Hotel Professionals

Pricing your Product for Profit.


The art and science of management has been defined by many scholars, and predictably, all definitions differ, even if ever so slightly . While some claim planning to be important, others believe directing people is crucial, yet others are of the opinion that the very essence of good management is controlling and evaluating manpower.

Today, more than ever before a manager must be a leader who can inspire his/her collaborators. Rather than u s i n g the word workers, the word collaborator is being used in an attempt to reflect the new way of thinking in the workplace).

A manager today must be able to bring physical resources and manpower together in a place and market the product profitably. The manpower may be highly skilled, semi-skilled or unskilled. Managers (at all IeveIs in the hotel and restaurant business must integrate the functions and actions of a wide range of mostly semi-skilled workers. AII managers must establish an organization that can d e a I with a rapidly changing business environment and also exemplify a level of ethical performance expected from them.

A manager must know that the higher the position of the supervisor, the greater is the time lag between the establishment of standards and objectives, and the measurement of performance, against measurable criteria.

While in the past a manager’s intuition was accepted as an important factor, today most management specialists insist that accurate forecasting, constant monitoring, and calculated financial risk- taking are a manager’s most important responsibilities and managerial skills.

Accurate, relevant, and fast information are important cornerstones in today’s decision-making process. No manager can afford to make important decisions based on f acts and figures that are outdated.

There are many food and beverage operations in North America that, have high sales but show no profit, or low volumes and high costs resulting in significant losses. Before anyone tries to turn an operation around, he/she must know the financial situation of the establishment, and what it could be if it was well managed. There are many operators who believe controls to be unimportant, and stress sales more than anything else. There are others who happen to believe that controls are vital. In reality, both sales and controls are important in the financial well-being of an operation.

Before a manager can accomplish any task, he/she must understand its components and how they complement each other.

In food costing, this translates how costs vary according to the volume of sales, changes in sales prices, and the mix of sales .

There are various food-cost control techniques, some of which are simple, others more elaborate and time-consuming. Both have their place in the industry.

Simple techniques are suitable in small, uncomplicated operations, with few employees a n d where the owner is aIso the manager, whereas elaborate techniques are required in multifaceted operations with considerable sales.

A good control system must contain the following elements:

– Purchasing specifications
– Standard recipes/Portion size
– Operating policies (Purchasing, receiving, storage, issuing, production, service, cash control, security, data gathering, analysis, and improving deficient areas of the operation The best control system in the world will fail if you neglect to exercise it consistently.

Standard recipes, based on well-conceived specifications and standard portion sizes help determine ideal cost of food for different dishes, ensure consistency in both quality and quantity, and provide a basis for intelligent pricing. Each and every item on the menu should have a standard recipe established by the chef who must take into consideration both the size and configuration of the kitchen, equipment available, the storage capacity, and the skill level for his/her cooks.

Purchasing specifications are vital for any food operation and should be developed according to the menu, anticipated volume, availability, strict receiving policies and storage capacity.

A well-developed purchasing specification manual depends much on the needs of your establishment and the size of the market in which the establishment is located.

The adequacy of every specification depends much on market conditions. While for some items there exist various specifications, for others there may be few. For the latter, you may want to develop your own.

Once purchasing specifications have been developed and agreed on by all concerned, they should be distributed to the manager, chef, purchasing agent, receiver and suppliers. Only by means of specifications can you succeed in obtaining truly competitive bids from your suppliers.

Evaluating and changing the specifications as market conditions change is highly recommended. Markets change constantly, and you, too, must change with the markets.

In order to control food costs adequately, you must determine your potential or ideal food cost, which is based on each standard recipe and the frequency of sales of each item on your menu. All dishes sold are tabulated by frequency of sale, cost per dish, as well as sale price per dish. These figures are then extended and total cost as well as total sales put into perspective in form of a percentage ratio. This then is your ideal or potential food cost percentage. In any given period, if sales of a particular dish increase or decrease, percentage will differ. If the item is a high food-cost dish, and sells more than others, the overall food- cost percentage will increase; the reverse is true, too.

When then you establish your actual food cost percentage at any given time based on your opening inventory, purchases and closing inventory related to sales, you can compare it to the ideal food cost.

Variances may reflect too large portions, waste, or pilferage. All have to be analyzed separately so as to arrive to meaningful conclusions. Your variances may be the result of theft, spoilage, poor receiving practices, inadequate portions control, wrong calculations or overproduction. Corrective measures can be taken after establishing the true reason(s) of the variance.

It may be worthwhile to point out that the food-cost percentage in itself should be analyzed with regard to its relevance. A low food-cost percentage does not mean that everything is well in your operation.

There are many profitable restaurants with relatively high food-cost percentages, than those with a low food-cost percentage.

Another component contributing largely to the profitability of an operation is the labour cost While labour cost can be geared to sales up to a certain point below a minimum staffing level, it is impossible to reduce the payroll. A minimum level of Iabour must be scheduled in any restaurant regardless of forecast business. Thus, when low sales occur, labour cost controls become impossible after a certain point.

In every restaurant, food, beverage, payroll, and other expenses can be controlled to a certain point, but overhead costs such as rent, heat, light and power, administration, mortgages, or loans can hardly be controlled in the short run.

It is a known fact that many restaurants declare bankruptcy after a short period of operation. In all the years in this business, I have found the most important reason of these failures to be poor planning from the conception of the idea of opening a restaurant to the actual creating and managing the establishment.

Planning requires a considerable amount of effort, but without it, no business can be successful in the long run.

An annual budget is a first step in good planning. Without this essential tool of management, decision-making is often reduced to gut feeling, and results can be devastating. Budgeting must be undertaken with due care, and not treated as a haphazard compilation of figures. Many factors contribute to budgets: the overall economy of the country, that of the region, weather conditions, special events staged in the area, the decor of the establishment, the quality and quantity of the food served, beverage offerings, and the quality of service provided. When budgeting, figures from the previous year should be used as a guideline only.

Examine your menu and determine whether or not you are stiI serving the quality, type, and quantity of food your guests expect. Tastes change from time to time and so do the preferences of your guests. The same applies to beverages. While barely a decade ago, some* cocktails were the predominant concoctions demanded, today these very cocktails are remembered by only few patrons. You should examine your inventories and inventory I e v e I s to determine their adequacy with regard to the business volume. It is also important to calculate the inventory turnover to establish how often the merchandise is turned over during a month.

A thorough study of the purchasing process from the very beginning to the receiving should take place from time to time in order to discover deficiencies. Receiving practices are aIso important and deserve the attention of the management. The adequacy and size of storage facilities, issuing, production, cooking , portioning, controls, and mix of sales, contribute to the overall financial well-being of the restaurant.

Many restaurant operators claim that all the above procedures are time consuming and complicated, and slow down the running of the business. Proper management procedures are part and parcel of any business and should be treated as such.

In the above procedures, everything is simple, and not even time consuming if the right people are made responsible for the execution of each segment of the system.

When prices increase demand decreases, at least for a period. Many restaurateurs find it tempting to increase their prices when the cost of ingredients increase, rather than tightening controls, altering the portion size, and keeping their sales prices.

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