Why Variance Based COGS
Managing your Cost of Goods Sold (COGS) is one of the two essential costs you must control as a restaurant owner. The other is labor. Together, they make your prime cost. Most restaurants simply take their purchases and divide them by sales to get their COGS. This method works, but setting a 29% COGS goal every month is not rational and will not get you the data you need.
Precision in Cost Analysis:
Variance-based COGS methods offer a nuanced approach to a cost analysis by calculating the cost of ingredients used in each menu item. The Point of sale system combined with your inventory software will tell you exactly how much of every ingredient you should use and exactly what your food cost should be. This is called your theoretical food cost. This level of precision allows restaurant owners to identify discrepancies between expected and actual costs, providing insights into potential inefficiencies or discrepancies in recipe execution. For example, a significant increase in inventory or a loss of ingredients could indicate deviations from standard recipes, improper portioning, or theft. By pinpointing these anomalies, restaurant owners can take corrective action to ensure consistency and quality across their menu offerings.
Transparency and Accountability:
One of the critical advantages of variance-based COGS management is its ability to provide transparency and accountability throughout the supply chain. By tracking ingredient costs and consumption in real time, restaurant owners can identify fluctuations and discrepancies that may signal issues with suppliers, storage, or preparation processes. For instance, a sudden spike in the cost of a particular ingredient could indicate supplier price increases or quality issues, prompting proactive measures to source alternatives or negotiate better terms. Similarly, excessive waste or spoilage could point to deficiencies in inventory management, training, or portion control, prompting targeted interventions to address these root causes.
Quality Optimization:
Beyond its financial implications, variance-based COGS management can significantly impact the quality and consistency of food and beverage offerings. By ensuring accurate cost analysis and adherence to standardized recipes, restaurant owners can maintain the integrity of their menu items and uphold customer expectations for taste, presentation, and portion size. Moreover, by identifying and addressing deviations from established recipes or procedures, restaurant owners can mitigate the risk of quality inconsistencies and customer dissatisfaction. For example, if your cooks are not using enough tomatoes on your burger, that growth would appear on your inventory, and you would investigate the growth. You realize they are only putting one slice of tomato, and you can correct the behavior.
Another example is that the french fries get espelette, an extremely expensive seasoning; the cooks put an entire tablespoon when the recipe calls for 1/3. You will see that you are using three times the amount of espelette you should be and can quickly correct the process. By leveraging variance-based COGS data to monitor and enforce recipe adherence, restaurant owners can safeguard quality standards and their bottom line.
Working Off Your Theoretical Food Costs
If you sell 43 Tomahawks in September and 143 Tomahawks in November, you can not expect your chef to have the same COGS in both months. High ticket items with a healthy dollar margin, like a Live King Crab or Tomahawk steak, but a poor percentage margin, will drive up your COGS even if they drive up your profit simultaneously. Knowing your theoretical food cost can help you manage your staff effectively. If you realize the appetizer that has a 34% food cost is being oversold, and your workhorse 12% appetizer is not performing, you will have the data to ask your servers to pivot what they are selling as well as have the data to know the kitchen is not wasting product. Inversely, you may have a month that your theoretical food cost is very low, and without the data a variance-based COGS system will give you, you could miss that steaks are being stolen until the next month.
Impact of 1% Reduction in COGS on a $3 Million Annual Revenue Restaurant:
To consider the potential impact of variance-based COGS management, let's consider a restaurant with annual sales of $3 million. A 1% reduction in COGS, achieved through meticulous cost analysis and optimization strategies, would translate to a savings of $30,000 per year. This represents a significant increase in profitability, providing restaurant owners with additional resources to invest in growth initiatives, employee training, or customer experience enhancements. Moreover, ongoing cost optimization efforts can yield substantial long-term benefits, positioning the restaurant for sustainable success in a competitive market. Consider if the $70,000 chef you hire will deliver you a food cost of 31%, but the $90,000 chef will deliver a 30% food cost; there would be a $10,000 delta in your favor.
Strategic Decision-Making:
In addition to its operational benefits, variance-based COGS management provides valuable data for strategic decision-making and performance analysis. By tracking cost variances over time, restaurant owners can identify trends, patterns, and areas of improvement, informing menu optimization, pricing strategies, and resource allocation. For instance, insights into ingredient costs and sales performance can guide menu engineering efforts, enabling restaurant owners to prioritize high-margin items and optimize profitability.
In conclusion, while traditional blanket COGS methods offer simplicity and ease of implementation, variance-based COGS management provides superior precision, transparency, and strategic value for restaurant owners. By leveraging advanced tools and technologies for cost analysis, restaurant owners can optimize quality, consistency, and profitability, positioning themselves for long-term success in the competitive restaurant industry.