In the hospitality industry, financial success hinges on making informed decisions based on accurate data. The profitability matrix is a powerful framework that simplifies complex financial information into actionable insights. By focusing on the key pillars of revenue, COGS (Cost of Goods Sold), wages, variable overheads, rent, and operating profit, the profitability matrix helps managers and owners align their decisions with profitability goals.
This guide is specifically designed for bars, pubs, and restaurants, as function centers often require a different percentage breakdown due to their unique business models.
1. Simplifying Financial Complexity
Hospitality operations involve countless moving parts, from menu costs to staffing schedules. The profitability matrix consolidates all these elements into a clear, easy-to-understand format.
- Revenue (Sales): Tracks the total income generated during a specific period.
- COGS: Reflects the cost of producing food and beverages, expressed as a percentage of sales.
- Wages: Labor costs relative to revenue, covering both front-of-house and back-of-house staff.
- Variable Overheads: Includes fluctuating expenses like utilities, marketing, and cleaning supplies.
- Rent: Fixed costs associated with the venue’s premises, expressed as a percentage of revenue.
- Operating Profit: The amount remaining after all expenses, indicating the financial health of the venue.
By turning raw numbers into percentages, the matrix allows managers to easily compare performance over time or across venues, revealing trends and areas for improvement.
2. Using the Matrix Throughout the PERI Framework
The profitability matrix is a cornerstone of the PERI framework (Plan, Execute, Results, Improve), ensuring data-driven decisions at every stage:
- Planning: Used during budgeting to set clear targets for sales, costs, and profit margins.
- Execution: Guides forecasting and resource allocation to ensure weekly plans align with financial goals.
- Results: Provides a benchmark for evaluating performance in weekly profitability reports and monthly profit-and-loss statements.
- Improvement: Tracks progress over time, measuring the impact of adjustments and highlighting new opportunities.
This integration ensures that every decision supports the venue’s financial objectives.
3. Guiding Key Decisions
The profitability matrix helps managers and owners make better decisions in critical areas, such as:
Menu Pricing and Optimization
By tracking COGS percentages, the matrix highlights which menu items generate the best margins and which require adjustment. Managers can use this data to:
- Promote high-margin items through upselling.
- Reevaluate portion sizes or supplier agreements for underperforming items.
Labor Cost Management with COGS Balance
Wages are one of the largest expenses in hospitality. While the goal is to keep wages within benchmarks, there are scenarios where higher wages are acceptable if offset by lower COGS.
For example, a kitchen preparing more items from scratch may have higher wage percentages but lower food COGS. This balance can lead to better overall profitability when managed correctly.
Case in Point: One client’s kitchen achieves a 23% food COGS, well below the industry benchmark of 28%-32%, but their wages are higher than average. The client considers this trade-off worthwhile because it delivers better overall profitability. However, the balance between wages and COGS must still align with financial goals to remain sustainable.
Revenue Growth Opportunities
When rent or overhead costs exceed benchmarks, the matrix emphasizes the need to boost sales. This insight drives strategies such as:
- Hosting events to increase foot traffic.
- Running targeted promotions during slow periods.
- Expanding menu offerings to attract new customer segments.
4. Measuring Success with Percentages
One of the greatest advantages of the profitability matrix is its use of percentages to measure financial performance. For bars, pubs, and restaurants, benchmarks typically include:
- COGS: Food should range between 28%-32% of revenue, and beverages between 25%-30%.
- Wages: Labor costs should fall between 28%-35%, though higher wages may be acceptable if balanced with lower COGS.
- Variable Overheads: These should remain within 12%-16%.
- Rent: Ideally less than 8%, but no more than 10%.
Note: Function centers often have a different percentage breakdown due to factors such as event-driven revenue, lower staff requirements outside events, and bulk food preparation.
Using these benchmarks, managers can:
- Spot deviations quickly and address them proactively.
- Compare performance across weeks, months, and years.
- Understand the financial impact of operational decisions, such as adding staff or running a promotion.
- Monitor Progress Over Time: The matrix allows managers and chefs to see the impact of their decisions daily, weekly, and monthly, ensuring they stay aligned with profitability goals.
5. Supporting Weekly Coaching Sessions
The profitability matrix is a focal point of weekly coaching sessions, where managers and chefs review their numbers and identify areas for improvement. By discussing the matrix, these sessions ensure:
- Accountability: Managers and chefs take ownership of their financial performance.
- Clarity: Everyone understands how their decisions impact overall profitability.
- Actionable Goals: Each session concludes with clear next steps, such as adjusting rosters or launching a new menu promotion.
For example, if a venue’s wage percentage rises to 37%, coaching can help managers pinpoint scheduling inefficiencies and implement changes to bring it back in line.
6. A Practical Example
Consider a bar with weekly sales of $40,000 and the following profitability matrix:
- COGS: 33% for food and 28% for beverages.
- Wages: 35%.
- Variable Overheads: 17%.
- Rent: 9%.
- Operating Profit: 6%.
Using the matrix, the management team identifies two key areas for improvement:
- COGS Reduction: By optimizing food portion sizes and renegotiating supplier pricing, they reduce food COGS to 30%.
- Wage Management: By improving scheduling and cutting unnecessary shifts, they lower wages to 30%.
These changes increase the operating profit to 11%, demonstrating the matrix’s power to guide impactful decisions.
7. Driving Continuous Improvement
The profitability matrix isn’t just a snapshot of financial performance—it’s a tool for continuous improvement. By revisiting the matrix regularly, managers and owners can:
- Adapt to market changes, such as rising food costs or shifts in customer demand.
- Set realistic benchmarks based on the venue’s current performance.
- Celebrate wins and maintain accountability for long-term success.
The Profitability Matrix as a Roadmap
In hospitality, success depends on understanding and optimizing every element of a venue’s operations. The profitability matrix provides a clear, actionable roadmap for aligning costs, boosting sales, and maximizing profits.
When integrated into tools like the PERI framework and weekly coaching sessions, the matrix empowers managers and chefs to make data-driven decisions that drive sustainable growth. Whether it’s identifying high-margin menu items, addressing labor inefficiencies, or planning for long-term success, the profitability matrix ensures that every decision supports your venue’s financial goals.
