You have your financial reports for the week, month, or year...now what do you do with them? Do you file them away without a second thought; they're only for the banker anyway? Do you compare the current period to prior periods to pinpoint areas requiring further investigation? Do you compute your key ratios and investigate variances? Having a set of key ratios that you monitor allows you to:
Analyzing trends using operating ratios is a good way to make manageable and meaningful pieces out of a large amount of data. From the large amount of potential ratio calculations, select the few that will yield the most valuable information about your operations. It may be a good idea to have certain ratios that you calculate on a weekly basis, and another set that you calculate monthly.
Which list the ratio belongs on depends on the volatility of the item(s) you are monitoring. If there is a high degree of volatility, you might want to monitor it on a weekly basis to be able to make rapid adjustments and be able to rapidly assess the success of the adjustments made.
Following are some examples of ratios you may want to monitor. This list is not all-inclusive; you may want to consult your advisor to determine which ratios are the best to monitor your specific operations.
- Profit as a percent of sales:
Profit as a percent of sales = Operating income/Net sales
Compare with prior periods to determine whether this ratio is improving or worsening. Analyze individual income and expense items to determine which items are causing the change.
- Liquor cost as a percent of sales:
Liquor cost as a percent of sales = Liquor cost/Liquor sales
The same ratio can be used for food costs, beer costs, wine costs, etc. This ratio can be calculated for any item or group of item for which you separately track sales and costs. This ratio may help you discover the effect of price increases on operations, inefficiencies and waste by staff, theft, etc.
- Labor cost as a percent of sales:
Labor cost as a percent of sales = Labor expense/Net sales
This ratio helps you determine how efficiently you're using your labor.
- Sales per employee:
Sales per employee = Net sales/FT equivalent employees
To calculate FT (full-time) equivalent employees, take total hours worked divided by the amount of hours a full-time employee would have worked during the period being analyzed (40 hours if the period is a week).
You may also want to look at front-of-house and back-of-house employees separately if your operation includes a restaurant.
- Labor ratios:
Sales per hour of labor = Net sales/Total labor hours
Cost of labor per hour = Total labor costs/Total labor hours
Mgmt. Costs as a % of sales = Mgmt wages/Net sales
Hourly cost as a % of sales - Hourly wages/Net sales
Customers per labor hour = Customer count/Total labor hrs.
These ratios may be used in combination or alone to help assess efficiency between employees or managers, calculated during a specific time of day, these ratios may assist with staffing decisions.
- Bar supplies as a percent of sales:
Bar sales as a % of sales = Cost of bar supplies/Net bar sales
This ratio monitors the use of bar supplies (napkins, straws, swizzle sticks, etc.). You probably won't bother to calculate this ratio unless you suspect improper use of bar supplies due to the relative low cost of these items.
- Liquor inventory turnover:
Liquor inv. turnover = Liquor cost/Avg. liquor inventories
Average age of inventory = 360/Inventory turnover
These are annualized calculations used to determine how efficiently you are using your inventory. Compare with prior periods or industry standards.
- Current ratio:
Current ratio = Current assets/Current liabilities
Evaluates your ability to meet current obligations as they become due.
- Debt to equity:
Debt to equity = Long-term debt/Owners' equity
Measures the extent you've used non-equity (non-owner) capital to finance the business.
