You are in a very tough business and you know it very well. As per a survey done in USA recently, around 24% of restaurants close within an year and morality rate grows upto 80% by 4th. If you have survived the 5th year, you are probably poised for greater success. I don’t have statistics for India, but I guess the rate will be similar or even worse.

Hospitality business is about serving great food and love, which should be your guiding beacon. That apart, having a unique concept is very important to distinguish yourself from ever growing competition. Restaurants have actually run without technology since decades, the word restaurant itself originated from French word “restaurer”. The first official one was opened in 1765 in Paris by a man named Boulanger.

Process and Technology

Restaurant business has innumerable moving parts and levers, is highly fragile and dynamic, as an owner you will never feel settled, that is the nature of this business. This is where big chains like McDonalds, KFC, PizzaHut, etc score over others. Have you ever wondered why we don’t have any big chains operating out of India and reached a global scale ? We can talk about A2B or BBQ Nation today, but their size today is nothing compared to the global chains.

These chains have standard operating procedures and well established processes; consistency in preparation, taste and replicability is very important if you want to scale. They invest millions of dollars in training, R&D, technology every year to get more efficient. No franchise would beeline them if they don’t show how the franchise owner will make money. Their scale and replicability is hardly doubted today by anyone, it is a well oiled machine. Many of these chains and upcoming ones have appointed CTO’s and CIO’s, such is the role of technology and the digital world.

Costing and steps to be followed

Restaurant income is only thorough sale of items. Out of every INR 100 you earn, rough split is as follows

COGS is 28 - 35 %
Operational Expenses - 35 - 40 %
[Salary, Rent, Electricity, Water, maintenance, IT expenses, marketing, Wages, etc]

As we can see, anywhere from 65 to 75% will go towards your expenses, leaving you with 25 - 30% before tax, which is healthy and reasonable. In India, cost of labour is relatively cheap and forms about 10-15% of your expenses. But in developed countries like USA, labor cost is as high as 35% of revenues, leaving them with a average profit percentage of about 7%.

If you see most of the above operational expenses are fixed (rent, salary) for a given time period. Some are technically variable (water, electricity, labor for e.g.) but doesn’t move the needle much compared to their overall cost contribution. Labor cost will increase with time, as you need to provide for salary increases every year. Now if your sales is flat, which starts to happen at some stage after you stabilise, it will start pressurizing your net margins. You will need to pass on this cost to the customer at some stage, inflation hits everyone.

COGS is the main variable that fluctuates in direct proportion with sales and forms roughly 1/3rd of your direct expense. This is something that can be monitored and controlled if you follow processes to the T.

EagleOwl is primarily designed to help you with costing, analytics, standardisation and process adherence. As a restaurateur you need to have strict controls and discipline in place, else no software can help.

Below is a snapshot from Avendus Restaurant Industry report in 2016.

How do we arrive at COGS?

Here we have assumed that only food is sold in a restaurant Jack's Corner, so that is the only cost centre. It is important to note that the OS and CS is taken at Jack’s corner

Let us take an example of a place that sells more than just food. The calculations will look something like below.

To be able to arrive at above calculation, there are the steps to be followed. Since each row belongs to one cost centre, columns 2 to 5 need to be categorised accordingly.

Refer to our article on Categorisation and tagging.

Technically, trials need to be excluded from COGS and should be captured separately. Wastage is part of food cost.
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