Principles of Profit Making in Food Business

Objectives

  • Identify profit‐making principles in food businesses
  • Calculate \text{Food Cost }\% and other key ratios
  • Use financial indicators to assess new product feasibility

Key Definitions

  • Business: activity providing goods/services for profit
  • Entrepreneur: individual risking time & money to run a business
  • Revenue: \$\text{ from sales in a period}
  • Cost: all expenses required to operate
  • Profit: \text{Revenue} - \text{Cost}

Profit Basics

  • Golden rule: ensure \text{Sales} > \text{Cost}
  • Profit needed to cover both fixed & variable costs

Cost Types & Control

  • Variable / Semi-variable: change with sales (food, beverage, some labour) – controllable
  • Fixed (Overhead): independent of sales (rent, utilities) – non-controllable
  • Four major cost categories: Food, Beverage, Labour, Overhead
  • Cost control: managerial regulation to prevent excess cost via inefficiency/waste

Forecasting & Budgeting

  • Forecast: predicted sales/costs for a period, based on historical data & POS reports
  • Operating budget: financial plan for a specific time frame

Food Cost Calculations

  • Actual food cost: (\text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory})
  • Food Cost %: \dfrac{\text{Total Food Cost}}{\text{Sales}} (target ≈ 28!–!35\%)
  • Cost per category ratios:
    • \text{Food Cost} = \text{Food Cost }\% \times \text{Food Sales}
    • \text{Beverage Cost} = \text{Beverage Cost }\% \times \text{Beverage Sales}
    • \text{Labour Cost} = \text{Labour Cost }\% \times \text{Total Sales}

Pricing & Gross Profit Formulas

  1. Determine ingredient costs
    • \text{Total Ingredient Cost} = \sum \text{Ingredient Costs}
    • \text{Misc. Cost} = \text{Total Ingredient Cost} \times 5\%
    • \text{Total Cost} = \text{Total Ingredient Cost} + \text{Misc. Cost}
  2. Portion & selling price
    • \text{Cost per Pax} = \dfrac{\text{Total Cost}}{\text{No. of Portions}}
    • \text{Suggested Selling Price} = \dfrac{\text{Total Cost}}{0.35}
    • \text{Selling Price per Pax} = \dfrac{\text{Cost per Pax}}{0.35}
  3. Profit metrics
    • \text{Gross Profit} = \text{Selling Price} - \text{Total Cost}
    • \text{F\&B Cost }\% = \dfrac{\text{Total Cost}}{\text{Selling Price}}
    • \text{Gross Profit Margin }\% = 100\% - \text{F\&B Cost }\%

Key Takeaways

  • Maintain Food Cost % within industry standards to ensure profitability
  • Monitor fixed vs. variable costs; adjust controllables to protect margins
  • Use accurate forecasting & budgeting to guide pricing and product launch decisions