Costing, Purchasing, and Monitoring Margins: A Practical Guide

In the highly competitive hospitality industry, effective cost management and margin monitoring are crucial for the success and profitability of any business. Jon Stacey from our hospitality and leisure team highlights some key strategies and best practices.

Conduct a comprehensive cost analysis:

Before implementing any cost-saving measures, it is important to have a clear understanding of your current expenses. Analyse all cost categories, including food and beverage, labour, utilities, maintenance, and overheads. This analysis will help identify areas where costs can be reduced or optimised without compromising quality.

Implement efficient stock management:

Stock (or as most software now calls it, inventory) management plays a critical role in cost control. Adopt a systematic approach to inventory tracking and ordering to avoid wastage and overstocking. Regularly review what you really need to hold (sometimes called par levels), optimise storage space and implement proper rotation techniques to minimise food spoilage, holding costs and ensure fresh stock is always rotated into the back of storage space.

Embrace strategic purchasing practices:

To optimise purchasing, build strong relationships with suppliers and negotiate favourable terms. Consider bulk purchasing for frequently used items to secure volume discounts. Regularly compare prices and quality among multiple vendors to ensure the best value for money. Leverage technology by using procurement software that streamlines the purchasing process and provides valuable insights into spending patterns.

Monitor and control food and beverage costs:

Food and beverage costs are significant contributors to expenses in the hospitality industry. Implement portion control measures to minimise wastage and standardise recipes to maintain consistency while optimising ingredient usage. Continuously evaluate menu profitability by analysing the contribution margin of each item. Regularly review pricing to ensure it aligns with ingredient costs and market trends. Ask us for tips and processes to make this work.

Optimise labour efficiency:

Labour costs account for a substantial portion of operating expenses. Conduct a thorough analysis of staffing needs based on business demand patterns and adjust staff levels accordingly. Invest in employee training to enhance productivity and efficiency. Implement automated systems, such as staff scheduling software, to optimise scheduling and reduce overtime costs.

Utilise technology for costing and margin monitoring:

Leverage technology tools to streamline cost analysis and margin monitoring processes. Implement an accounting system such as Xero that provides detailed cost breakdowns, tracks expenses to different departments, and generates accurate financial reports. Utilise analytics software to monitor key performance indicators (KPIs) and develop a dashboard for the team to monitor, such as gross profit margin, net profit margin, and food cost percentage, in real-time.

Regularly review and adjust pricing:

Price optimisation is essential to maintain healthy profit margins. Monitor market trends, competitor pricing, and customer feedback to determine appropriate pricing levels. Regularly review and adjust menu prices, considering factors such as ingredient costs, overhead expenses, and desired profit margins.

Monitor and control overhead expenses:

Overhead expenses, such as rent, utilities, and insurance, can significantly impact margins. Regularly review these expenses and explore opportunities to reduce costs without compromising quality or service. Implement energy-efficient practices to reduce utility bills and negotiate favourable terms with suppliers for better pricing.

Implement margin monitoring systems:

Continuously monitor key financial indicators and compare them against industry benchmarks to identify areas for improvement. Set up automated reports to track sales, costs, and profit margins on a regular basis. Conduct variance analysis to identify deviations from expected margins and take corrective action promptly.

Foster a culture of cost awareness:

Engage your team in the cost management process by fostering a culture of cost awareness and accountability. Educate them about the importance of cost control and train them on cost-saving techniques. Encourage suggestions for process improvements and incentivise employees for cost-saving initiatives.

We’re here to help

By following these practical strategies, hospitality businesses can proactively manage costs, maximise margins and build a strong supplier team to ensure the business is always operating as efficiently as possible.

Ask Westcotts how to practically address these suggestions – we can show you examples of how to achieve these goals, provide software suggestions and help you develop KPIs for your own business.

For more information about this subject or to see how Westcotts can help your business, please contact Jon Stacey or a member of the leisure and tourism team. Get in touch today.

Alex Tozer, from our hospitality & Leisure team, discusses some important factors of cost management within the hospitality industry.