You may notice we made a few changes to adapt the model more easily to Restaurant businesses and for the purpose we are pursuing here, which is to give you a guide to concrete actions to help you reduce the costs of your business.
You will also realize this goes far beyond theory, because all the tips given here, as we said before, come from a team with formal education and direct experience on dealing with costs and expenses management for more than 2 decades. Once you apply the recommendations given here, the curve in your business numbers should look something like the following chart; reducing costs, improving profits and why not? Perhaps even your sales will improve as well!!
Obviously, every restaurant and business is different from each other. This is why your diagnosis and understanding of this approach is so important.
THE 7Rs of SUSTAINABILITY. BEST KEY EVER!
The principles behind the 7Rs model once you make the correspondent insight is quite "common sense", it has to do with doing things thinking from the beginning to the end of the processes, just like you should do it when designing and assigning the tasks in your kitchen. You know what you need, what must be the result... so you have to find the best way to get there, being thrifty and creative -among other things.
To easily remember, and because it is part of our DNA, we are going to use the 7Rs of sustainability to find out the solutions for the different problems -or opportunities areas- you might have: Rethink, Reduce, Reuse or Repurpose, Repair, Refuse, Rent & Recycle. Keep reading, you will quickly understand the connection!
RETHINK: it means to reassess what you’re currently doing. You have to mark down any areas of your business that you’re not happy with or where there are improvement opportunities and then, start to formulate a plan to make the necessary changes.
It is a fact that doing the same things as usual, we won’t get different results. Therefore, to Reduce the costs, the first thing to do is to make a thorough diagnosis of our expenses. What for? To find all the opportunities possible to reduce costs, increase profits or just, survive!!! Once you have the diagnosis, you will be able to find opportunities, and creative solutions RETHINKING what you should keep doing… or stop doing… or just give it a try to something new!!! So, this is the basis where all the work will be supported. The more accurate the diagnosis, the better results you will get!!
To make the diagnosis, it takes some time and organization. But consider it a great investment! You might discover more things than you imagine. In order to help you to do the kind of diagnosis you need, please, answer these questions - if you have more than one Restaurant, do it for each one separately. Synergies will come later, for sure!!! For the analysis of costs, it is essential that you choose a specific period of time (weeks, months, etc).
How much is the Total amount of Sales of my business every (period of time)? We will use the “Formula of food costs”
How much money do I spend in my business every (period of time chosen in prior step)? Consider cash, credit cards, etc.
How is that money distributed? It means, how much is spent in each of these items? Take a look at your bills and if you haven’t yet, separate them into these categories:
Food
Workforce
Equipment
Maintenance & repairs
Rent
Public Services
Other
The ideal results should look something like the distribution in Graphic 1 taking into account some parameters that experts consider more or less the standard in Restaurants. Of course, once again, every restaurant is different from each other, and it will depend on the premises of your business. But remember the idea is to give you some guidance as a thermometer, so you find the pain points of your business and RETHINK!!
Food: the amount spent in food is obviously one of the most significant in a Restaurant. Experts say it should represent 28%-32% of the total amount of sales. If the results you obtained are higher than that… Warning!! A useful tool to manage food costs is the following formula:
Then, to obtain the % of Food Costs, multiply the result of the formula by 100. Example, consider the following amounts of money earnt and spent in a week:
Initial Inventory: $10,000
Food bought in the week: $4,000
Inventory an exact week later: $7,000
Food Costs = 27,7%
Workforce: this is usually the 2nd most significant cost. The ideal amount should be 25%-30% of the total amount of sales. We know, this is currently a headache for many of you! It is very difficult to find the right people to do the jobs in the kitchens, they expect higher salaries, and unfortunately, everything gets worse in summer due to school vacations... This is an extremely important issue to deep dive about...
Equipment: this is a category that shouldn’t be so important, unless you are at the beginning of your business life cycle, opening a new place. However, there are ways to reduce costs here as well!!!
Maintenance & repairs: do not wait until your equipment says “no more!” Most manufacturers recommend preventive maintenance. Doing it is worth it! This item should not be higher than 1%-3% of your sales.
Rent: Location in a dining in model is truly important, but if you have a Ghost Kitchen, the priorities regarding the location might change considerably! You have to think carefully about how to find the equilibrium between the ideal place and the costs involved. Depending on how lucky you are to find the right place, experts think that the amount of money spent in the Rent category should not exceed 25%. However, there might be some other expenses like real estate taxes for instance, but still should not exceed 10% of sales.
Public Services: electricity, water, internet, garbage collection. It should not exceed 5% of your sales.
Now that you have a first approach to your current expenses. It is time to take a look at the services/ products Providers.
How many providers / Business Partners do you have?
Who are your Providers / Business Partners? What are the advantages and disadvantages of working with each of them?
What services / products do they give you? (each of them)
How much do you pay each?
Do you have special arrangements with any of them? Price, date of payment, credit, etc.
Is it possible that one of your Business partners could provide you with more than one product/service?
Now that you have completed “the numbers” of diagnosis, perhaps you have already found some things you can change to improve… But do not stop here! Let's keep working on our 7Rs...
REFUSE: this refers to starting to refuse things that you don’t need. Whether it has to do with toxic relationships in your teams, physical clutter, mental clutter, bad habits… If there is something that doesn’t or won’t bring value to your business, just say NO! When you learn / acquire the habit to REFUSE, you might save energy, time, money & avoid trouble as well.
REDUCE: Once you’ve had a rethink and have established which areas of your business can be improved, it’s time to put your hands in the dough!!
One of the easiest ways is to reduce what you have and need. Here you have some actions you can evaluate:
Is it time for a change in your Menu?
List the items in your menu. Order them from the top selling to the one you are not selling.
List the same items, but now do it by organizing them by the ones that require the lowest preparation to the highest labor preparation (including the ingredients needed).
If the bottom items on both lists match, you now know which items should not be part of your menu.
Which items are the ones you are selling the most? Which ingredients are used in preparing them?
Are there products on the Menu that do not sell as you expected? People do not like them as much as you do?
Perhaps not all the dishes in the Menu can be delivered, but grab-n-go is exactly what you need now...
Which items could you go without or replace?
Are all the dishes in your Menu high labor?
You do not have enough personnel to prepare all the high labor products. Is there someone who can make them for you?
Which products can you introduce in your Menu to substitute the ones that have become a problem, or to innovate and make it simpler?
Special follow up of food costs is crucial for your business. For example, if the ingredients you buy are high quality but excessively expensive, you will have two choices and a decision to make: a) to transfer costs to the price your customers pay for the dishes in your menu, making your business less competitive than others, which will tend to make you lose customers or b) do not change prices, but to reduce profits.
How much Food Waste are you generating? Which are the causes of Food Waste in your business? Shelf life? Bad Inventory management? There is A LOT to talk about in this regard. Have you ever valued how much money you are throwing to garbage? The more you Reduce Food waste, the more money you save!
Make frequent Inventory audits. Let’s be clear… without Inventory audits, some of your inventory could go missing, become stolen, or damaged. So, investing time on inventory audits will save you money and reduce your costs. What am I using the most? What am I not using at all? Is there an ingredient I could use for several of my preparations? Meat cuts, poultry? Is there something I could substitute in order to have a smaller assortment of products inventory? Less products, more applications? With just a few items you could have more dishes. For example: in your appetizer section you could have up to 8 different offerings with just 4 products; potato´s skins (4 pieces); tequeños serving (3 pieces); Empanadas beef and chicken (4 pieces); Empanada Sampler (8 pieces); Vegetarian Sampler for 2 (3 potato skins and 3 tequeños) Appetizer Sampler for 4 (4 beef empanadas, 4 tequeños, 4 potato skins and 4 chicken empanadas).
Buying big quantities at once, might offer your better prices. However, be careful with expiration dates! Also related to the inventory audits mentioned before, remember the rule of “FIFO” (First things In, First things Out!). Moreover, you might not have the adequate space for storage. Again, a partnership with a foodservice distributor will allow you to handle smaller inventories as you move through the products during the week.
Maybe, there is an opportunity with your Business partners; not just negotiating prices, but also analyzing the advantages of having one Provider for many things. For example, it could make the ordering/delivery processes easier, faster, cheaper. A trusted and reliable partner will allow you to access the product inventories needed as you call for it. Do you have a reliable partner for the supply of those top selling menu picks?
Perhaps, there are opportunities in your production processes. Take a look at them. Can you make them simpler? The simpler, the better… efficiency is key in this matter, especially when there is a problem hiring people. First, you can make things easier, reducing or optimizing time. On the other hand, think of assigning the people with more knowledge or experience, more responsibilities or added value tasks, while outsourcing what you can. This will help reduce the costs of your operation significantly!
If you have to buy equipment, please do intelligent acquisitions. It is not just about comparing prices or finding discounts -which are always important!- But there is more than price to think of. Neither the most expensive or the cheapest refrigerator for instance is always the best solution! Think of long term… quality? costs of repositioning? (not just the money you will have to pay for a new one), how much electricity does it consum? Is there a technical support service? Any kind of guarantee? Second-hand equipment are great alternatives as well to reduce the cost of acquisition.
Making preventive maintenance will definitely help you Reduce the costs of buying new equipment, but also the ones derived from losing inventory or even having to stop operations!
Do you really need all the space you are renting? Is it possible to maximize the use of space and/or reduce the area?
Regarding public services, reduce the consumption of water and electricity, implement simple actions such as: change regular bulbs for leds, unplug the appliances that do not have to be connected all the time, turn off the lights when not needed, pay attention to the method used to wash the dishes, etc.
Take a look at your insurance policies, despite these being for your vehicles, Responsibility, different Liabilities, etc. Insurance companies are very competitive. When doing this analysis, do not just look at the final rate and commission. You also have to pay attention to the amount of the benefits and coverage, and you must also review other conditions such as co-payments, deductibles, insurance exclusions (things that are not covered) etc. It is also very important to consider that investing in things like alarm systems, water sprinkles, etc. might improve your security conditions and therefore, might help you find a discount in your insurance rates.
Do not be afraid of technology. It is a work and time savior! Using computers, softwares or apps to manage all the information and some processes in your Restaurants, will not only benefit you organizing important and valuable information -which you could later analyze to make more informed decisions-, but will also make things quicker, easier, giving you some mental peace and “spare” time to invest either in personal issues or in the core of your business. To get deeper in this matter, you may want to take a look at our post “Delivery & Take out Apps vs. Direct Online Ordering Systems”.
Using Digital marketing is much more effective nowadays than traditional marketing. It is how word of mouth recommendation works today. So, even though you do not like social media too much, your business has to be on the net!
Consult an Accountant, this professional might -among other things- give advice on deductions you may make from taxes and how to keep things organized.
REUSE: Reusing items you already have, rather than opting for single-use products forms a big part of reducing costs. There are so many incredible reusable products! from reusable coffee cups to reusable baking mats. Switching to eco-alternatives might seem expensive, but give it a thought… It also pays back!
REPAIR & REFURBISH: Before you go rushing off to the shops when something breaks or gets worn out, think... could it be repaired? Or, is it possible to upcycle it? This is very important not “just” for reducing garbage and helping to reduce climate change, but will also help your wallet.
RENT: When you do need to get something new, have you considered renting the item rather than buying it? How often are you going to use it? Think of storage costs too.
RECYCLE: If you can’t reuse or repair an item, then you can -hopefully- recycle it!!! Things like glass bottles, different kinds of plastic, tins, paper, cardboard -among other things- can be recycled. What you can and can’t recycle near you depends on your county and state. However, It’s worth taking a look! you might be surprised by what you can recycle... The more you recycle, the more space you will have in your garbage containers, and this reduces the cost and frequency of trash pickups – saving your business money.
Did you know…?
Some States have special programs to incentivize businesses to recycle and to diminish Food Waste?.
OCC (Old Corrugated Containers), buckets, plastic-lined ingredient bags, etc can be recycled? Depending on the amount you generate every month, this might become an unexpected new revenue stream out of your waste stream!
There are companies that might help you recycle more than one kind of waste. Look for them and the conditions of their services, some may give you advice on how to better store different kinds of materials to be recycled.
There are product presentations or packaging that will allow you to reduce your waste bill by reducing the space it takes in the trash.
In good times or bad times, there is no doubt that Reducing costs and expenses brings only benefits!
Efficiently managing costs and expenses will be equivalent to having more money to either save it for the future, unplanned events, or to expand your operations or improve your business offer to your customers. You might even want to share the profits with employees and contribute to their wellbeing, happiness and engagement with your business. But before spending that “extra” money, remember to always apply the 7Rs of Sustainability!
We hope the information provided will be useful to keep your business prospering! We would love to hear your comments or suggestions!!