  # Restoration: margin and ratio calculation

What are the restaurant performance indicators, how is a restaurant's margin calculated, how do you define the sales price of a dish? These are some of the questions we are regularly asked. In this article, we will therefore distinguish between the different indicators used in the restaurant industry. These performance indicators allow the manager to control the overall management of his restaurant, to maintain balance and to ensure the financial health of his establishment.

The gross margin rate is a key indicator. Indeed, it allows you to set the selling price of your commercial enterprise's products. It is therefore essential to optimise this rate as much as possible. In particular, this involves the price of raw materials and goods used in your production.

## Main indicator of Margin calculation

### Gross margin

For an activity such as catering, the first performance indicator analysed is gross margin.

It is none other than the turnover achieved minus the cost of raw materials. The calculation of the gross margin is done in a theoretical way, when a dish is created, or in a real way over a defined period of time.

In this second case, the gross margin calculation is done at the global level of the restaurant or on one of the activities (bar, kitchen, snack bar, etc.) provided that sales and purchases of raw materials have been isolated.

The gross margin generated must make it possible to cover all costs (excluding material costs) while generating a profit.

Aclear distinction must be made between the theoretical gross margin and the actual gross margin.

### Calculation of the theoretical gross margin

It is done on the data sheets, usually for a portion.

When creating a restaurant or a new menu, the cost of raw materials is anticipated via the data sheets (theory). These are forecasts that do not take into account the quality of stock management. Sensitive ingredients (fragile and/or expensive) are subject to loss (dlc exceeded, proportions poorly respected, theft, breakage, etc.). These are all factors that alter the performance of the actual gross margin.

Theoretical gross margin calculation = ((Selling price - Material cost) / selling price) x 100

### Actual gross margin calculation

It is carried out over a defined period (days, months, year...). It takes into account purchases, stock variations, actual sales, as well as losses, breakages and offers altering your theoretical forecasts.

Calculation of actual gross margin = ((Sales - (Purchased goods + Inventory change)) / Sales) x 100

### Analysis of the results

The gross margin must be analysed regularly (per day, month, quarter, year etc.) as well as by sector (bar, kitchen, snack bar etc.).

What is its evolution? Is it decreasing? Your short and medium-term strategy is based on the reflections of this analysis. Identifying poor performances and their origins allows you to implement relevant corrective actions.

## The ratios used

### Material ratio (Food cost)

The material ratio (Food Cost) is simply the cost of the raw materials used, expressed as a % of turnover.

It makes it possible to check the importance of the material cost in relation to the turnover achieved.

Just like the gross margin, it is calculated in theory on the data sheet, and in reality over a defined period of time.

Usually a target material ratio is set by management. The chef's objective is to respect it. A too high material ratio will necessarily reduce the gross margin at the risk of seeing the financial balance of the restaurant altered.

Material ratio = ((Material cost + Inventory change) / Sales) x 100

* Inventory change = Beginning of period stock - End of period stock

### Margin calculation: Labor cost ratio

The personnel expense ratio represents the % of sales allocated to salaries and social security charges.

The cost of labour is high in restoration, it represents on average between 35% and 40% of the turnover.

Personnel expense ratio = (Labour cost/sales) x 100

### Prime cost ratio (Prime cost)

The cost ratio is a ratio specific to the restaurant industry. It is equal to the sum of the material ratio and the staff cost ratio.

This ratio therefore represents the % of turnover allocated to the production of dishes (material + personnel costs). It should be around 65% of turnover.

Costing Ratio = Material Ratio + Personnel Expense Ratio

### Margin calculation: Occupancy cost ratio

The occupancy cost is made up solely of fixed charges (rents and rental charges, loans, etc.). It represents approximately 10% to 15% of turnover.

Occupancy Cost Ratio = (Fixed Charge / Sales) x 100

### Operating expense ratio

The Operating Expense Ratio represents the % of sales allocated to fixed and variable restaurant expenses. It is the sum of occupancy cost and overheads. It is around 25% to 30% of sales.

Operating expense ratio = ((Fixed expenses + Variable expenses) / Sales) x 100

### Casting ratio

The leakage ratio corresponds to the impact of losses (breakage, expired product, theft...) on your turnover.

To be able to calculate it, it is necessary to weigh the losses and to inform them (management software, excel...) in order to calculate the cost. Attention this ratio is very important and sometimes difficult to quantify. It must not exceed 2% of the turnover.

Casting ratio = (Cost of losses / Sales) x 100

### Summary of ratios used in restoration

Monthly monitoring of ratios is essential in order to check the proper control of costs. This allows us to quickly identify areas for improvement as well as the corrective actions to be taken.

## Other indicators Margin calculation: The multiplier

The multiplying coefficient is a tool that makes it possible to define the selling price of a dish according to its material cost (example 1). It is sometimes used as a performance indicator by calculating it for all of the restaurant's services (example 2).

The multiplying coefficient is equal to the ratio between your "Selling price excluding VAT" and your "Cost of materials".

For a material to solids ratio of 30%, the multiplying coefficient is 3.33. For liquids it can be very variable, on average it is around 4 to 6.

Example 1:

You wish to offer a dish of Osso Bucco to your customers, you know your material cost and are looking to define your selling price including all taxes.

Your dish costs 3€ HT in raw material per portion.
The sales tax is 10%.
The average multiplier coefficient in catering is : 3,33

So... (clears throat) (Cost of material x coef multiplier) x VAT = Sales price incl. VAT
So: ( 3€ x 3,33 ) x 1,10 = 11€ ttc

You can propose your dish at the price of 11€ ttc in order to be able to cover all your expenses with the generated gross margin.

Example 2:

You wish to analyze your average multiplier coefficient realized over the year n-1

The calculation is as follows: CA / Cost of material = Average multiplying coefficient of the year n-1

As with the gross margin, it is ideal to control the average multiplying coefficient achieved per period and, if possible, per business line.

### The average ticket

The average ticket is the average bill of your customers. It is calculated per day, week, month, year... It is the ratio between your turnover and your number of customers. A rising average bill means that your customers are consuming more or more expensive products. It is a good indicator of the average budget of your customers or the sales performance of your team.

Average ticket = Turnover incl. VAT / Number of customers

## Conclusion margin calculation

A number of performance indicators are used in the restaurant industry. Their purpose is to check the restaurant's financial equilibrium. They make it possible to identify the source of excessive expenditure in order to determine its origin and to carry out targeted corrective actions. Monthly monitoring of ratios is therefore essential .