Category: Profit & Economics

“Paweł, we need to hire more people immediately. There is so much work that we will probably have to introduce a night shift. With the rapid growth of the business, we need to think about moving – this 600m2 site is becoming too small for us,” I was really worried. At the time we had 25 kitchen staff, 600 parcels a day and one catering brand.

I was happy that the number of customers was increasing, but I had the impression that costs were rising disproportionately faster. There were more of these things – at least once a day I heard the boss say to the production assistant: “go to the store, we’ve run out for production”. How could this be, when we had exact recipes and shopping lists? In a moment it turned out that the day after we bought things for the social, 6 packs of coffee disappeared – that’s how much even the most seasoned coffee drinker wouldn’t drink.

One thing was for sure – money was leaking through our fingers. At least it was not a thin stream. I felt like I was fighting a hydra – for every problem, two more seemed to pop up. They seemed to pile up and the more I tried to find out where we were going wrong, the more problems appeared. I tried talking to the staff. I got a number of suggestions, such as that the theft and low efficiency were due to wages being too low, because “employees just have to compensate themselves”. I tried talking to catering experts: “Look Paul, this is a specific industry. This is how it is. You can’t control everything”, “You’ve got to get good people”, “You can’t do anything about it, you’ve got to do everything yourself if you want it to be good”.

I finally understood. The real problem was the lack of a map, a structure that would make me aware of which fires I needed to put out immediately because they threatened to collapse the entire structure, and which fires, while undesirable, would not kill me immediately and I could return to them in a moment.

Segregation of parcels in my Primate catering.

It became my ambition to pass the McKinsey problem-solving test. In the materials I used to prepare, there was a lot of reference to the MECE method. The name comes from the English words Mutually Exclusive, Collectively Exhaustive . For example, a population can be divided into men and women – each person can belong to only one of the two, and at the same time there are no people who do not belong to one of the two. An example where this principle is not fulfilled is nationality – people can change their nationality, they can be citizens of many countries. In such a division, the sum of the sets will be greater than the number of people.

The purpose of this method is twofold:

1. Make sure we don’t miss anything
2. To spend the minimum amount of time necessary to solve the problem by not having to go back or repeat – everything is sorted.

I began to group my problems into category trees, common themes. As I wrote down and organised the problems and my thoughts about them, things began to fall into a logical whole. I began to see connections and understand where the problem lay.

My views on the need for change were not met with approval. For example, my disagreement with a 50% pay rise was not met with approval. I felt trapped. I wanted the business to be healthy. Conflict with employees and the risk of production stoppages – the very thought of that paralysed me.

I wouldn’t be surprised if you’ve encountered similar situations. Looking back, I think a lot of things are done provisionally, for “holy peace of mind”, like a provident loan. It solves the problem in the short term, but then it turns out that the cost is gigantic. Then another loan, and the spiral of debt is so great that it’s hard to get out. No one has ever shown me the problems I can face, and I suspect that you will not either. Ignorance and old habits are our common enemy. That’s why I’m going to show you 14 places where I’ve missed out on money, to help you out.

I have created many different categories. So don’t get too attached to mine. The key is to group the subject and have fairly consistent groups. Items on individual lists can come and go, but the list of topics is relatively constant.

1. Purchasing and Suppliers
2. Warehousing and Inventory
3. Production and Preparation
4. Management and Administration

Now I will show you the 4 stages of problem diagnosis:

1. “Triage – what are the most urgent problems? When paramedics arrive at the scene of an accident, they don’t treat casualties on the spot. They make a quick assessment of the injuries and decide who needs help first. It’s the same with running a business – I think about which category I need to focus on first because it threatens the running of the business.
2. My daughter says, “Trousers down, cards on the table” and I think it fits this point perfectly. Once I have identified a category, I try to uncover all its problems. I knew about problem A, but I wonder what is B, C, D. What if you cure gangrene when the flu kills you?
3. “We play in pairs. – There’s a reason they say problems come in pairs, or even in herds. Once I’ve identified them in point 2, I group similar ones that have a single cause.
4. “You did not stand here”. – At this stage I know which area needs attention first, I have identified all the potential sources of problems that I could, grouped the issues and understood the interrelationships. This is how I arrived at the final list of problems, which I arrange in order. It’s important not to jump from issue to issue. Think of it as a street fight. Even if you are an experienced karateka, boxer or other fighter, and no average thug has a chance against you – the force of evil against one. What will you do in such a situation? You will shout: “One at a time! Then the problems will not overwhelm you and you will have the strength to deal with each of them.

Below are examples of problems you may encounter in each of the categories listed. The list is not exhaustive and there will be issues in your business that I have not included below.

Purchasing and Suppliers

1. Lack of regular price monitoring

In the foodservice industry, ingredient prices can change faster than the weather in the mountains. Lack of regular price monitoring is like driving a car without a seatbelt – sooner or later something will happen. By implementing a systematic review of supplier prices, you can react to changes in real time and avoid unnecessary costs. At Flambia Market we have learned that regular price analysis can save up to 10% per month.

2. Ignorance of the supplier market

Not knowing the supplier market is like going fishing without a rod. You need to know all the players in the market to get the best deals. By regularly comparing offers, you can get better terms and avoid overpaying. I remember one time we found a new vegetable supplier who offered better prices without compromising on quality. As a result, we were able to reduce costs and increase margins.

3. Don’t compare supplier offers

Comparing suppliers’ offers is an important part of your purchasing strategy. It is like the stock market – you need to know where and when to invest. More than once we have found that different suppliers offer the same products at different prices. By comparing quotes, we found a supplier who sold coffee 20% cheaper. This decision allowed us to save a significant amount of money without compromising on quality.

4. Buying branded products instead of cheaper substitutes

Buying branded products is simply paying for a logo. Instead, it makes sense to look for cheaper but equally good substitutes. In my practice, switching to non-branded products in some categories has allowed me to cut costs without compromising on quality.

Warehousing and Inventory

5. Poor inventory management

Poor inventory management is like trying to keep water in a strainer – nothing will come of it. Regular inventory control and the introduction of an inventory management system have helped us avoid wasting products. At Primate, we have implemented the Flambia System, which allows us to closely monitor inventory and order only what we really need.

6. Improper storage conditions

Improper storage conditions really can end in a major disaster. Preventing it avoids losses and waste. In my companies, we regularly control the temperature and storage conditions, which significantly extends the life of products.

7. Excessive or frequent orders

Orders that are too large and too frequent increase logistics costs. The key is to find the golden mean. Here again, the Flambia System came to our aid, which allows us to plan purchases precisely, avoiding excess and frequent deliveries.

Production and Preparation

8. Failure to follow established grammars

Using accurate recipes helps control costs and reduce waste. In our kitchens, every recipe is accurately measured, which helps to maintain consistency and control costs.

9. Poor organisation of work in the kitchen

Poor work organisation in the kitchen is like trying to lead an orchestra without a conductor – chaos is guaranteed. By introducing clearly defined procedures and division of labour, we have been able to increase efficiency and minimise waste. Regular training and systematic organisation are the keys to success.

10. Overly elaborate menus

Focusing on a narrower range allows us to better manage stock and avoid waste. At Primate, we have limited the menu to the most popular items to optimise purchasing and reduce costs.

11. Sub-optimal use of seasonal ingredients

Seasonal products are cheaper and often of better quality. In my businesses, we regularly adapt our menus to seasonal ingredients, which helps to reduce costs and offer customers fresh, local produce.

Management and Administration

12. Lack of price negotiation with suppliers

Negotiating prices with suppliers is essential – it’s like bargaining in a bazaar. Applying the Pareto principle and negotiating the prices of the most important products will bring the greatest savings. In our case, negotiating meat prices saved us 15%!

13. Lack of effective reporting

Lack of effective reporting is like driving a car without a mileage meter – you don’t know how fast you’re going or how much fuel you have in the tank. Regular reporting and food cost control is key to keeping costs down. At Flambia System we use advanced analytical tools that allow us to monitor all relevant indicators on an ongoing basis.

14. Poor internal communication

Poor internal communication is, in effect, a deaf telephone – information is distorted and results are far from expected. Effective interdepartmental communication allows us to better manage resources and avoid mistakes. Regular meetings and clear communication procedures have helped us to significantly improve operational efficiency.

Over time, this method got into my blood and proved useful in many other areas, such as remembering things! By grouping topics into: family, training, production, marketing, legal – it’s easier for me to remember everything. I don’t have an endless list of things, just baskets that I check in my head.

I believe that together we can bring best practice to the foodservice industry and end the myths that dominate the industry. This article is an excerpt from a guide I wrote for the community of Culinary Entrepreneurs, a new generation of foodservice business owners who are using technology and best practices to deliver the best quality for their customers and professional fulfilment and financial security for themselves.

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Where to go next

This is one piece of a bigger move: adding a prepaid meal-plan line to the kitchen you already run, and run the meal-prep profit numbers. When you are ready to land your first paying subscribers, the First-Customer Kit is the step-by-step playbook.

I have a confession to make. I love to eat. A lot. I eat so much that I had to set up a whole company to cook for me, because my wife couldn’t manage to produce the amount I consume. My standard is 3,500-4,000 kcal a day and my favourite place to eat is a restaurant. My lover has even come up with a trick to motivate me to be active. For me, activity has to have a purpose, so I love jujitsu, the gym (to get stronger at jujitsu), running (so I don’t run out of breath at jujitsu) and swimming (because it’s my time together with my daughter). If you say to me, “Let’s go for a walk to a café for dessert!” – I’m first.

The example for my breakfast. 🙂

The other thing I’m obsessed with is when things just work. An example would be the techniques in Jiu-Jitsu, which I’ve been training for 23 years, improving all the time and still finding ways to improve the small components. I can’t stand doing things in a sub-optimal order, like wandering around a shop without a written shopping list. But what frustrates me most is when things don’t work in business. When things don’t work, we have a loss-making business, an unprofitable business with negative margins.

Having run two diet catering brands, which at one point reached a turnover of 1 million zlotys per month, I have learnt that there is not one, not two, but even three catering margins!

1. Gross Margin , also known as Level I Margin
2. Operating Margin , also known as Level II Margin
3. Net Margin , also known as Level III Margin

Before we get into what these margins are, let’s get back to the basic question for which you are probably reading this article: “How do you run a profitable foodservice business?

A profitable business is one that makes a profit. If a business is not profitable, the problem is 100% one of two things, or worse, both at the same time:

• The sales are too low.
• Costs are too high.

If you ask, “Which is more important – revenue or cost?”, I will answer: “Revenue, but at what cost? Costs can be generated by any of us. Revenue, i.e. sales, requires some effort. We have to find a need in a group of people and then convince them to pay us to satisfy it with our product or service. I deliberately wrote “at what cost” because if increasing revenue is going to be done in an unprofitable way, we don’t want to do it.

“Thanks, Sherlock, I thought we were trying to sell at a price below our costs.” – Although this sentence sounds absurd and you’re right to think I’m stating the obvious, it’s not.

In winner-take-all businesses, managers sometimes make the decision to maximise revenue growth at the expense of profitability. Look at Allegro, they have more than 60% of the entire Polish e-commerce market (yes, 6 out of 10 products sold online in Poland are Allegro). Its profit for 2023 is around PLN 600 million. Despite many attempts, neither Amazon, eBay, Temu nor AliExpress have achieved such popularity. From this point of view, would you be willing to accept a loss of PLN 60 million per year for 5 years in order to grow your business to the point where it will generate PLN 600 million per year as a near monopoly?

In the food service market we can find a similar strategy in diet catering. There are several brands, e.g. Diety from Broccoli, Viking’s Kitchen, Maczfit or the second brand after Republic of Gourmet – NTFY’s child brand Syta Król, which communicate aggressive price discounts and may sell products with zero or even negative margins, e.g. with the intention of becoming the leader and causing the competition to withdraw. This is a fine line, as price dumping is prohibited in Poland.

Although, as I said earlier, revenue is ultimately more important, a profitable business starts with costs. We usually spend money first (costs) to get customers, and only then do they pay us (revenues). This is the first way your business can be unprofitable.

Gross Margin – Level I Margin

Gross Margin is the difference between turnover and the cost of goods sold. It tells you how much you are actually earning from the sale of your products after deducting direct production costs.

If your gross margin is high, it means that your production is going well and that you are able to sell your products at much higher prices than the cost of production. A high gross margin is a sign that your business is running efficiently and effectively.

Operating Margin – Level II Margin

The operating margin shows how much you earn from your core business after all operating expenses, but before tax and finance costs.

A high operating margin shows that you are managing your business well and controlling the costs associated with day-to-day operations. It’s a key indicator of how effectively you’re managing your day-to-day costs.

Net Margin – Level III Margin

Net margin is a ratio that shows how much you earn after deducting all costs, including operating, financial and tax expenses.

A high net margin is proof that your business is financially sound and can make a profit after all costs are taken into account. It is the ultimate indicator of the financial health of your business.

The importance of different margin levels

Gross Margin:

A high gross margin is a sign that your production is efficient and you can sell products at prices well above the cost of production.

Negative gross margin – “The cost of producing a good or service exceeds the amount you receive from sales”. How can this situation occur?

1. You sell a diet catering service for days ahead at today’s prices. In the meantime, the cost of an employee, raw materials and transport increases. In a few dozen days, you realise that the amount of money you received from the customer at the beginning does not cover the cost of production.
2. You organise an event. It turns out that your equipment breaks down and your people get sick. You don’t have a choice because you’re bound by contract and you don’t want to lose face, so you hire equipment from a rental company and find people on the spot. Rental equipment is very expensive, and so are employees for the time being.

Operating margin

A high operating margin indicates that you are managing your day-to-day operating costs well, which is key to a healthy business.

Net Margin

A high net margin is an indication of the overall financial health of your business, showing that you are able to make a profit after all costs are taken into account.

This margin structure helps to understand and control the company’s finances, which is crucial for long-term success.

Based on my experience, I have identified 4 key elements that affect gross (stage I) margin in the foodservice industry.

Food cost – the cost of purchasing raw materials for production.

Labour – the time spent by employees cooking, packing and possibly delivering food to the table or home.

Logistics – in the case of home delivered food, this is the cost of an external or internal courier and their means of transport and associated costs.

Customer acquisition costs – marketplace commissions such as Glovo, Delicious, UberEats, Facebook ad budget, ad agency fees, social media, photo production costs, graphics. All costs incurred to get the customer to buy from you.

Why gross margin matters?

The company that can spend the most on customer acquisition will always win. The company that can spend the most on customer acquisition is the one whose product prices are the highest, whose margins are the highest, and whose customers return most often and stay the longest. To put it in human terms, the ideal scenario is that you sell expensive products or services to customers, it costs you little to produce them compared to the amount you receive, and customers return to you regularly and for years.

Let’s suppose we have two restaurants, Green Pepper and Pink Orange:

Green Pepper attracts customers with discounts and attractive prices. Its owners rely on word of mouth and don’t have much money to spend on advertising, as they sell food with a minimal mark-up.

• Cost of acquiring a customer – 30 PLN – very low, as it’s mostly word of mouth.
• Average bill – PLN 100
• Average cost – PLN 80
• Profit per customer visit – 20 PLN
• Average number of visits per customer – 1.5 – the restaurant doesn’t even have a social media presence. Although the food is decent, customers just forget about it.
• Total customer value – 1.5 * 20 PLN = 30 PLN – the amount Green Pepper can spend to acquire a customer and still end up with zero.

Pink Orange creates an exclusive brand where the cheapest water sells for 25 PLN, but the owners invest heavily in advertising and customers like the place and come back often.

• Customer acquisition costs of 300 PLN – they invest heavily in all possible customer acquisition channels.
• Average bill – 500 PLN
• Average cost – 80 PLN – thanks to their size they can optimise costs and it is similar to Green Peppers.
• Revenue per customer visit – 420 PLN
• Average number of visits per customer – 5 – it is a trendy place, food is decent, customers are eager to return
• Total value of the customer – 5 * 420 PLN = 2100 PLN – the amount that Pink Orange can spend on acquiring a customer in order to come out at zero.

In this example, Pink Orange’s business is much more secure because of the margin it generates throughout the customer lifecycle.

How do you implement revenue counting, gross margin, operating margin and net margin?

The absolute most important thing, and the first thing you should do at this point, is to keep these numbers in front of you and your management at all times. You can’t control what you can’t see. It is not something you should “look at”. Your control cockpit should have 4 indicators that you control all the time. Monthly is the absolute minimum:

• Revenue
• Gross margin, also known as Level I margin
• Operating margin, also known as Level II margin
• Net margin, also known as Level III margin

If at this stage you are still thinking: “At my level, I don’t need to check it that way”, ask yourself whether you run a business or have an expensive hobby. If it’s the latter, you really don’t need to. I also refer you to 23 Biggest Myths About Catering Management .

The easiest way is to ask your accountant to give you a breakdown. Armed with this knowledge, you will be able to explain how she should qualify the costs. It’s not a perfect solution, as you’ll see the data with a delay of a month or more, but it’s better than not seeing the data at all.

The second method is to use a system that scans your invoices and helps you control your workflow, such as Cheff.it for restaurants or Flambia System for diet catering, event catering, pre-school catering, hospital catering. Then you can react in real time.

Data is nothing without action. At Primate and Cebulka Catering we have a monthly meeting where we discuss important issues for the business, look at what has changed, why there have been increases and what has caused decreases. We come out of the meetings with a to-do list for which individual managers take responsibility. For example, I am responsible for customer acquisition costs, while Łukasz Załęski, our operations director, is responsible for food costs and employee costs per package.

Just as data alone won’t make a difference, reading alone won’t make a difference. Take action now and increase your chances of making your foodservice operation profitable.

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Where to go next

This is one piece of a bigger move: adding a prepaid meal-plan line to the kitchen you already run, and run the meal-prep profit numbers. When you are ready to land your first paying subscribers, the First-Customer Kit is the step-by-step playbook.

“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.

CFO Adam Matusiak, right (in shirt), head of operations Łukasz Załęski, and head of technology Mateusz Cygan, left, in glasses.

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:

1. Purchase price of food.
2. Storage costs: costs associated with storing food, such as refrigeration costs.
3. 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.
4. 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:

1. I bought meat for a steak for 30 PLN net.
2. I sold a steak for 100 PLN net.
3. VAT on restaurant meals is 8%.
4. The customer paid 108 PLN gross.
5. 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:

1. I bought meat for a steak for 30 PLN net.
2. I sold the steak for 115 PLN net.
3. The VAT for restaurant meals is 8%.
4. The customer paid 124.2 PLN gross.
5. 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:

Food cost percentage 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:

Intermediate calculation formula

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.

A screenshot of the Flambia System.

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.

Screenshot of the Flambia System.

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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Where to go next

This is one piece of a bigger move: adding a prepaid meal-plan line to the kitchen you already run, and check whether a meal-prep line is actually profitable. When you are ready to land your first paying subscribers, the First-Customer Kit is the step-by-step playbook.