Your Cash Flow

Financial Managament

Restaurant Management 101: Understanding Restaurant Overhead
    Your overhead includes all of the indirect (non-food related) costs associated with running your restaurant. (This means that overhead doesn’t include the actual costs associated with food production itself, such as inventory, as they are deemed “direct costs.”)

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Determine Your Overhead

  • Property costs. If you rent or lease your restaurant space: the whole dollar amount. If you own your property: only the interest, as the principal payment itself will be a depreciation expense you may claim on your taxes.
  • The salaries of your workers.
  • Administrative costs, such as repairs to your building, parking rentals, food trucks, custodial services, and accounting and consulting fees.
  • Any items that aren’t directly used for food production, such as cleaning supplies and dishwashing detergent.
  • Utilities, including internet service.
  • Monthly point of sale costs.
  • Any paid advertising.
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    Cost of Goods Sold (COGS)

    COGS = Starting Inventory + Purchases – Ending Inventory

    To start, look at your inventory at the beginning of the specific period you’d like to measure. Typically this will be the end of your month or quarter. Then, add the inventory you purchased over the course of the month or quarter. Finally, subtract what you have left now that the month or quarter is over. The resulting number is your cost of goods sold.

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    Calculating Restaurant Gross Profit
      Your restaurant’s gross profit is the amount of money you made after you take out the cost of producing your menu items. You can use this simple equation to assess how efficiently you are using inventory and staff and, from there, decide if you need to make any changes to your operations in order to improve your numbers.

      Gross Profit = Total Sales – COGS

      To start, take the total sales for the period in question. Again, this will probably be the end of a month or a quarter. Subtract your COGS.

      The resulting number will be your gross profit. This figure can now be taken a step further to calculate your net income.

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    Your Total Money
    Net Income

    Net income is the total amount of money you’ve made over the last month. This is your profit after overhead, taxes and expenses have taken their cut. The equation is useful in determining your overall success as a restaurateur. It’s important to note that many restaurants won’t start showing a positive net income for the first year after opening.

    Net Income = Gross income – Total Expenses

    First, total all of your expenses for the month, including payroll, overhead and inventory. Then, subtract the total expenses from your gross income. The resulting number is your net income.

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    Net Income / Sales

    Profit margin is the percentage of money you’ve made based on how much you’ve invested in your restaurant for the month. A 30-percent profit margin means that for every dollar you’ve put in, you’ve made an additional 30 cents. Profit Margin = Net Income / Sales Calculate your net income. Divide your net income by your total sales. This resulting decimal number is your profit margin. Multiply it by 100 to get a percentage. (0.05 x 100 = 5% return on investment, or a 5% profit margin) There you have it! The five things you need to calculate in order to have a solid understanding of your restaurant’s financial situation. As we said before, this list is hardly exhaustive, but it’s a great place to start. If you can, it’s almost always worth the investment to hire a pro at the beginning. Once you see how financial plans are made and how restaurant financial calculations are done, you can eventually take over and do it yourself with the knowledge that you’re definitely doing it right, which is invaluable because these numbers matter—a lot.

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