"Stockholm syndrome" - only years later did I understand how the protagonist of Orwell's 1984 felt. My tormentor was a maths teacher. She was no ordinary teacher, she was a crusading knight whose mission was to cleanse the world of the filth of those who did not know.
Only those worthy of respect and awe who could count without error were called to the blackboard. All others were treated with the contempt of second-class citizens. The pattern was always the same: first a friendly smile and a question as to who would come to the board to solve the problem on the board. No one came forward, so she continued with a beaming smile and said: "Then maybe Krzysiu (or any other student who happened to be there) will solve it". If Krzysiu did not start writing immediately, the teacher's forehead would start to sweat and she would start wiping it, which meant trouble.
The next sentence was: "Now write, Delta equals! What do you think?" If there was no surprise at this point, and it is usually difficult for her to follow under such pressure, the shouting began: "YOU CAN'T DO ANYTHING, SIT DOWN AND COMPLAIN!
I was a humanist and one of the worst in the class. She despised me with all her heart. However, I decided not to be broken and practised maths every day. As a result, by the end of third grade I was really good, and although the teacher didn't want to admit it, I was at the top of the class. She told me not to take the maths exam because I would make a fool of myself. To this day I have the satisfaction of thinking that when she found out about my maths score, she said it must be some kind of mistake - she was so unwilling to believe she was wrong. So if you hate maths, know that I really do understand. At the same time, I think it's the most valuable skill in business, so I'm grateful for what I got at school.
Years later, in my professional work, I found that simple actions and the ability to measure things were very useful to me. Despite everything, I still thought that I was inferior in this area, that I couldn't do anything. I graduated with a degree in psychology, where I was inferior to people from SGH, economics or science. I equated Excel with them. "It's a tool for weirdos, what's there to bury in numbers. Entrepreneurship is the spirit of adventure, ingenuity, action, not spreadsheets!".
I was lucky enough to meet 3 wonderful people who helped me with the financial side of my ventures and taught me how to use counting in a practical way to give ingenuity a real dimension. The first was Wojtek Smolinski, the second Radek Cielicki and the third Adam Matusiak. From each of them I learned about cost control, budgeting, liquidity and profitability. Until recently, these words made me shudder, but I understood that I would not be a full-fledged entrepreneur without assimilating them - I accepted my fate. In the end, it wasn't so bad.
I still only know how to do basic things like adding, multiplying, etc. My spreadsheets are ugly, but the most important thing is that I know how to read those made by people smarter than me, I know how to check basic business metrics and I know what to ask the people I work with. In the context of the catering business, these metrics are food and beverage costs, or in Polish, food and beverage costs. I'm going to tell you how I use these measures in practice in my diet catering business for the Primate and Cebulka Catering brands.
In theory, the cost of raw materials consists of the following:
Purchase price of food.
Storage costs: costs associated with storing food, such as refrigeration costs.
Food waste: loss and waste due to expired products or inefficient stock management. This category also includes theft, which I have experienced on a number of occasions.
Labour costs: costs associated with food preparation, e.g. washing, peeling, cutting.
I say 'theoretically' because in practice it is difficult to separate the cost of energy for the fridge from the cost of energy for the oven, and losses and waste are difficult to measure without the right software and recorded inventory. We count energy costs as utilities, kitchen staff costs as cooking costs, and I will talk about counting food waste in the section explaining how to count it.
In addition, when we talk about food costs, we usually refer to their percentage value, i.e. the net purchase price of the raw material to the net selling price of the dish. This is a common mistake. Some people do not use the net value when counting, but one or two gross values. VAT is a pass-through tax and should not be tabulated.
For example:
I bought meat for a steak for 30 PLN net.
I sold a steak for 100 PLN net.
VAT on restaurant meals is 8%.
The customer paid 108 PLN gross.
My cost of the meal is 30% (30 PLN net / 100 PLN net).
The analogy will be for drinks, the only difference being that the VAT rate for them is 23%.
The second type of food cost will be nominal. In the case of the steak above, it's simply 30 PLN. What are the practical differences? The aim of you and the managers of your catering business - diet catering, event catering, pre-school catering, hotel or restaurant - is to maximise guest satisfaction whilst minimising food and beverage costs, or at least not exceeding a certain assumed threshold. To put it in human terms, you want the customer to be as happy as possible, to recommend you to friends and to come back, and at the same time to pay as little as possible for food and drink.
What is the easiest way to reduce the food cost percentage? Increase the price of the food. If I increase the denominator, the selling price or the value I am dividing by, the result will immediately be lower.
For example:
I bought meat for a steak for 30 PLN net.
I sold the steak for 115 PLN net.
The VAT for restaurant meals is 8%.
The customer paid 124.2 PLN gross.
My cost of the meal is 26% (30 PLN net / 115 PLN net).
As I'm sure you can see, this is not how it should work. This is where nominal food costs come in. Even if my steak cost 108 PLN and now costs 124.2 PLN, the food cost is still 30 PLN , so it hasn't improved.
Another common mistake is to include the cost of packaging. Packaging is a separate item and should be treated separately from the cost of raw materials. Firstly, some dishes will have different packaging and therefore different costs, and secondly, it is part of the logistics cost, not the production of the dish or drink.
Correctly counting and monitoring the price of food is a must for any foodservice business. I was surprised to find out how many thousands of zlotys we were losing each month on peeling potatoes, for example. It turned out that, in the vast majority of cases, it was more profitable to buy a peeled pomegranate than to peel it ourselves, and the "one-off failure to observe the best before date" turned out, on closer inspection, to be no one-off. As I wrote in the article Optimising Food Costs: The Secrets of Effective Catering Management, this is one of the 4 key variable costs that determine whether your business will be profitable at gross margin level.
Food cost nominal vs. food cost percentage
Nominal food cost
Nominal food cost is the absolute amount of money spent on the purchase of raw materials used in the preparation of meals. It is a figure expressed in monetary units (e.g. zlotys, dollars, euros). It is calculated as the sum of the costs of raw materials in a given period.
For example: If a restaurant spent 10,000 PLN on food in a given month, the nominal cost of food is 10,000 PLN.
Meaning:
Food cost nominal shows how much money a restaurant actually spent on raw materials.
It makes it easier to track expenses and control the budget.
It is the basis for further financial analysis, such as comparison with turnover.
Food cost percentage
Food Cost Percentage is an indicator that shows what percentage of food sales revenue is spent on food costs. It is expressed as a percentage and is calculated as the ratio of raw material costs to sales revenue in a given period.
Formula:
For example: If a restaurant spent PLN 10,000 on raw materials and received PLN 50,000 in sales, the food cost percentage is:
Meaning:
Food cost percentage allows to evaluate the effectiveness of raw material cost management in relation to sales.
It makes it possible to compare profitability over different periods or with other restaurants.
It is an indicator that helps to determine whether raw material costs are under control.
Summary
Food cost nominal tells us the total amount spent on raw materials, which is important for managing the budget and tracking expenses.
Food cost percentage shows what percentage of sales is spent on food costs, allowing you to assess the operational efficiency and profitability of your restaurant.
Monitoring both metrics is key to effective cost management in the foodservice industry, allowing you to control expenses and evaluate efficiency in relation to revenue generated.
The second dimension is food and beverage costs, both direct and indirect.
Differences between direct and indirect costing
Both methods have their own unique characteristics, advantages and disadvantages. Here is a detailed discussion of the differences between the two:
Direct calculation
Description: Direct costing involves directly counting the cost of raw materials used to prepare meals in a given period. This method accurately records the quantities and costs of raw materials used to prepare each meal.
Process:
Purchasing: Recording of all raw materials purchased.
Consumption: Monitoring the consumption of each raw material based on recipes and prepared dishes.
Calculation: Add up the cost of raw materials used to get the nominal cost of food.
Advantages:
Precision: Allows you to accurately track the costs associated with each dish.
Control: Allows detailed control of raw material costs and identification of areas for optimisation.
Disadvantages:
Time consuming: Requires accurate tracking of all raw materials used, which can be labour intensive.
Complexity: Can be difficult to implement in restaurants with a wide variety of dishes and raw materials.
Intermediate calculation
Description: Indirect costing calculates the cost of raw materials consumed during a given period by taking into account the changes in inventory at the beginning and end of the period. This method is more general and less detailed than direct costing.
Process:
Initial inventory: Record the value of the stock at the beginning of the period.
Purchases: Record any raw materials purchased during the period.
Closing Inventory: Record the value of stock at the end of the period.
Calculation: The cost of food is calculated as the difference between the sum of opening stocks and purchases and closing stocks.
Calculation:
Advantages:
Simplicity: It is easier to implement and less time consuming than direct calculation.
Efficiency: A quick method to get an overall picture of raw material costs in a short period of time.
Disadvantages:
Less accurate: It does not provide detailed information on the cost of individual dishes.
Difficult to identify problems: Less accurate cost tracking can make it difficult to identify areas for improvement.
Conclusion
Direct calculation is more accurate, but time consuming and complicated. Ideal for restaurants that require detailed cost tracking and have the resources to accurately monitor raw material consumption.
Indirect calculation is simpler and quicker, but less accurate. It works well for restaurants that need a quick assessment of total raw material costs and have fewer resources for accurate monitoring.
We use both in our business. Direct costing is essential for menu planning. We use it once a week to plan the dishes that will appear on our menus. Normally this would be time consuming, so having the recipes written down is crucial.
In the basic version you can do it in Excel and update the prices manually every week, but we use Flambia System and Flambia Market. The former works out the total cost of a dish for us and also shows which ingredients contribute the most to it - both as a percentage and by highlighting them with darker colours. This is a huge help to the person controlling the food cost of dishes and making changes to dishes, as it is often enough to minimally reduce the content of the ingredient with the highest food cost in a dish to significantly reduce the value of that ingredient.
Changing the content of an ingredient that has little impact on the food cost will have almost no impact and will be a waste of time. In the example below, you can see that the ingredient to focus on to reduce the food cost of the dish will be blueberries, as they account for almost 50% of the total cost of the dish at this point.
The Flambii system also gives you the ability to create different price groups for dishes and control their allocation, depending on pre-set price limits for the cost of the dish. If the cost of a dish exceeds the limit set for it (either upwards or downwards), the system will inform us in an easily recognisable graphical way, both in the Menu Planner, if the dish has already been added to it, and in the list of all the dishes in the "Dishes" tab, which is used when selecting dishes for the menu. This reduces the risk of overlooking a change in the cost of a dish and incurring losses as a result. In the list of dishes there is also information about the percentage of the food in relation to the established norm.
The Flambia Market shows where an ingredient is cheapest and provides information on the current prices for recipes.
On average, a human and a dog have 3 legs each. Therefore, the 'average' food cost should be approached very carefully. You need to find the right level of detail. Looking at the big picture will not tell you much. Let me give you an example. I used to track costs averaged over all diets and calories separately. I saw that for the group as a whole they seemed to be in line, but there was little money left over. Looking for the reason, I looked at each calorie separately. It was a hit! It turned out that we were selling the lowest calorie of some of the diets below the cost of production, we were subsidising up to 5 PLN per pack! If that doesn't seem like a lot, multiply it by hundreds of packs - a day, thousands - a month, tens of thousands - a year. The hardest part was recognising the problem because of the wrong way of looking at the numbers. Once we diagnosed the problem, the solution was quick and easy.
Don't be fooled by "we can't reduce food costs without reducing quality". - This is one of the most common myths. Read more about it in 23 Biggest Myths About Catering Management. This and other untruths are repeated because it takes extra effort to change, to find the reasons. It is easier to use two "proven" suppliers than to compare prices from 20 or 30 different suppliers. I say this without sarcasm. With the amount of hours you work in catering, it is really difficult. We had this problem ourselves, which is why we created Flambia Market, to finally have shopping under control.
If, like us, you believe in smart and informed purchasing for the catering industry and are a pioneer of modern solutions that bring savings and improve the quality of our services, then join us.
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