What the Heck is a KPI and Why You Should Give a Sh*tApr 26, 2020
As competition gets tougher and profits seem to slip slowly away, you need to analyze your data more than ever.
In fact, the bars and restaurants that fail to capitalize on their data will find themselves in hot water. It’s been happening for a while—you just haven’t felt the heat yet.
It’s like the story of the frog placed in a stockpot in room temperature water—it doesn’t notice the danger it’s in. The heat is slowly turned up and it doesn’t do anything until it’s too late and he becomes frog soup.
That’s happening to your bar or restaurant right now. Profits are sliding away a small percent at a time until you wake up one day in panic mode. All this could’ve been avoided if you had your finger constantly on the financial pulse of your business.
That’s where tracking and adjusting to certain key performance indicators (KPIs) are critical to the modern restauranteur who wants to win the ever-changing restaurant game. And if you haven’t noticed, the game is getting harder to play and even harder to win.
What the Hell is a KPI?
This is a fairly straightforward answer: A KPI is any piece of data that can be measured and compared to your objective. Now, fair warning—not all KPIs are created equal. There’s a wicked quote by William Bruce Cameron that sums it up rather well: “Not everything that counts can be counted and not everything that can be counted, counts.”
It’s important to track numbers in your bar or restaurant. What numbers you track can make the difference between just getting by and getting ahead. Now, before you start throwing out the “I’m too busy” excuse for not monitoring your KPIs, allow me to say this: “If you don’t know your numbers, you don’t have a business. What you have is a hobby. An expensive hobby.”
Let’s be clear that you never have time—you make time for what’s important. Also let me affirm that if you want success and not mere survival, knowing your numbers is important. Think of it like air: you need it to live.
Why Do You Need to Track Them?
Here’s the deal: Your numbers are like time and they’re happening whether you’re watching them or not! Tracking your KPIs is like keeping your finger on your pulse to determine your heart rate. You want to keep an eye on the pulse (or profitability) of your restaurant or bar.
Just like having a health issue and not monitoring it, many restaurants have poor financial health. It’s not until they’re almost gone that they wake up and try to get things back under control. I prefer that you know your KPIs now and avoid an emergency.
What to Look for in a KPI
There are a few requirements needed for a KPI to be effective:
- It must be specific and measurable.
- It must drive results that improve the business.
- It must be easy to understand.
- It must be tracked regularly.
- It must be visible to the team.
- Someone needs to be accountable for them.
KPIs are a great tool. And just like any tool, they’re only effective if you use them. A hammer on the table doesn’t build a house on its own. You need a skilled craftsman to use it properly to get the desired result.
When you have solid KPIs, they work in synergy with strategy and results. The numbers drive the strategy. The strategy drives the actions. The actions produce the results.
KPIs can Be Classified as Two Types: Lagging and Leading
Lagging KPIs are indicators that can only measure what has already happened. Your sales or guest count for the day are great examples of lagging KPIs: they’ve happened and can’t be changed.
Leading KPIs are where the magic happens! These indicators are more predictive than reactive, providing the opportunity to influence and change the future. Knowing your guest check average (GCA) is a great example of a leading KPI. By knowing the GCA today, you can train your team to increase sales and thus have an impact on the lagging KPI of sales for that day. Leading KPIs are what drive results; lagging KPIs let you know how you’re doing. You need both!
Where to Start
There are around three dozen restaurant KPIs you could track. The keyword there is “could.” I find that only about 12 really have a big impact on sales and profits. Of those twelve, the minimum number my client's track is nine KPIs.
To get you started down the KPI Mastery path, let’s start with the basic metrics:
Cash flow is simply the amount of money going in and out of the restaurant. It’s essentially how much cash you have on hand. Naturally, you'd look for a positive cash flow where the cash input exceeds the cash output over a period of time.
Cash flow = Cash input - cash output
Cost of Goods Sold
Cost of goods (COGS) sold refers to the cost required to create each of the food and beverage items you sell to guests. An accurate COGS is often representative of the largest expenses for the bar or restaurant and is, therefore, an important metric for profitability.
COGS = Beginning inventory + purchased inventory - final inventory
Rather than looking at ways to make more money overall, some strategists will urge you to first look at cutting expenses to improve profitability. Prime Cost is the standard way of determining how much it costs to operate your business and is a standard line item on your P&L statement.
Prime Cost = Total COGS + total labor
The most profitable restaurants I've ever worked with all track their prime costs on a weekly basis. They don't wait around until their monthly or four-week P&L is prepared to find out what happened. The more to track your KPIs, the faster you can react and adjust.
This is one of my favorite KPIs! RevPASH stands for “revenue per available seat hour” during a given time period (and sounds really cool when you say it). Developed by Sheryl E. Kimes at Cornell University, RevPASH is used to optimize labor scheduling, plan food purchasing, and to improve table turn times... Yeah, it’s that cool!
RevPash = Total revenue ÷ (available seats x opening hours)
RevPASH is a good measurement because it uses time and capacity in addition to average check to paint a bigger picture than just margins or average checks do on their own.
Repeat Visitor Rate
A restaurant is only as strong as its loyal customers. Some experts argue that all other metrics are moot points if the guest experience isn’t up to par. If acquiring a new customer is six to seven times more expensive than keeping an existing guest, this might be the best way to measure the success of the business.
Retention Rate = ((Number of customers at end of period - number of new guests acquired during that period) ÷ number of guests at start of period)) x 100
Note: The most difficult thing about calculating the retention rate is finding the data to plug into that formula. Check out systems with built-in customer relationship management (CRM) tools to track customer history.
Another Note: Most modern POS systems have CRM built into their platforms today. If you’re not using your restaurant’s POS system to engage more with your guests, take a time out and go sit in the corner! Bad owner!
Now that you have some KPIs to look track, when should you get started? Now!
Now is always the time to get started tracking your numbers. I asked the audience last year at the Nightclub & Bar Show (around 175 people in the crowd) how many knew the cost of everything on their menu down to the penny. Only 11 people raised their hands. And we wonder why so many restaurants and bars fail every year. It’s no shock to me and it shouldn’t be a shock to you. Know your numbers!
Manage your numbers or they will manage you!
PS. Allow me to help you manage your KPIs.
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