Restaurant Profit Shrinkage – Where to Find the Biggest Culprits

August, 30th, 2018 at 1:12 am

Years ago, I was a chain restaurant executive working with the GM of one of our 16 locations. We were discussing why his COGS were consistently higher than other units.

Although his store was very small and the sales to labor ratio was in line, costs were creeping up. We reviewed all the typical possibilities for his dwindling profits, then we went to work on WEPT.

diners at a restaurantHow to plug the restaurant profit drain

Waste – What are you throwing away that could be used? Are you over-ordering or over-producing for the day’s sales and creating spoilage? It’s pure profit down the drain!

Employee mistakesI’m talking about honest errors that require better systems. Are employees forgetting to ring in items that they make and serve themselves? Does your kitchen staff produce items without a ticket? Are the prices in your POS system accurate?

Portioning – Does the staff have easily accessible recipes and line builds to ensure proper portioning during prep and plating? Portioning affects costs, creates inconsistencies with your guests and will erode profits.

Theft – Your exposure to theft in a restaurant can be overwhelming. Still, once you’re aware, you can make it harder for staff to sneak product out the back door, give drinks to their friends and abuse time cards. Keep your eyes on cash transactions, as managers can manipulate them. Also, petty cash and deposits offer opportunities for theft, so controls are critical. Watch for employee backpacks positioned near desirable and valuable items in the front and back of the house.

What you track gets accomplished

If you set a goal and don’t monitor your progress until the deadline, you’ve already failed. CTUIT software, a third-party platform for analyzing and tracking data, was one of the many ways we stayed on top of our goals.

At this small store, even after we tackled WEPT, costs were still higher than company averages. The GM and I reviewed the CTUIT reporting and discovered the profit leak.

It turned out a manager had gained access to the GM’s security card number. So he used that code, as well as his own, to reopen closed cash checks, void them and pocket the money. Since he started small and made infrequent voids no one noticed. While he gained confidence and accelerated his scam, store profits dipped so low it triggered our investigation.

Evidence of $80,000 stolen

Our data system revealed over $80,000 in reopened and voided cash checks on the suspected manager’s shifts. The GM called the police and they arrested the employee.

Some of the staff found pleasure in the security footage of him being escorted out in handcuffs. Instead, I felt disappointed for not catching this problem before it affected managers’ bonuses and shareholders’ confidence in my team.

Is your restaurant vulnerable to theft?

Consider these common risks:

  • Short ringing tickets or missing items
  • Trash as camouflage — conduct garbage audits, dumpster checks, randomly peek into bushes where product could be stashed during trash runs
  • Vendor mistakes — check incoming orders to the invoice
  • Watch the empty keg count
  • Unprocessed credits
  • Staff eating/drinking products
  • Managers voiding sales or employees requesting voids after a guest leaves
  • Fraudulent petty cash receipts
  • Time theft through card accounting or breaks
  • Giving away food and drinks to increase tips
  • Using the same ticket for multiple guests at the bar

The cause of 30% of business failures

Employee theft is the deciding factor in an astounding 30% of business failures. In fact, internal pilfering costs us 7% of gross sales nationally. And sadly, 75% of all employees are likely to steal from their employer in the next year. (U.S. Chamber of Commerce statistics, 2012)

Because your business can lose cash, products and profits in hundreds of ways, start by implementing a culture of active oversight. And for balance, remember to celebrate those employees who follow the systems and have new creative ideas.

What to do this week

  • Add locks to alcohol and meat storage areas
  • Do routine check audits
  • Pull bartender/cashier drawers mid-shift
  • Review cash tickets
  • Inspect void and comp reports
  • Spot-check camera footage if available

And don’t stop there! I recommend you change up manager and bartender schedules. Then reset the safe and alarm codes, and invest some valuable time educating yourself on the many ways employees can steal in your business.

It’s a big job, and you may need help. We’re experts at tightening up systems and rescuing companies when they’re in crisis. Get in touch and let’s talk about it.

Learn more
About GoGo Graves operations consulting services
About Bay Area consultant Rick Graves