# Ratios and Indicators to Follow for a Restaurateur, Caterer or Baker

Break down your income statement from sales to net income by studying its different items and learning how to follow the right ratios: gross margin, multiplier, etc..

Published on 03/03/2023Sébastien Vassaux

Break down your income statement from sales to net income by studying its different items and learning how to follow the right ratios: gross margin, multiplier, etc.

## The Different Items of the Income Statement

### Turnover

The turnover corresponds to the sum of the sales made. We usually speak of a turnover excluding tax because VAT is only collected on behalf of the State to which it is then remitted.

You can calculate the turnover in different ways:

• Product turnover incl. VAT = sales price incl. VAT * sales volume
• Product turnover excl. VAT = sales price excl. VAT * sales volume
• Total turnover = sum of the turnover of the different products
• Total turnover = average number of covers * average turnover per cover

### Expenses: material costs and personnel costs

Different types of charges:

• Variable costs: material costs, temporary staff, financial costs
• Fixed costs: permanent staff, overhead costs

For the restaurateur, caterer and baker, the material costs often represent a ratio of 25% to 35% of the costs while the personnel costs can reach a ratio of 40%.

The material costs conceal an important source of optimization because they are seldom controlled or known while the personnel costs are sudden and due to the competitive environment of the labor market.

Temporary staff make it possible to reduce exposure, but there is an indirect learning cost which is difficult to quantify.

The overhead costs include everything relating to administration and what is not core business: cleaning, electricity, etc..

Financial expenses such as loan repayments, and then taxes and duties, further reduce the total. We go from an operating total to a current total and then to a net sum.

Easily calculate your cost of goods sold, gross margin and net margin

## Profitability Indicators or Ratios to Follow

### Gross margin

The gross margin corresponds to sales excluding tax minus material costs. The calculations are always done by removing the VAT from the price including VAT.

In percentage or ratio, we divide it:

• By price: it is a mark rate or margin on price. Its value is between 0 and 100%. This is the rate usually followed in catering, we aim for a minimum of 75%.
• By cost: it is a margin rate or margin on cost. Its value is between 0 and infinity.

Example: for a product sold for 5 including VAT with a material cost of 2 excluding VAT, we have:

• Price excluding VAT = 5 - 5 * 20% = 4
• Margin on price = (4 - 2) / 4 = 50%: profitability is lower than expected

### The multiplying factor

The multiplier is the ancestor of the price margin. It is more ambiguous because we often forget the impact of VAT.

Coefficient = Price excl. VAT / Cost excl. VAT

Thus, for a margin of 75% we have a coefficient of 4x, for a margin of 50%, we have a coefficient of 2x, for a margin of 25% we have a coefficient of 1.33x.

Example:

• Cost of 2 and coefficient of 4x: price excl. VAT of 8 + 20% = 10 incl. VAT. (8 - 2) / 8 = 75%.
• Cost of 2 and coefficient of 2x: price excl. VAT of 4 = 5 incl. VAT. (4 - 2) / 4 = 50%.
• Cost of 2 and coefficient of 1.33X: price excl. tax of 2.6 = 3.2 incl. tax. (2.6 - 2) / 2.6 = 25%.

In catering, we try to maintain a material ratio greater than 75% which is equivalent to a multiplying coefficient of 4x

### The margin on variable costs

The margin on variable costs is obtained after deduction of all the variable costs associated with your production.

For a restaurateur, baker or caterer, these are the material costs (ingredients and consumables), the costs of the kitchen staff (all the more if the staff is not on a permanent contract, otherwise it is debatable) and the other costs associated with the production but often associated with overheads because they are difficult to associate directly with products (electricity, etc.).

### The operating margin

The operating margin corresponds to the deduction from sales of all operating expenses: material costs, labor costs and overheads.

### The operating sum

The deduction of operating expenses from turnover makes it possible to calculate the operating total. It's a very representative indicator of the viability of your business.

In fact, the other charges are not directly linked to the nature of your activity, they are important but circumstantial.

### The current sum

The current total is obtained after the deduction of financial expenses such as your loans, taxes and duties (excluding income tax). You can negotiate this loan with your banker, which is why the current sum does not absolutely reflect the viability of your business, it depends on the payment period, the amount borrowed and the rate applied.

### The net sum

The net total is obtained after additional deduction of income tax.

## How to take advantage of these factors?

Ask your accountant for help to analyze the different components and identify trends over time. It will help you identify risks: continuously increasing costs, decreasing turnover, irregularities, etc..

### Don't neglect cash

The sinews of war have less to do with the net income than the available cash, impacted by the value of the stock, your debts and the debts of your customers (the WCR). Depreciation and provisions have no impact on your cash flow.

### Calculate your material costs for each product

Use Melba to calculate the cost of each of your menu items, taking into account all the parameters: weight loss, cooking, packaging costs, etc. Melba will allow you to reflect the reality of the work in the kitchen and to understand precisely the details of your profitability.

### Compare your products with each other

• Isolate products that have a low margin: Do you have to renegotiate the costs? Are the quantities of the ingredients in the recipes too large? Are the selling prices too low?
• Identify the products that have a good margin:  What can you do to sell more? How to highlight them? Can you increase the prices further?
• Identify ways to cross-sell: Do you sell products together easily? Suggest it to other customers to increase sales volumes. Create set menus.
• Compare margins with sales volume:  Highly sold products are bestsellers, they are compared strongly to the competition and you have to handle their pricing carefully. Little sold products are slow-movers, customers are not very sensitive to these prices and can be increased without much risk.