Have you ever wished for a magic tool that forecasts costs and profit—and predicts the future? Since time travel doesn’t exist, there is no instant fix. But restaurants do have an incredibly powerful tool for looking ahead that’s underused: Standard Costing.
You’re probably familiar with the importance of COGS (Cost of Goods Sold). Industry practice often says that this shouldn’t be more than a certain amount (the standard is around 30%). Certainly COGS data is useful. But there’s another approach that can dramatically increase profits. One accounting tool that is invaluable to running a more successful business based on real figures is Standard Costing.
Relying on Cost of Goods Sold without getting Standard Costing is like getting a grade on a test, but not being told what was right, and what was wrong. We all need feedback to improve. That’s where Standard Costing comes in. Think of it as a “highlighter pen for profitability.”
What are the most profitable menu items?
Accountants are used to seeing blank stares when we ask, “What are your most profitable menu items?” Few things are more central to profitability. And yet, this data is often neglected. Predicting future costs is not like rent (where you quickly see what the rent hike impact will be). Relying only on COGS percentages may tell you there’s a problem. But that info can’t tell you where to look, or how to fix that problem. This is exactly where Standard Costing shines for restaurant owners and managers.
So, what is Standard Costing? It’s an accounting tool to plan a more accurate budget. Standard costing lets you increase efficiency, raise profits and look ahead. Standard costing gives you what you need: a detailed understanding of both cost and quantity that go into a menu item.
For example, let’s say you have a popular dish that uses an 8-ounce portion of chicken. If chicken is $2.50 per pound, the standard cost per plate for that chicken dish would be $1.25. Add up all the components. Now you have the standard cost. Subtract the standard cost from the menu price. Now you have the profitability for that item—at least from a theoretical perspective. We can make standard cost more accurate by adding in additional factors: wastage, shrinkage during cooking, portion control and theft. Now we have something valuable. We shift from the theoretical, to the real cost.
This detail is golden. You can use standard cost to enhance your business model. You can more realistically price menu items. You can investigate wastage. You can also promote certain items based on profitability.
Calculating a True Cost of Goods
But wait—there’s more. Say you have a business model forecasting COGS will be 30% of revenue, but it’s actually 33%. After analyzing your standard costs, you find that most items are around 30%. But a couple items are 40%. Now you know what is causing the problem. Now you can decide how to fix it. Perhaps it’s re-pricing. Perhaps it’s revised portions. Perhaps it’s a combination of multiple changes. This is the power of Standard Costing. It’s like a magnifying glass to find and address red flags and potential issues.
One more problem that Standard Costing solves is the large gap between your POS and bookkeeping data. This is every restaurant owner’s nightmare. You calculate the theoretical COGS from the items in your POS. But what happens when the actual bills are much higher? Where is the disconnect? It could be inadequate portion control, wastage or theft.
To solve this problem, you need a starting point. The overly broad analysis that “COGS is too high” isn’t much help. Standard costing, though, provides the data points so you make a few changes and get significant results.
Most restaurateurs understand that menu placement has significant impact on order frequency. Standard Costing tells you which items are the most profitable, so you and your staff know which items to push. The same logic applies to promotions. Without Standard Costing, you’re guessing. Standards save time. Standards increase profits. Standards find problems. And standards help achieve goals.
Unfortunately, Standard Costing isn’t magic fix or a “one-and-done” analysis. Material prices fluctuate. Doing this kind of analysis takes time. Most restauranteurs go into the business because they love business, food, communities. If sheet pans are more your style than spreadsheets, it may not be your task to do planning and profit management with Standard Costing. But it should be someone else.