A fork in the road
When it comes to profitability, there is a seemingly endless number of factors to consider. Where should you focus your efforts? Should it be on increasing sales and marketing to customers? Or should you spend your initial time and energy on getting your costs under control? It's the proverbial fork in the road.
Luckily, there's a way to choose which fork to take. It's called the "Acid Test." Grab a pencil and paper and use the following formula:
Divide your annual sales by the square footage of your operation. This is your annual sales per square foot.
For example: a foodservice facility with $1,000,000 in annual sales and a total of 2,500 square feet has annual sales of $400 per square foot (1,000,000 / 2,500 = 400).
In the commercial segment, you need sales of at least $300 per square foot to achieve your full profit potential. If you're generating less than $300/sq. ft., chances are you don't have sufficient gross sales to support your concept. Your focus should be on the top line: sales-building. This includes marketing activities, menu engineering and menu merchandising.
If you're producing more than $300/sq. ft., you probably have sufficient gross sales. The best way to boost profitability in the short run is to focus on the bottom line. You can do this by making improvements to operating systems, and implementing better prime cost-control techniques.
Browse through our Trade Secrets for a number of ways to start you down the right road to profitability. Here are some of our favorites:
If you have annual sales of less than $300 per square foot, it's time to implement some sales building techniques. The easiest and fastest way to build revenues is through your menu. A well-designed menu can:
- Raise your average check. A broad selection of profitable menu items, including side dishes, appetizers, and add-on's can instantly boost sales with the same number of guests.
- Increase the frequency of visits. It costs significantly less to bring a customer back more often than to attract new ones. A diverse menu keeps customers interested and coming back for more... more often.
- Increase the party size. A great menu stimulates guests to bring friends and larger parties to share in the wonderful dining experience. Word-of-mouth marketing is the most powerful marketing you have.
- Attract new customers. The menu can be a powerful selling tool when it's properly merchandised and strategically distributed in your market.
If your revenues are over $300 per square foot, your sales velocity is adequate to meet basic overhead and core costs. Your primary focus should be on lowering prime costs. "Prime costs" — food, beverage and direct labor costs — represent roughly 63¢ of each foodservice dollar.
There are a number of cost control techniques, operating systems, and management concepts that can be applied to immediately increase profits. The most significant place to start is with direct labor costs, or payroll. This is the largest stand-alone, controllable expense you have to cover. In addition, payroll taxes, benefits, and workers' compensation add an average of 20% to every payroll dollar, so a $5 per hour wage is really $6 per hour. In addition to labor costs, direct your attention toward cost of sales, or food and beverage costs.