Here’s part 3 with some key financial terminology to help you get started!
Revenue: The amount of money you receive in sales
Cost of goods sold (COGS): All the costs involved in producing food – whether it is the ingredients or sourcing for ingredients
Gross profit: Revenue minus COGS
Operating income: Profit earned after deducting operating expenses like COGS, wages, rentals….
Operating margin: Important to measure your restaurant’s pricing strategy and determine operating efficiency. Divide your operating income by your revenue. A bigger number is better.
Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA): Important to compare how profitable you are compared to competitors. Deduct expenses from your revenue.
Net profit margin: Deduct operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been from a company’s total revenue. A higher number is better.
Operating expenditure (OPEX): Costs of running your restaurant. Does not include fixed costs – costs that won’t change whether or not you are open for business. E.g. coffee beans.
Capital expenditure (CAPEX): Cost of physical assets. E.g. a coffee machine.
Operating cash flow: Take your revenue and deduct OPEX and CAPEX. You want this number to be positive!
Working capital: A measure of a company’s efficiency and short-term financial health, calculated as current assets minus current liabilities. The best way to optimise working capital is to look at your business model periodically and understand the movements of cash in and out of the business.
Return on capital employed (ROCE): Rate of return generated on total capital. Take operating income and divide it by capital costs.
Return on invested capital (ROIC): Tells you how well a restaurant generates cash flow, relative to the amount invested in capital. Take the net operating profit (adjusted for tax) and divide it by the invested capital.
Inventory turnover: The ratio of sales to inventory. It shows how many times a restaurant’s inventory is sold and replaced over a period. Although a higher ratio is usually better, it is important to compare your inventory turnover ratio with industry benchmarks – very high ratios could also result in lost sales and not enough inventory to meet demand.
Occupancy cost ratio: The ratio of a restaurant’s annual rent to its sales receipts.
We hope this series has been helpful to you. Do let us know if there are other terms you would like help with!