory.

    C. Change in Inventory. This is how efficiently your store has been ordering product. This number is important, just as inventory turns are, because it clearly represents how much cash you have either freed up or tied up on your shelves.

    D. Budget Variance: These numbers show how close your store came to achieving its goals. Without a target you will be unable to quantify performance. These numbers will allow you to better interpret how your store performed in a given period.

In the table below, I will show you how all of these numbers can come together to give you a crystal ball to see how you are doing. Then you can eliminate circumstances where you can be taken advantage of and recognize opportunities to put cash back into the bank.

Cost of Goods Sold - Food Cost Example

You can see that four additional calculations have been added to bring new facts to light. These facts will demonstrate how at first glance we might think that the Kitchen Manager is doing a great job and may be entitled to a bonus, but looking deeper shows that the KM has made it difficult to make payroll and should not receive that bonus.

We can see from the standard calculation that the KM has come pretty close to hitting the targeted food cost percentage budgeted for. He has achieved a 30.61% vs. the budgeted 30%. The KM might even say, "I'm only .61% off budget." And at first you might say, "You're right, it's not a big deal." But let's look at the numbers deeper.

While the food cost percentage was close to our target and is very close to last month's food cost percentage, our inventory turns are not hitting the minimum 4 to 6 turns desired. This means we have too much food on our shelves. Our change in inventory shows that we added $3,222.80 in product to our shelves. That might mean the difference in making payroll. Remember, cash pays the bills, profits don't! Then we see that .61% means that we wasted $385.89 worth of product. So due to poor management of our restaurant and this controllable expense, we had a negative impact of $3,608.77 in our bank account. And without looking at the four additional numbers, we might have rewarded our KM - even though he actually mismanaged our money.

The Facts

You should have learned that the standard Cost of Goods Sold calculation alone, while important, can get you into trouble with a false sense of well being. A light bulb should have gone off in your head. You should no longer stop with the standard calculation. From here on out, you know what to look for and will be able to take steps to not only make your numbers, but increase your operating efficiency to create a larger bank account, from which you can pay your bills or maybe even yourself.

David Scott Peters is the founder of Smile Button Enterprises, LLC, a hospitality systems consulting firm that trains restaurant owners and managers on the appropriate skill sets and SMART Systems-those that are Simple, Measurable, Applicable, Repeatable and Trainable-to realize their dreams in the competitive restaurant business. David can be contacted at david@smilebutton.com.

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