Managing your margins in the hospitality industry

The management of key cost margins is imperative for operators of café and restaurant businesses, as this industry is characterised by high sales turnover and high input costs.

The two key input costs that margins need managing are wages costs (employee wages and superannuation) and cost of goods sold (COGS) relative to sales turnover.

These are variable costs which would ordinarily be expected to increase and decrease in relation to sales turnover.

By managing the gross margins on these two costs correctly, the business operator helps to ensure that the business can cover its fixed and overhead costs, and that any increase in sales will translate to an increase in net profit. Failure to manage these two cost categories correctly will see potential profits walk out the door with customers or employees.

Ensure you have timely and accurate data in the correct reporting format

This may sound basic but make sure your data processing is timely and correct. Cloud-based accounting programs allow data to be reconciled daily. If the data is processed correctly at the time of reconciliation it will allow you the option to run true and correct reports on a daily basis. This allows you to make decisions much sooner and get ahead of the curve.

It is vital that you get your profit and loss report set up in the correct format and ensure that you understand it. You will be running this report on a regular basis, so make it simple and easily comparable.

Set your targets and focus

The margin percentage targets chosen will depend on the individual business. Targets should be changed and updated to suit individual circumstances. A possible starting point is 35% for wages costs and 35% for COGS. This means that for every $100 of sales the total cost of wages and COGS will be $70. The remaining $30 is there to cover fixed and overhead costs and hopefully, result in a net profit for the owners. A small change in margin percentage on either of these two cost categories will have a large effect on the net profit of the business which is why we focus on them.

What does it all mean?

Remember that the margin results are only an indicator of what is happening in the business- they do not provide the detail. 
If the margin reports indicate issues, then it is up to you to drill down and find the root cause. Whilst you need to react quickly, make sure you act with caution when making drastic changes that could impact negatively on the business. Rostering of staff, portion sizes, sales mix, opening times and pricing are just some of the factors that could be considered as potential solutions once you start the margin management process.

Where to next?

Having trouble knowing what targets to set or how to interpret your results? 
At RSM we have the industry experience to help you get the most out of your café or restaurant.
Contact your local office today