Do you know the difference between cost of goods sold
and direct operating expenses?
In today's video, I'm going to explain that to you in great detail.
Hey, everybody. Ryan Gromfin here – author, speaker, chef, restaurateur,
and the founder of TheRestaurantBoss.com,
as well as RestaurantProfitAndPerformance.com.
And like I said earlier, today,
we're going to talk about the difference between cost of goods sold
and direct operating n expenses.
While they're very similar, they're also extremely different.
Most restaurants get these two confused
and they're tracking them in the wrong places.
It's also a little bit difficult to track them,
so I'm going to share with you a little trick and a way to track these
expenses a little bit better.
Let's do a quick review here.
So cost of goods sold, this is when we say food cost
or beer cost, wine cost, liquor cost.
Those are costs of goods sold. Let's just break it down simply.
It's the cost of a good that we're selling, right?
It's the cost of a good that we're selling.
So how much did you buy something for?
How much are you selling it for divided, right?
So, it's the sales price divided by the purchase price
or the production price if it's like a recipe.
Basically, again, I'm not getting into formulas here today,
you can look for other videos where I have costs of good formulas and things like that,
but direct operating expenses is something that we
haven't really talked about too much.
Let me just quickly go back to cost of goods sold here for a second.
That is a direct expense.
Now, I know this is going to get confusing, so bear with me,
but what I mean by a direct expense is that
if you sell a hamburger,
every single time you sell a hamburger,
it's going to get a bun and a piece of cheese
and a burger patty and a whole bunch of other things, right?
It's directly related, meaning you can't
sell a hamburger without selling a bun and a burger.
I mean there's always the exceptions, right? But for the most part.
Now when we get into direct operating expenses
and forgive the word because this is where the confusion comes in,
these are direct in the sense that they're related
to sales,
but they're not directly related.
And we should almost call them like related operating expenses,
but we don't, we call them direct operating expenses. And what that means is,
something like toilet paper or hand soap or hand towels
or to-go containers; these often fall into the direct
operating expense category.
Now every restaurants going to do things differently.
Sometimes you do include to-go containers and cost of goods sold,
sometimes you don't.
If you have any specific questions about if you should or shouldn't,
please comment in the video below here and I'll be sure to answer them as best.
I can I have some very specific rules about that,
but again,that's not the purpose of today's video.
The purpose is the direct operating expenses.
So what I mean by like chemicals
or toilet paper or hand towels or hand soap is that
the busier your restaurant is,
the more that stuff you're going to use,
but it's not a 100% directly related.
Meaning, if you have a hundred customers in your restaurant
today and they all order hamburgers,
you're going to sell a hundred buns and 100 burger patty,
but if you have a hundred customers in your restaurant today,
you can't relate that to an exact amount of toilet paper.
But if you have 200 customers in your restaurant,
generally speaking, you're going to go through more
toilet paper than 100, but it's not a 100% directly related, right?
You're going to use more hand soap with 200 customers than a 100,
you're going to use more dishwashing chemicals
with 200 customers than with a 100, but not a one-to-one ratio.
So. that's the difference. Now,
a lot of people ask what should my direct operating cost be.
Somewhere between 4 and 8% is the general industry standard.
Let's just say 6%. It's going to depend on what you put in there,
it's going to depend on the volume of your restaurant,
to depend on the type of restaurant, fast-food restaurants
that use a lot more paper goods
and a lot more to-go containers.
Like fast food quick service usually have higher
direct operating expenses then “
you know finer dining or plate service restaurant”.
But again, it's going to kind of vary.
What's most important is you always hear me say when it comes to
your numbers is that you're comparing your numbers
to your numbers and nobody else's.
I don't care what someone else’s direct operating
expenses because I don't know what they put in it,
what's yours? I don't care what someone's food cost is
because I don't know what they put in it, what's your food cost?
Tracked weekly, monthly, yearly.
Is it trending down or is it trending up? It's turning up,
we got a problem we got to fix it. If it’s turning down, you're doing great.
If it's flat, you're probably doing great too.
So the point is,
the difference between cost of goods sold is that they are 100% related.
A product and a sale. Direct operating expenses are partially related,
meaning that they move in a general trend together,
but they're not a 100%.
So, I promised you a easy way to track these and to be honest unless you
are custom building spreadsheets
or you're a very advanced user in QuickBooks and you're able to
create categories and subcategories and work all this stuff out, and even then,
it's not the easiest thing in the world to do
or whatever counting software you're using.
I have some software that we have developed over the last few months,
it's called Bacon, and we've just recently
released it to a small group of test people.
The tests have been going great.
We're not quite open to the public yet.
Well, it depends when you watch this video, but either way,
there's a button below that will take you to the Bacon
software website where you can learn more about it
and either apply if we're still in beta testing
or early adopter testing,
it's open to the public, there'll be an opportunity for you
to take a trial or to sign up or whatever.
But the point is, below this video is a button where you can look at our Bacon software,
which very inexpensively and very easily we'll help you track
your cost of goods sold, your direct operating expenses,
your labor expenses which will altogether give you prime cost
on a daily, weekly, and monthly basis.
And the best part is, if you're not taking inventory in your restaurant
or if you hate taking inventory, we have a patent-pending
algorithm in our software that will give you a very,
very accurate number without taking inventory.
There's so much more on the software, I can't even tell you about it,
but again, click the button below and learn more about it.
I hope this helped explaining the cost of goods sold and direct operating expenses,
and I hope this video helps you make more money,
enjoy more profits,
and just enjoy operating your restaurant a little bit more.
Sorry, it went long. Have a wonderful day.
I look forward to seeing you next week with another one of these great training videos.
Bye-bye.
Hey, everybody Ryan here. I really hope you enjoyed that video.
Would you mind doing me three really quick favors?
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I use this planner
every day in my business and actually,
I think this is one of the reasons why I'm able to get as much done
as quickly and as efficiently as I am able to.
See every year when I sit down to plan out my year,
I sit down and I do 4 of these 90-day planners because
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but we can get a lot more done in 3 months
than we think we can.
And so I've developed a system,
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where you can achieve just about any goal you want in 90 days
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G-O-A-L.
Again, that's TheRestaurantBoss.com/Goal
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Until the next time I see you,
go out every day and improve the lives of your customers,
your employees, your vendors, and of course, your family.