The difference between Theoretical and Actual G.P. and C.o.S. | Kitchen CUT
It may seem obvious that managing an F&B business requires a basic knowledge of theoretical vs actual gross profit and cost of sales, but the shocking fact is that many businesses are not keeping track of these figures and are getting them confused. Knowing the difference between your Theoretical Cost of Sales/Gross Profit and Actual Cost of Sales/Gross Profit and examining any discrepancy between the two is extremely important for you to be able to manage your food and beverage business correctly.
Here, John Wood explains why it’s so important to understand the difference between the two and how to use these figures to improve the performance of your operation…
“What is the difference and why do I need to know this?”
Many businesses roll through the month/week not knowing how they are tracking financially until they have gathered all the figures together and the profit and loss figures get released from accounts. Often this will be a few days after the end of the accounting period; by this stage IT IS FAR TOO LATE.
There is nothing you can do about the previous week or month once it has passed.
Typically, when chefs and managers have a bad week/month they ‘apply the brakes’ reactively. In a desperate bid to avoid a repeat performance they start looking for cheaper products, cheaper cuts, reduce portions sizes, increase prices, or all of the above. This, serves no purpose. Ultimately the customer ends up paying for your inability to manage your margins by spending more money on lower quality food, making them less likely to return. It’s a vicious circle.
Instead, a better approach is to understand what went wrong and why. To analyse, understand, adjust and predict in a proactive manner, whilst keeping an eye on performance on a daily basis.
Theoretical Margins
In order to create a ‘Theoretical Margin’, the following points need to be taken into account.
- Supplier/vendor’s live prices of all products.
- Costed live recipes of all your dishes and drinks, with correct margin calculations.
- Quantity sales of each of the items on your menu.
- Revenue for each of those items.
By pulling this data together every day you will be able to have a daily Theoretical Margin figure, either by individual dish or drink or as a combined total.
From this you can create a Menu Engineering Report.
Actual Margins
This is when you take all of your food or beverage related costs:
- F&B Purchases less any credits.
- Variance in any stock levels + or -.
- Any wastage that has been recorded.
- Allowed wastage – staff/colleague food/drinks & complementaries.
- Transfers internally from food to beverage or vice versa.
- Transfers to other locations/outlets in the business.
The next stage is to compare the total cost of production of your Food and Beverage with your sales.
This will allow to accurately calculate the Cost of Sales (CoS), often referred to as Food Cost and Beverage Cost, both as a percentage and in monetary value.
It will also allow you to calculate Gross Profit (GP), again, as a percentage and a monetary value.
How should you compare your Theoretical vs Actual figures?
If your dishes and drinks are correctly costed and a sensible wastage margin has been built in, your Theoretical and Actual figures should be reasonably close. Typically the Theoretical figure tends to be better than the Actual figure by around ½%, however, if the discrepancy between the two is greater than ½% then it’s important to investigate the reasons why.
Typically, these are the reasons for a why there maybe a larger variance:
- Wastage is higher than anticipated and/or recorded.
- Selling price varies from original costings to actual selling prices.
- Supplier/vendor prices have gone up and have not been linked to costings.
- Theft- either by customers or staff/colleagues.
- Inaccurate stock/inventory counts – or not doing these frequently or at all.
- Colleague/staff consumption – not being recorded.
- Inaccurate portion size control.
It’s both difficult and time consuming to investigate properly and find out where the issues are. Often, businesses will speak to the chef/s and manager/ service teams and blame them for margins not being good or being close to their theoretical figures. They then revert back to ‘applying the brakes’.
At Kitchen CUT we believe there is little to be gained by apportioning blame and finger pointing, that often a team will have no idea where the issues are and become demoralised. Without specific details to focus on and examine, it’s impossible to see where you are going wrong. With this in mind, we have created a system that allows you see all of the above very clearly with detailed line by line, recipe by recipe, menu by menu, product by product analysis so you can see exactly where the issues are, allowing you and your team the opportunity to tackle these far more effectively.
By automating many of these manual processes we maximise the accessibility to critical information, enabling you and your teams ultimate control.
Find out more
You can get more information about Kitchen CUT by emailing support@kitchencut.com or calling +44 (0) 330 113 0050
You can register for a free trial here.