Some Financial Tips For Restaurants
At Deion Associates & Strategies, Inc., we recently had the opportunity to review the finances and operation of a family style restaurant with full bar service. They were experiencing a decline in revenues and profits and engaged us to look at various aspects of the business to identify possible causes and recommend solutions.
Our initial assessment revealed that the location, parking, interior and exterior venue and appearance were excellent. Additionally, the market demographics for this type of restaurant were positive as well. A review of the food quality was above normal, but we did notice that the portions being served were larger than normal. Also, the prices being charged had not been adjusted in years to deal with increased food costs. The bar service (they had 2 locations within the facility) were adequately designed to provide for efficient service. The POS system being used was state of the art and provided for ease of use by the staff. The kitchen design was moderately outmoded, but manageable. The staff and wait staff were knowledgeable about the menu, were courteous and efficient.
Our observations resulted in some basic issue areas which we provided recommendations for.
Food Pricing:
Management had indicated that their food costs were much higher than industry standards. An analysis of their food costs was conducted which revealed a rather low waste factor. But, since pricing had not been reviewed in a number of years, a basic analysis of food costs was performed and it became evident that many of their menu prices needed to be increased. A comparative analysis of local competitors also revealed that they were drastically underpriced. This problem was even more exacerbated for food items such as steak, meat, fresh fish, prime rib, veal, lobster, shrimp, shell fish and fresh produce. All of these items have experienced massive cost increases over the past few years, and a failure to adjust pricing accordingly resulted in many of their financial problems. A review of all menu prices was conducted with recommended increases to bring them more in line with relative food costs, and what the market was charging and would bear.
Food Portion Control:
The propensity for the kitchen staff to serve larger than normal portions was noticeable. This resulted in much higher food costs when a 13oz steak was served when an 8oz steak on the menu had been ordered. Combined with the pricing issue, serving larger portions merely added to the food cost problems. Management was encouraged to meet with and provide training programs for the kitchen staff to assist with the establishment of food portion standards to ensure that the proper portions were being served.
Comped Meals and Drinks:
From time to time, management might (at their discretion) comp a meal or a drink for a customer or staff. There is nothing wrong with this process as long as it does not become excessive. But, what we did notice was that when this happened, it was not accounted for on the POS system. This resulted in no accountability for what was being comped and by whom, or, what the total amount being comped was. This is a disaster just waiting to happen. Additionally, when meals and drinks aren’t accounted for in the accounting system, it increases the reported food and drink costs providing a less than accurate financial picture of the business. It becomes impossible to determine actual food and liquor costs, becomes impossible to determine actual waste factors, and becomes impossible to determine theft. A new policy was established whereby only certain members of management would be allowed to comp meals and drinks, and each comped meal or drink had to be entered into the POS system under a special code. This would provide for great accountability on comped meals and drinks, and who was responsible. But most importantly, it would allow for more accurate financial reporting and analysis.
Bar Service: Pouring and Pricing:
There were 2 primary issues we identified regarding the bar service. First, as with the food pricing issue, no recent analysis had been preformed on the increased prices for beer, wine and liquor. The current profit margins were significantly below industry norms. A definitive review was performed on all actual costs and menu prices with recommended price changes to all beer, wine and liquor. But, pricing was just one of the problems.
The other major problem was “over pouring”. Beer that was served in bottles or draft were not a problem, but wine and liquor did present some interesting problems.
Wine was listed on the menu as an 8oz glass, which happens to be a rather large pour by industry standards (industry standards are 5-6 oz per pour). When management was asked how many glasses of wine they get from a 750ml / 24.5 oz bottle of wine, they indicated that they get approximately 3.5 - 4 glasses of wine from each bottle and that they had priced their wine according to those amounts. When we sampled numerous pours and measured them out, the average glass pour was 10-11 oz per pour!! Staff was over pouring and pricing had been calculated on a much smaller pour.
Bar staff appeared to be reticent to some of the corrective recommendations made. When shown where 8 oz lined up on the glass, they balked and said customers would think that they were only getting ½ glass of wine and would complain. (Previously, bar staff were filling wine glasses almost to the top to make the customer think they were getting a “good drink” which would result in a “good tip”). Bar staff also did not like the suggestion to use mini-carafes which were pre-measured to ensure that only 8 oz was being served. They said it would take too much time, and tie-up the dishwasher.
Despite what appeared to be insurmountable obstacles, the solution was really very simple. Management replaced all of the much larger wine glasses with much small ones that would only hold 8 oz. The glass would be full when served, but accurate to the 8 oz pricing structure. No time would be wasted on pouring or cleaning wine carafes. AND, the pricing plan for wine could now be calculated out at 3 glasses of wine per bottle, thereby resulting in increased revenues and lower costs for wine poured.
Liquor prices for mixed drinks presented another type of problem. We addressed changes in basic prices for liquor (bar liquor, top shelf, specialty drinks), but over pouring remained as a primary problem. As with the wine over pouring issue, bar staff appeared to want to over pour a mixed drink or shot in order to satisfy the customer (increase tips). A sample of multiple shot pours revealed that the pours were always 2 oz. A standard shot pour is 1.5 oz. Hence, the bar was continuously over pouring shots and mixed drinks. This is probably why the profits on bar revenues were below industry standards.
All liquor bottles had free pour bottle spouts. When the bar staff was asked to use the 1.5 oz jigger, they appeared to be reticent to this process for numerous reasons. Again, the solution was rather simple. Management replaced all of the free pour bottle spouts with gravity controlled 1.5 oz pour spouts which would only allow 1.5 oz to be poured at a time. Bar staff was instructed that a double pour would require a double charge for that specific drink.
There were numerous other issues addressed during our review, but these were some of the basic and immediate ones. Calculations have been made to identify possible customer fall off due to some of the pricing changes which could possibly impact sales volume. But, there would need to be a massive customer fall off to impact profitability. Due to the compatibility of pricing to competitors in the same geographic area, we felt that the customer fall off would be nominal. Additionally, even if sales volume drops, at least profitability will be more positive than in previous years.
Management is currently implementing many of the recommendations provided. They now feel more comfortable with the accuracy of the financial reports being generated, and feel more confident in being able to make more accurate and realistic financial decisions.
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at: Deion Associates & Strategies, Inc.
