By Eric F. Nusbaum, PhD, CHA
Recently I have been getting a lot of phone calls from operators experiencing food, beverage, and labor cost problems. Given the stagnant economy, increase in competition from new chain units, and rising costs of ingredients, the need to control costs is understandable. Now is probably a good time for a refresher on the basic principles of cost control. I believe that there are eight key points to keep in mind when developing a cost control system and I have listed and described each one below.
1) Keep it Simple- cost control isn’t ‘rocket science’ so your system should not be designed as if it were. Keep your procedures and forms to the minimum necessary to do the job so that the people who provide information and fill out the reports can do so easily. If the system is too complicated there is always a chance that the staff will get confused and that they will have excuses about the process being too time consuming or difficult to complete.
A second element of “Keep it Simple” is to reduce the number of costs or items any one person tracks to between seven (7) and ten (10) “statistics” as research shows that this is the maximum number of statistics that any one person can watch and manage. If there is a need to track a great number of statistics – delegate that task. The General Manager may track kitchen and dining room labor costs, while the dining room manager tracks labor costs by shift and/or by position title.
2) Make the System Timely – information that takes too long to get, is ineffective in controlling an operation. Long ago I discovered that finding out on the 20th of the month that I had an unacceptable cost the previous month probably meant that I was going to experience at least two months of bad costs – the previous month which had already passed and the one that was now almost over. I developed snapshot reports that tracked my sales and costs on a daily and month-to-date basis so I would always know where I was and could take action immediately if necessary.
3) The Information Must be Comparable - the whole purpose of accounting and cost control systems is to provide the information that is necessary to manage the operation and to track changes over time and progress towards goals. In order to do this, the information provided must be comparable – if you change systems or procedures (such as what you count or don’t count) you will get different information and might not be able to compare different periods (i.e.: make useful year-to-year comparisons).
4) Stay Current – operational profitability, which is dependent upon controlling costs, is not a ‘destination’ that you reach at some point, it is a ‘journey’ that you will be on each and every day that your business is in operation. To make sure that your costs are being controlled, someone must actively monitor them each and every day and take action if there are inappropriate or unacceptable deviations. If you expect it, inspect it!
5) Practice the Pareto Principle- which states that 80% of your attention should be on the 20% of items that make a difference. You will to see the best results in cost control when you monitor the higher cost and/or higher volume items. The loss of one strip steak will probably have more impact upon food cost than the loss of a case of dinner rolls – so track the steak usage, not dinner rolls. Similarly, to correct or prevent labor cost problems concentrate on the hours and overtime of your highest paid staff rather than the lowest paid staff.
6) Get what you pay for – thirty plus years ago as a receiving clerk I was told, “Our scale is our back door cash register.” We had a sign on the receiving area wall that said:
If it’s purchased by weight, we weigh it.
If it’s purchased by count, we count it.
And we did as part of our receiving and inspection process. Initially there were many discrepancies in weights and counts, but these quickly ceased. It goes without saying that even small shortages can have major impacts on costs whether those shortages are in products purchased or labor hours.
7) Know what the Costs Should Be – if you don’t know this then you will never know how well you’re doing and you will never know when to take action. It’s a good idea to prepare a theoretical cost for use as a goal and to compare performance to as well as knowing industry statistics for similar operations.
8) Costs are Cumulative and Interactive – food, beverage, and labor costs are all added together to become the “Prime Costs”. It is a false economy to save on one cost if it adds greatly to another. Seek out “value added” products the overall effect of which is to lower total operating costs.
Three brief examples will illustrate the need for the principles listed above:
A restaurant whose food cost was “too high” but which did know know what its costs should be. The actual food cost was only 0.3% above their theoretical cost – it was the portion specifications that were wrong.
A restaurant with “high costs” because menu prices had not been adjusted to account for the increased cost of dairy and meat products.
A restaurant that wanted to lower its food cost to become more salable found, when they purchased a scale, that they were regularly being shorted by as much as 10% of the weight listed on the invoices of a certain trusted meat purveyor.
A restaurant whose credit card discount rate was nearly double that of comparable operations simply because the owner didn’t know what the going rate was.
A properly designed and implemented cost control system provides managers with concise, timely, accurate, actionable information in an easy-to-understand format and will be well-worth the time and effort it takes to develop and implement. Once the system becomes established as part of the operational routine it will help enhance and sustain your profitability. It is probably the case that an effective cost control system will have other non-monetary benefits including reducing your stress level while increasing your level of self-satisfaction. Please feel free to contact me if you have questions about developing and implementing a cost control system in your operation.
Eric F. Nusbaum is a hospitality management consultant with experience in clubs, hotels, restaurants, and senior feeding. He has taught hospitality management in the United States and Switzerland and is a CRA member. He can be reached at (413) 774-2786. www.wheelwrightconsultants.com