In the hospitality industry, profitability often comes down to one critical concept: aligning costs to revenue. This alignment ensures that your expenses, such as wages, COGS (Cost of Goods Sold), and overheads are proportionate to your income. Without this balance, even high sales volumes can result in poor profitability or even losses.
Here’s why aligning costs to revenue is vital for the success of any hospitality venue, and how you can implement this strategy effectively.
1. Why Costs Must Follow Revenue Trends
In hospitality, revenue can fluctuate dramatically depending on the day, week, or season. Aligning costs to revenue ensures that expenses remain in proportion to the income being generated.
- Adjusting Wages: If sales are lower on weekdays, rosters should be adjusted to reflect this. Overstaffing on quiet days unnecessarily inflates wage percentages.
- Flexibility in Operations: Responding quickly to shifts in revenue trends, such as shortening shifts on quieter days, helps to keep costs aligned.
Example: A venue with a quiet Monday might reduce the number of staff scheduled, bringing wage percentages closer to target levels even when sales are low.
2. Preventing Profit Leaks
When costs aren’t aligned with revenue, venues risk “profit leaks,” where expenses eat into margins unnecessarily.
- Wages: Wage percentages can balloon if rosters don’t account for revenue trends.
- COGS: High costs relative to revenue due to inefficiencies or poorly managed pricing can erode profitability.
- Overheads: Fixed and variable overheads must be monitored to ensure they don’t outpace revenue growth.
Key Insight: Every dollar spent must contribute to profitability. Misaligned costs reduce your ability to reinvest in growth or navigate challenges.
3. Using Forecasting to Align Costs
Forecasting is an essential tool for ensuring costs are aligned with expected revenue. By predicting sales for the week or month, you can proactively adjust your expenses.
- Weekly Forecasting: Analyze historical sales data and current trends to predict upcoming revenue and adjust costs accordingly.
- Daily Adjustments: Monitor daily sales against forecasts and make real-time changes, such as shortening or cutting shifts to maintain wage percentages.
Example: A steak restaurant used forecasting to predict a 20% drop in revenue during winter. By proactively reducing shifts and offering specials to boost traffic, they maintained profitability despite lower sales.
4. The Role of KPIs in Monitoring Alignment
Key Performance Indicators (KPIs) like wage percentages and COGS help track how well costs are aligned with revenue.
- Wage Percentages: Aim for 28-32% of revenue for labor costs, adjusting rosters to meet these targets.
- COGS Benchmarks: Food COGS should ideally be 28-32%, while beverage COGS should be 25-30%.
- Profitability Matrix: Regularly review the profitability matrix to see if each area of the business is within industry standards.
Key Insight: Regularly reviewing KPIs ensures that any misalignment is quickly identified and corrected.
5. Planning for Special Events and Seasonal Peaks
Special events and peak seasons can lead to higher revenue, but they also require increased costs, such as additional staff or marketing spend. Aligning these costs with the anticipated revenue ensures profitability.
- Event Planning: When hosting large events, ensure that additional wages and other expenses are offset by higher revenue.
- Seasonal Adjustments: During quieter periods, focus on reducing costs rather than maintaining peak-season spending habits.
Example: At a rooftop bar, careful planning for a New Year’s Eve event ensured that the cost of additional staff and premium stock was balanced by higher ticket prices and beverage sales.
6. Accountability Through Weekly Coaching Sessions
Weekly coaching sessions with managers and head chefs play a crucial role in ensuring costs are aligned with revenue.
- Reviewing Numbers: Use these sessions to discuss wage percentages, sales trends, and any cost misalignments.
- Encouraging Real-Time Adjustments: Managers and head chefs should feel empowered to make changes during the week to maintain alignment.
Key Insight: Accountability keeps teams focused on their financial targets, ensuring that costs remain proportional to revenue.
7. The Consequences of Misalignment
Failing to align costs with revenue can lead to several issues:
- Reduced Profit Margins: High costs erode profitability, making it harder to sustain or grow the business.
- Cash Flow Challenges: Overspending on wages or operational costs can create unnecessary financial strain.
- Operational Inefficiencies: Misaligned costs often indicate deeper issues in management or processes, leading to missed opportunities for improvement.
Key Insight: Misalignment isn’t just a financial problem—it affects every aspect of the business, from team morale to customer satisfaction.
Aligning Costs Is Key to Long-Term Success
Aligning costs to revenue is one of the most effective ways to ensure profitability and sustainability in the hospitality industry. By using forecasting, monitoring KPIs, and holding regular coaching sessions, you can create a culture of accountability and proactive decision-making.
When costs follow revenue, your venue operates efficiently, margins are protected, and you’re better prepared for both challenges and opportunities. It’s not just about managing expenses, it’s about ensuring every dollar spent contributes to the success of your business.
