The Key Performance Indicators, known as KPIs, are tools which help you identify how well your business is performing in specific areas and if you are achieving your business targets in those areas.
Using KPIs in your daily operations is a must if you really want to have control of your business in the key areas. They will help you identify quickly and effectively any opportunities for improvement and show you the problems your business may have at an early stage, when you can easily take corrective action to bring everything back on track.
In order to be able to use KPIs in your operations, it is a basic requirement that you collect and analyze data in the key areas of your business. This will offer you a deep knowledge of the core of your business and will help you escape from the fog you might be finding yourself, sometimes on a daily basis, because of all the responsibilities and worries running and operating a business can cause.
Especially in hospitality industry, saying that competition is high is an understatement, as you know very well; in every corner there is a food and drinks business of any type. If you want to be successful and profitable, and your business lasts for many years to come, you need to know how to control the key areas. Your weapon in this battle are the KPIs.
There is a big list of KPIs in hospitality, especially the restaurant KPIs are so many and not all of them will be relevant to you. In order to help you at this point, I have put together and described the most important ones, which I think are relevant to your operations and targets.
You are free of course to use any KPIs you can imagine, but you need to be careful and aware that if you focus on the wrong ones, you will find yourself wasting money, time and effort, as they will not give you back the value and knowledge you are really looking for.
The 5 Basic KPIs
The key areas for every restaurant, café, coffee shop and other hospitality establishment are the Sales, Average Ticket Value and Variable Expenses like Labour Cost and Cost of Gods Sold (COGS), and finally Food Waste. In order to keep control of them and be able to improve them, you need to set KPIs on these areas.
The absolute and ultimate target of every business. You must set at least daily sales target for your business to achieve. Good practice is to set weekly and monthly sales targets as well, as this will help you with your planning.
The way to set your sales targets is based on your forecast and any sales data you have from previous years and periods (Year on Year YOY sales are great to help you on this). This will help you to set a target to achieve, which will direct your team in the right direction and motivate them to achieve it.
It also gives you a good indication of how the day goes, especially if you set sales targets per period in the same day.
For example, you can set a sales target from opening until 3pm and another one from 3pm to close. This way, if the first target until 3pm is not met, then you can push and direct your team accordingly to increase sales through several ways in the second period from 3pm to close, so you can recover the difference and finally achieve the final sales target for the day.
By monitoring your Sales KPI, you know exactly what money you are making and how many more you might need to meet your targets. Knowing this on time and taking corrective action swiftly, will save you from trouble and guide your business through a healthy path.
This is one of the most critical KPIs you need to use in your business. Based on your daily forecasted sales, you can also get the forecasted sales for the week.
What you need to do then is to set the labour target for each day so you can operate your business smoothly but without using excessive number of hours, which translates to unnecessary extra money for you, as this is one of the two main variable expenses.
Usually in hospitality sector, the labour cost varies between 18% to 25% of the total sales. This is clearly dependent on every operation and can’t be the same for all the businesses as a flat rule.
The way to calculate your Labour Cost Percentage is as follows:
(Amount spent on Labour / Total Sales) * 100} = Labour cost percentage
The daily labour target can be set based on money or hours, whatever is more convenient for each business. For example, in order to meet your labour cost percentage set on 22%, you can set a target to spent up to £500 that day on staff wages or up to 50 hours shared between the team for that specific day.
Cost Of Goods Sold (COGS)
Another critical KPI here. As a term, COGS describes the cost of the all the ingredients and supplies used to produce and sell the food and drinks within a specific period of time.
It also includes the cost of all other items which are sold directly without going through a production process, like a can of Coke or a bottle of water, within the same period.
A basic formula to calculate COGS is the following:
COGS = Beginning Inventory + Purchases During the Period – Ending Inventory
COGS is one of the two main variable expenses in your business. If you want to have control of your business and expenses, you need to control and monitor your COGS, there is no other way around it.
Usually in hospitality sector, COGS varies between 25% to 35% of the total sales. This clearly dependent on every operation and can’t be the same for all the businesses as a flat rule.
Best practice is to calculate and be aware of the COGS for each individual item on your menu. You will then realise that some items have much lower COGS than others.
For example, a portion of soup might have 15% COGS, compared to a starter with prawns having 40% COGS. This means that a portion of soup will give you 85% gross profit compared to 60% from the prawns.
Having this knowledge will help you direct your sales and be able to have a list of high margin items for your staff to upsell, making you extra money.
Average Transaction Value
This is great KPI to implement in your business as it gives you a great guide about the customers’ spending and any opportunities to improve it, so you can increase your net profit.
The Average Transaction Value (ATV) is calculated by dividing the total value of all transactions (Total Sales) by the number of transactions. This can be calculated on a daily, monthly or annual basis.
ATV = Total Sales / Number of Transactions
For example, let’s calculate your ATV for one day. If that specific day, the total value of transactions (total sales) was £5000 and the number of transactions was 250, then you divide £5000 by 250.
The ATV for that day is £25.
If you know your ATV, then you can set daily targets on it. What you really need is to maintain at least at the current level, but your target should always be to increase it.
To increase your ATV, you need to get each customer to spend more than they intended to initially. This process is called Upselling.
Food waste is a one of the biggest concerns for every hospitality business. If you manage to monitor your food waste and keep it under control, then you will be able to improve your financial performance and keep more money in your pockets.
Calculating your food waste percentage is basic. All you need to do is to add the cost of all the items wasted, by keeping a record of all the waste during the day. This will give you a result. If you then divide this by the total sales for the day, you will get the Food Waste Percentage.
Food Waste Percentage = (Food Waste Cost / Total Sales) * 100
You can then set a KPI for Food Waste based on a Food Waste Percentage. This can be for example, 2% or 3% on a daily basis, which will give you the opportunity to monitor closely and very efficiently this area.
Knowing what the 5 basic KPIs are and how to utilize them in your daily operations is a must for every business leader and management team for the road to healthy business activities and finally, success.
It is important that the KPIs are set by using S.M.A.R.T. targets so they can be effective and produce the results desired by using the most efficient and productive way.