Know Your Numbers

Know Your Numbers!

If you don't spend the time to work out your margins then you have no idea whether you're making money on each of your products and items. I've tried to keep the maths as simple as possible. Its worth spending the time to get your head around this though - even raising your margin by .5% can have a massive impact on your business. Correct pricing is essential.

Gross Profit is calculated as follows:
Sales Revenue less the cost of sales = gross profit margin.

It is important to remember that VAT must be removed from both your sales figures and your cost of sales. So if you sell a barrel of lager for £720 you divide by 1.175 to remove the VAT and are left with £612.77 as your Sales Revenue figure. You would repeat the same process to calculate your cost of sales figure.

GP is often expressed as a % of sales revenue or turnover.

This is calculated as follows:
Gross Profit Margin divided by Sales Revenue multiplied by 100 = GP %

Right. That's the basics out the way. You can use these simple maths equations to work out the GP you are making on items. Below are some other equations you can use to help you set prices to deliver specific GP's. They are a little more complex but try getting a piece of paper and a calculator and following along with the examples.

If you cant get the hang of it - don't worry. Head over to our Resources page and you can download our free gp calculators that do it all for you!

REMEMBER - All %'s must equal 100.

Ok. So here goes. If you want to make 75% GP on a product that means you can spend 25% on buying it (or the ingredients for it if you're making it). 75% plus 25% equals 100%. So far so good yes.

How to calculate the selling price of an item
1. Calculate the cost of the ingredients or of the individual item.
2. Divide that figure by the target food cost
3. Multiply this figure by 1.175 to add on VAT.
4. Round to the nearest acceptable figure.

Example (Drink):
Cost of a single shot of Vodka = (Bottle Price / Number of Shots in Bottle) = £9.95 (the price of the bottle) / 28 (the number of shots you get out of each bottle = £0.36p (the cost to you of each shot)
Divide by target food cost = (We want 70% GP, which leaves us with 30% to spend on the product) = 0.36 / 0.3 (30% expressed as a fraction) = £1.20
Multiply by 1.175 = £1.20x1.175= £1.41
Round to nearest acceptable figure = £1.45
Selling Price for a single shot of Vodka on its own is therefore £1.45p

You can apply the same process for food items you have made. Simply add up the cost of the ingredients used in making your item, divide by your target food cost, multiply for VAT and round to the nearest figure. Its really very simple.
So, now you can work out your margin. Your margin is simply the amount of profit you make on a particular item. Lets take the example above.

Selling Price = £1.45p
We've collected tax for the Chancellor so lets remove that = £1.45 / 1.175= £1.23
Now we need to take of the cost of the item, in this case 0.36p = £1.23 - 0.36p= £0.87p
So our margin is £0.87p

I told you it was easy. This 'margin' money is what you have to pay for your staff, premises, accountants, lighting, heating, rent, rates basically all of your other outgoings.

Here are some other calculations you might like to play with:

How to calculate the amount you can spend on ingredients if you know the selling price
1. Menu price
2. Divide by 1.175 to remove VAT
3. Multiplied by target food cost.

So we've made a Homemade Steak Ale and Mushroom Pie and are planning on selling it for £8.95, we remove the VAT (8.95 / 1.175) which leaves us with £7.62. We then multiply this number by our target food cost (in this example 0.33 (33% expressed as a fraction) to leave us with 67% GP). So £7.62 x 0.33 = £2.51p. This means that we can spend £2.51p on this dish - don't forget to include all the costs, your vegetables, potatoes, salt and pepper, gravy etc.

How to calculate food cost percentages given the selling price and cost of ingredients
1. Cost of ingredients
2. Divided by selling price (less the VAT)
3. Multiplied by 100

So let us take the above example again. Our ingredients cost us £2.51. We divide this by 7.62 (The selling price less the VAT) which leaves us with 0.33 which we multiply by 100 to give us 33% So the food cost is 33% and the GP is 67%

There we have it. The BARventure guide to GP calculations and margins. Go through it nice and slowly and check all the items that you sell. Are you making money? What GP are you getting? As a rule most restaurants would like to keep there food costs at 30% or less. Most bars would be looking at food costs of 35% or less and liquor costs of 30% or less. High end coffee bars would be looking at 20% or less costs across the board. If you're miles away from these figures you really ought to have a look at your pricing structure.

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