Restaurant Accounting: For Profit's Sake, Inventory Your Food Cost!

The food is great, the service fabulous and the restaurant is busier than ever - but are you wondering why the bottom line isn't all it should be?

Check your FOOD COST. A vital ratio - key to the success of any restaurant as it directly impacts profitability. A profitable restaurant typically generates a 28%-35% food cost. Coupled with labor costs, these expenses consume 50%-75% of total sales. Because of the impact food cost makes on an operation, food cost is one of the first things we examine at a troubled property. Beyond the bottom line, food cost also reflects an operation's food quality, value provided to the customer, and management skill level.
Despite its importance, we find many restaurant managers do not calculate food cost correctly, or if they do, they do not fully understand the process. To be useful, food cost percentages must be determined accurately. Then the ratio can be compared to industry averages and previous performance. With an accurate food cost, steps can be taken to improve the operation and ultimately improve the bottom line. The following is a step-by-step method for calculating food cost including an example and a worksheet to figure your own food cost.

CALCULATING FOOD COST
Keeping in mind you want to eventually compare your food cost with industry averages, how you determine the numbers must be consistent with industry practices. The industry standard is based on the Uniform System of Accounts for Restaurants (a handbook available from the National Restaurant Association). This system clearly identifies what items are included in each part of the food cost formula and IS briefly outlined below.

Food Cost = Cost of Food Sales / Food Sales

GENERAL GUIDELINES

• Establish a specific time period for analysis. The food sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days.
• Juices, coffee, soda supplies and other non-alcoholic beverage sales are included in food cost calculations.

STEP BY STEP - CALCULATING FOOD COST

1. TIME FRAME
   Working with your accountant and managers, set up a regular time frame to analyze food cost. It is critical that the elements of the food cost calculation (sales, inventories and purchases) are representative of this time period.
2. FOOD SALES
   This is the relatively easy part - total the customer checks or reports from point-of-sale registers making sure to only include sales generated from food sources (sources other than food should be allocated to a "beverage" or "other income" account). Remember to use sales generated only within the allotted time frame.
   
   Example: Food Sales (+ Juice, Soda, etc.) $1,850
3. COST OF FOOD SALES The costs associated with food sales are comprised of purchases and inventory level adjustments. In our experience, this part of the calculation is often computed incorrectly. Determining the amount of purchases for the time period is straight-forward:
   
   Total all food purchases (include delivery charges and non-alcoholic beverages). Example: Food Purchases in past 28 days $500
   
   Equally important, and often not included in determining cost of food sales, is the inventory adjustment. Many restaurants consider only purchases in determining food cost. This does not create an accurate food cost percentage - depending on the day purchases are made and what the cut-off date is for including sales in the food cost calculation, your food cost could appear 5 to 6 points higher or lower than it is. Additionally, this discrepancy makes it difficult to compare and track food costs.
   
   For example, suppose you receive (purchase) all your dairy and meat products on Thursday to prepare for the weekend. The time period for determining food cost ends on Friday (the next day). In calculating your food cost, it appears much higher than last month. While the increase may be due to theft or another operational issue, most likely it is due to calculating your food cost inconsistently and incorrectly. Your purchases reflect a large Thursday delivery, however, you do not log the sales from the weekend to offset these purchases, making your food cost appear out of line. Additionally, you have not factored in the inventory adjustment.
   
   Determine Inventory Adjustment
   Realizing the time and energy that counting inventory on the line (in "production") is prohibitive to including inventory in food cost calculations, we recommend estimating a production inventory level. Conduct the inventory of the dining room, service and production areas a few times, average the inventory levels and use that constant figure each time period. Add the estimated figure to the physically counted storeroom inventories each period for your ending inventory. It is important to update the production inventory level at least once a year.
   
   Now that you have your ending period inventory level, look at the change from your beginning (start of time period) inventories (kitchen and storerooms). The key to accurate cost determination is understanding the role inventory levels play. For example, if the beginning inventory level is valued at $100 and four weeks later the ending inventory for the period is valued at $75, the inventory adjustment is the $25 difference - an increase in cost of food sales because you used $25 worth of inventory and did not replace it with new purchases.
   
   Considering this change and its effect on cost of food sales, apply the difference to the total purchases for the time period, giving you the total cost of food sales.
   
   Cost of Food Sales = Purchases +/- Inventory Adjustment
   (ADD if Beginning Inventory > Ending Inventory,
   SUBTRACT if Beginning Inventory < Ending Inventory)
   
   Example:
   Purchases $500
   Beginning Inventory $750
   Ending Inventory $625
   = $500 + $125
   = $625 Cost of Food Sales
   
4. FOOD COST PERCENTAGE The final step - putting the numbers together!
   
   Food Cost = Cost of Food Sales / Food Sales
   
   Example Food Cost = $625 /$1,850 = 33.8% 

Now you have the basic steps to complete your own food cost accurately and consistently with industry practices. Following is a form to assist you in the calculation.

CALCULATING YOUR RESTAURANT'S FOOD COST

TIME FRAME:
Start Date_______End Date_______

FOOD SALES (including coffee, juices and non-alcoholic beverages): A._______

COST OF FOOD SALES:
Food Purchases (including non-alcoholic beverages):_______
Inventory Adjustment:
Beginning Inventory_______
Ending Inventory_______
Difference_______B._______


Food Cost = Cost of Food Sales / Food Sales

FOOD COST =
Line B / Line A =_______=_______%

ANALYZING YOUR FOOD COST
WHAT SHOULD BE YOUR FOOD COST PERCENTAGE? Ron Gorodesky, President of RAS, maintains that successful restaurants generate food costs in the low to mid 30's. However, different types of restaurants typically run higher or lower percentages - steak houses may run up to 40% whereas Italian restaurants may run about 28%. Comparing your cost percentage to restaurants with similar menus and service levels provides a more accurate perspective.

For example, the average food cost is 35.7% for American/Regional menu themed restaurants and 32.0% for a restaurant in a multi-unit organization.

HOW CAN YOU USE YOUR FOOD COST PERCENTAGE? The next step requires compiling the sales and costs consistently and regularly, as comparisons to previous performance can prove very helpful, identifying problems and trends - remembering that a decrease in food cost is as important to investigate as an increase. From here, your operation is positioned to tighten their food costs by standardizing recipes, evaluating purchasing systems and taking other steps to create a target food cost for your particular restaurant - with the ultimate goal of positively impacting your bottom line. So, For Profit's Sake, Inventory Your Food Cost! 

Leadership Exercises to Encourage Employee Development

Studies have found a correlation between employee engagement and organizational output, leading many forward-looking companies to invest in methods of engagement through interpersonal activity when attempting to encourage employee development.

These leadership exercises – also known as training games – enable both managers and supervisors to experientially learn and understand the values of facilitative leadership, either as individuals or as a team. Ideal for use in training sessions, meetings, workshops, seminars or conferences, leadership exercises offer the added benefit of enhancing business projects as well as providing pre-defined business outputs that lead to direct organizational benefits.

There are a number of types of exercises and each one targets a specific area of leadership. Popular categories include:

• Motivation: This category enables participants to understand the situations that motivate team members as well as the individual practices. Often defining the approach a new leader should follow, these exercises center on the leader’s attitude.
• Change Implementation: Providing insight related to behavior within a team dynamic, this category attempts to provide team members tools for success during periods of restructuring through strategies arising from problems that occur during the process. These exercises establish clear objectives to achieve success and an individual will often have to take notes on the task and then reiterate them to the team as part of the exercise.
• Clear communication: As the name implies, the exercises that fall into this category revolve around achieving a target which is bound to fail if not properly communicated.

A Sample Exercise to Get You Started

Getting your group to work together as a team is crucial for effective management. And few exercises are more instructive (and fun) than tying people together – literally – and giving them a problem to solve.

For this leadership exercise, you’ll need the following:

• Materials: Rope, bandanas or cloth strips; additional supplies for specific task
• Time: 15-30 minutes, depending on the goal and number of group members
• Group Size: 2-15

The purpose of this exercise is to get your group to work together to achieve a common task. To begin, arrange all participants in a circle and have them face each other. Next, ask them to hold out their arms. Then tie the entire group together (while standing in a circle) so that each person is tied to both neighbor’s wrists. Doing so should prevent anyone from having a “free” arm. After tying up the group, assign a task. Ideas could include:

• Make root beer floats for everyone
• Wrap a package with gift wrap, bows and a signed card
• Prepare a snack
• Eat a meal
• Create a painting, clay sculpture or similar art project
• Pour a cup of water for each person in the group and then have each person drink their cup

This is a great exercise for retreats or other opportunities that would allow people to dress-down, thereby preventing ruined clothing. And if you really want to add an air of challenge, impose a time limit, offering rewards to the team that accomplishes their goal before other teams or within a certain time limit.

As with any leadership exercise, the goal is to enhance individual and team skill. So after each exercise, ask questions to generate discussion related to areas of success as well as those that need improvement. Questions might include:

1. Why were you successful at completing the task?
2. How did the time restrictions aid or hinder your group?
3. Did everyone in the group participate in achieving the goal?
4. If someone didn’t help, how did that affect the outcome?
5. Do you ever feel “tied up” with someone you work with? If so, why, and how did you deal with this feeling?

Implementing a Leadership Development Program for Your Business

Leadership development is a systematic approach to expanding the performance capability of individuals in leadership roles within your organization. And like any approach, it’s not achieved through a single stage or step but rather through a journey. This journey is the process of leadership development.

There is no single best way to lead. And there are a wide variety of leadership models that may each serve as well as the next. However, the systematic approach to leadership development has proven successful for many companies, working toward a set of preferred outcomes through a broad range of approaches to thought leadership. Unlike other approaches, it takes into account the differing expectations of leaders as well as unique organizational practices to create a system that allows them (and the organization as a whole) to function at peak efficiency.

Developing the Leaders Through Business Insight

Leadership roles are those positions within an organization that advance the implementation of business strategy by building alignments, winning mindshare and growing the capabilities of all employees. These roles may be formal, allowing the manager to make decisions and take responsibility, or informal, possessing little official authority while still holding a level of influence among co-workers and peers, like a team leader or similar lateral peer who listens and negotiates through interpersonal influence.

Therefore the practices of leadership development can extend to any individual that fits this supervisorial definition – practices that often consist of the following activities:

Core Competency Mapping

A clear understanding of the components related to effective leadership for management positions is crucial for effective succession planning. Therefore, a thorough competency map can be extremely useful to the members of your organization when they’re trying to determine where to focus their development efforts. Mapping leadership attributes also helps you identify and understand the specific leadership behaviors entailed in each organizational competency. This understanding will allow you to easily asses and develop your leadership candidates using the appropriate attributes.

Individual and Organizational Assessment

provides a comprehensive 360-degree assessment to inform individual managers and supervisors about their specific leadership attributes, focusing on both strengths and weaknesses. In addition, it’s vital for leaders to understand the organization and context within which they lead. So this stage should also include the specifics of how the organization provides value to its customers, the organization’s unique culture and how the leader is expected to function within the organization.

Leadership Development Plan and Training

leaders collaborate with upper management on a preliminary plan related to his or her individual development, documenting goals and any foreseeable obstacles that would impede success. You may then provide in-house or external workshops to teach the basics of leadership in a utility organization, focusing specifically on your organization’s particular values.

As Aristotle once said, “we learn by doing.” And experiential learning has been shown to provide the greatest rate of success for transforming potential candidates into high-functioning leaders. Within this process, emerging leaders are provided the opportunity to develop their aptitude and proficiency, enabling them to build their level of leadership competence in a safe environment, typically outside the presence of subordinates.

One popular method of providing this type of leadership development is the offering of mentorship to leadership trainees.

Principles of Creative Leadership

When properly managed, creativity can be found in any employee, regardless of the job description. On the whole, creative people typically fall into a variety of categories, ranging from those who are quick and dramatic to people who are careful and quiet. But one thing remains true of all: most creative ideas are not flashes of inspiration in an individual’s head but rather come from how people identify, create, store, share and use the knowledge they’re exposed to in their surrounding environment.

And fostering that environment (not the act of creativity itself) is the task of creative leadership.

Defining Creativity

According to the Snowflake Model of Creativity, developed by Professor David Perkins of Harvard University, there are six common traits present in creative people:

1. Strong commitment to personal aesthetics
2. Ability to excel in finding solutions
3. Mental mobility
4. Willingness to take risks (and the ability to accept failure)
5. Objectivity
6. Inner motivation

The first three traits are largely cognitive and the last three refer to aspects of personality. As none of the six are viewed to be genetically inherited, Perkins argues that creativity can be taught and, as it relates to modern business, cultivated.

Managing Creative People

Managing for creativity and innovation differs slightly from other methods of management due to the level of freedom employees are given in comparison to those in other job functions. But like any other process, managing creative functions must strike a balance between employees, clients, audiences and partners, achieving satisfaction between all involved for it to be effective.

This balancing act is reportedly achieved by employing five distinct leadership tools to stimulate the creative mind that include: the amount of challenge given to personnel, the degree of freedom granted to minimize hassles related to procedures and processes, the design of work groups to tap ideas from all employees, the level of encouragement and incentives provided (including rewards and recognition), and the nature of support provided by the organization as a whole. It goes without saying, but managers must be motivated themselves to achieve a peak outcome.

Fostering a Creative Environment

One of the key components mentioned above is encouragement. In fact, if you really stop and analyze each of the leadership tools mentioned, they all boil down to one basic function: support. And since creativity springs from a highly personal reaction to one’s environment, it’s the leader’s task to create an environment that fosters creativity. To do so:

• Organize regular team brainstorming sessions, allowing employees to produce a high quantity of ideas, regardless of whether they’re immediately viable or not. Once you’ve amassed a large pool of potential ideas, analyze and select those of the highest quality and move forward with them.
• Establish a positive and continuously-reinforced work environment. When employees realize their ideas are not only encouraged but accepted, they’ll naturally tend to think more creatively, which will lead to the potential for innovation in your products or services.
• Build a collaborative work environment. Do this by tearing down walls and barriers. Creativity and innovation often stem from employees working in close proximity toward a common goal. You can create an open channel of communication between employees (or departments) by rewarding those who work together on solving problems.
• Encourage risk taking. The thing that kills creativity the fastest is fear. Your team won’t be creative or innovative if they think their actions may result in failure (and a potential backlash from management). So foster a working environment that rewards success and learns from failure but does not penalize for it. And above all, don’t assign blame.

Tips for Maximizing Employee Potential

As a manager, maximizing employee potential should be one of your top priorities. Disgruntled, idle workers who do the bare minimum are dead weight for your company. Each employee you hire should be considered an investment in the company. Being able to push your employees to the maximum potential (without breaking them, of course) will enhance your entire company’s productivity and efficiency. Here are some ideas to help your workers be the best that they can be – and not hate you in the process.

Hire the Right People

First and foremost, recruit the right people! This seems simple and silly, but more often than not employers choose the safe choice – the middle of the pack applicant that won’t stir up trouble. Applicants who are too opinionated or have “too much personality” are often nixed from the list of potential hires due to their unpredictability. This would be a huge mistake – often these individuals possess leadership characteristics which would enhance your workforce.

Identify Existing Skills and Areas for Potential

From your workforce, you should assess individual potential. Maybe your data entry grunt actually has skills in other areas, such as product design or technical writing. Get to know your employees, their past experiences and their interests. Often times, an unhappy employee is simply a bored one, stuck in an unchallenging and unfulfilling post. Maybe a certain employee doesn’t have outside skills, but has such a mastery of their job that they can be given the responsibility of training new hires. Or maybe they have outside skills that can be pursued in their free time – for example, search giant Google used to require that its programmers set aside 20% of their time on personal pet projects, in an effort to foster creativity. You can even rotate employees between positions to insure that everyone understands the different jobs at your company, so they can substitute each others’ jobs, if need be.

Understand if your employees are natural leaders, followers or innovators. If there are a few cogs that are getting stuck, such as irreparably disgruntled employees, these toxic employees will have to be removed from the equation to insure smooth operations.

Nurture and develop talent in house. If you followed the steps above you should have a good idea of who your future leaders will be. Train them continuously, and have them train others. These prospective leaders should also be aware of your intentions to promote them. Let them know that you have your eye on them, to keep them competitive and vying for your attention. Reward these employees generously in the form of awards, bonuses of more flexible work hours. Give them recognition and make them feel like an integral, irreplaceable part of the company. These are the employees you want to pass along professional information and contacts to, in hopes that they will one day rise to a management position. Allow these employees to organize and lead company events in your place.

Consistent Performance Reviews & Feedback

Stay up to date with appraisals and feedback. Employees need to be thoroughly and continuously evaluated – not only when they are up for a raise. Set up a fair rating system – efficiency, punctuality, teamwork, attitude – and discuss the results with them after each appraisal. At each appraisal, have the employee set his or her goals for the next appraisal, which will be subsequently gauged. This keeps employees aware of their own goals, and if they stayed their original course or strayed from it. If they stay with it, reward them – if they strayed off the path, remind them of their preset goals.

In addition, require employees to take risks. You don’t want employees who will always play it safe, or act as yes men. Reward employees who take risks and attempt to think outside the box, even if they fail, since this is a hallmark of a true leader.

Now, if you have non-performing employees, even after encouragement, it may be time to part ways. Clearly warn and let go of these employees for non-performance. There’s no point in subtlety here if you want to maximize your employees’ overall performance. Make it clear to other employees that the employee was let go because they failed to improve or contribute to the workplace.

These ideas should get you better in tune with maximizing employee potential, and as a result, make you a better manager!

Effective Ways to Foster Innovation

Employee creativity and innovation are essential for the success of any business, particularly in times of economic turmoil. There is a clear connection between employee engagement and innovation according to a 2006 Gallup poll. Engaged employees are more creative and more willing to accept innovative ideas from others. Most CEOs value creativity, and employees who are allowed to be creative are more engaged with their current positions. A company’s culture can either foster or stifle innovation. Fortunately, business leaders are able to shape a more creative work environment if they follow a few basic guidelines.

Maintain an open dialogue between employees and upper management

Dialogue will effectively motivate and engage employees. Always allow employees to present their ideas before important decisions are made. Provide feedback to employees, even when their ideas are not used, so that they know that they are not being dismissed.

Encourage communication between departments: Collaboration between

members of different departments often results in creative solutions for problems. Interdepartmental communication facilitates trust and prevents conflict. Departments that do not communicate are more likely to blame each other when problems arise.

Organize brainstorming sessions

IBM has found the innovation jam to be quite successful. Since 2001, jams have allowed hundreds of thousands of IBM employees around the world to connect and come up with innovative solutions for company problems. You do not need to run a global enterprise to benefit from companywide collaboration. Give your employees regular opportunities to bounce ideas off each other.

Engage employees by encouraging them to share creative ideas

Do notlimit creativity to special occasions. Employees should be encouraged to continually share their ideas with supervisors and each other. Find the most effective method of communication for your organization. You may want to create a type of suggestion box or schedule time at the end of meetings for people to share their ideas.

Do not force people to be innovative

Creativity can be encouraged but not compelled. Forcing people to present creative ideas at certain times will not bring true innovation. Rather, create a number of different incentives to draw out creativity. Innovative ideas could be rewarded financially, with opportunities for advancement or any other incentive you have found effective for your employee base.

Remain flexible and forgiving

Inflexible environments discourage innovation. Innovation often involves taking risks. Encourage employees to think outside the box and implement ideas without interference. Additionally, do not punish employees if ideas are unsuccessful. Employees who are punished for taking risks serve as a warning to others against being creative or innovative.

Keep track of company innovations

Many leaders in upper management lose interest in supporting creativity and innovation because they do not bother to keep track of past innovations. Knowing how many employee innovations have been implemented and how successful they are, presents a clear picture of the financial benefits of employee creativity. Keeping track of innovations will also indicate whether any alterations need to be made to recently implemented programs or the company culture.

Creativity and Innovation in the Workplace

There was a time when the concept of creativity was only associated with writers, painters, musicians and similar people in artistic professions. But with the ever-increasing necessity of cultivating a unique brand personality, the need for creative thinking has transitioned from the arts into everyday business. In addition, the act of producing a product that distinguishes itself from competitors in a marketplace where differences are often hard to come by demands a high degree of creativity both in innovation and marketing.

As a result, it’s now become commonplace for companies – both large and small – to adopt policies that foster creativity and thereby promote innovation.

But what is meant by creativity? And how can it be harnessed effectively?

Defining the Creative Environment

Creativity is the mental and social process used to generate ideas, concepts and associations that lead to the exploitation of new ideas. Or to put it simply: innovation. Through the creative process, employees are tasked with exploring the profitable outcome of an existing or potential endeavor, which typically involves generating and applying alternative options to a company’s products, services and procedures through the use of conscious or unconscious insight. This creative insight is the direct result of the diversity of the team – specifically, individuals who possess different attributes and perspectives.

It’s important to note that innovation is usually not a naturally-occurring phenomenon. Like a plant, it requires the proper nutrients to flourish, including effective strategies and frameworks that promote divergent levels of thinking. For example, by supporting an open exchange of ideas among employees at all levels, organizations are able to inspire personnel and maintain innovative workplaces.

Therefore supervisors must manage for the creative process and not attempt to manage the creativity itself, as creativity typically does not occur exclusively in an individual’s head but is the result of interaction with a social context where it’s codified, interpreted and assimilated into something new. Within this system, incentives are paramount – ranging from tangible rewards such as monetary compensation to the intangible, including personal satisfaction and social entrepreneurship.

How to Set Up a Creative Work Space to Foster Innovation

Establishing a creative environment takes more than just turning your employees loose and giving them free reign in the hope they’ll hit on something valuable. As with any other system, the process of creativity requires the proper framework to operate effectively, which also enables management to evaluate the profitability of the results.

Popular approaches to fostering innovation through creativity include:

• Create a stimulating environment. Offices that include stimulating objects such as journals, art, games and other items – some of which may not even be directly related to your business – serve as sources of inspiration. In addition, structuring the work area by removing physical barriers between people will improve communication and promote creative interaction.
• Reward efforts through positive psychological reinforcement. Encourage your employees to take risks, rewarding them for creative ideas and not penalizing them when they fail. In doing so, you’ll enable people to more readily take on assignments that stretch their potential (and that of your organization), discussing in advance any foreseeable risks and creating the necessary contingency plan. Encourage employees at all levels to contribute suggestions for improving current business operations.
• Foster different points of view through outside perspectives. Innovation can often spring from a review of how your customers view and use your products and services. Soliciting their opinions can provide valuable insight into potential areas for improvement as well as areas where you’re succeeding (essential knowledge for positioning against competitors). Other perspectives might include: vendors, speakers from other industries or consumers using a competitor’s products or services.