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RIHA Column: Optimizing Your Profit Margin

Dale J. Venturini, President and CEO of Rhode Island Hospitality Industry Association.

Dale J. Venturini, President and CEO of Rhode Island Hospitality Industry Association.

By Dale J. Venturini, President & CEO, RI Hospitality Foundation

A truly successful restaurant or food-service operation is constantly monitoring its costs and profit margin with a fine-toothed comb, being nimble enough to adjust as necessary. Profit margin can be affected by many variables including rising food and labor costs, taxes and, of course, the economy.

A restaurant owner must take several factors into consideration when calculating profit margin, including the prime cost of meals that factors in labor costs, supplies and general food and alcohol costs; general operational fixed and noncontrollable expenses like utilities, insurance and maintenance; and its capitalization costs, which include depreciation, interest and amortization.

Although it is clear that restaurant operators have a fair amount of expenses to keep track of, food cost is the most controllable. When a restaurant does not make a fair profit on the food it sells, the business can be negatively impacted.

In the United States, true food cost is often determined by the percentage of total restaurant sales involving food product – a number that should float around 28-32% to remain profitable. Calculating food costs should be easy for all intents and purposes: If you sell a 32-ounce Tomahawk Steak for $100 and it cost you $30 to prepare, which includes all of the dish’s ingredients, your “food cost” for that particular meal is 30%. It is imperative that restaurant operators are aware of what each plate costs them, that way they can correctly price the dish to ensure a profit is made.

When calculating food costs, which should be done on a monthly basis, you will need to know food sales, food purchases and food inventory for the month. First, you will total all food sales for the month. Next, you will identify your food sales cost, which includes purchases and changes in inventory. To determine the food-cost percentage, the final step requires you to divide your restaurant’s food cost by food sales. As I stated earlier, an ideal average food-cost percentage for operating successfully should be at or below 30%.

Restaurants in the United States waste a lot of food; so much in fact, that the average restaurant can throw away 25,000 to 75,000 pounds of food waste a year depending on the size of the business. Taking steps to limit food waste can prove to be beneficial and cost-effective for restaurant operators, leading to decreased disposal costs and streamlined back-of-the-house operations.

There are many techniques that can be utilized to reduce a restaurant’s bottom line – from practicing more detailed inventory management, to spending more time planning and analyzing product need, to reworking menu items, portion sizes or cross utilization to reduce food cost.

The Rhode Island Hospitality Association (RIHA) periodically offers a National Restaurant Association (NRA) certified training course entitled “ManageFirst: Controlling Foodservice Costs.” This course is designed to help businesses learn how to calculate food costs, determine menu prices, as well as control labor and other business-related costs.

Additionally, RIHA has a food-cost workbook available to members for purchase upon request. No restaurant should be losing out on potential revenue due to mismanagement, inadequate food-cost analysis or inaccurate menu pricing.

Contact RIHA directly at 401-223-1120 to learn more about how we can help you manage your food costs to ensure your business’ optimal operational performance.

Dale J. Venturini is the President & CEO of Rhode Island Hospitality Association. A veteran of more than 25 years in the hospitality industry, Venturini is considered by many to be the voice of the industry in the state of Rhode Island. She has been instrumental in improving the industry’s educational and training programs in the state, as well as enhancing the bottom line of the business she represents. Venturini splits her time between the office and the State House, a constant presence for her membership.

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