When any of us consider starting a company, the conversation often revolves around 'how much money am I going to make?'. While financial security is a compelling reason to take the risk and put in the work to build a successful company, it's crucial to distinguish between making money and keeping your money. No matter how impressive the revenue at the top of your Profit & Loss statement, it's the figure at the bottom that truly matters. And the difference between Gross Revenue and Net Profit boils down to one word: cost.
To put it simply, cost control is what it sounds like: the process of identifying and reducing business expenses to increase profits. It's not just about how much you earn, but how much you get to keep after all costs are accounted for. This principle applies to every company, from restaurants and bars to coffee shops, retail stores, and salons.
Costs in the Hospitality
Let's consider a restaurant as an example. Think about the best restaurant you've ever dined at or a local favorite you frequent. We often focus on the prices of the meals, the service, the décor, but behind all that is a company layered with immense costs. The kitchen staff, the servers, the managers, the hosts, and bartenders all represent labor costs. Then there's the cost of food and alcohol, rent, insurance, utilities, permits, promotions, and discounts.
A Gross Revenue (the total of sales made by a company, also known as the "top line number") of $200,000, or even $1,000,000 can easily be whittled down by costs until it becomes $10,000, or $50,000. Profiting 3%, 5%, or 10% is normal in restaurants. Some of the best-run restaurants are able to profit 15%, but they are the exception, not the rule.
Methods of Cost Control
The only way to control how much money is going out is to truly understand all the numbers associated with your business. If you sell custom t-shirts, you need to understand not only the cost of the shirt and color, but the time it takes to make it, the cost of shipping, the cost of advertising, and so on. Break all this down into the smallest increments you can. If you own a bar, you should have liquor cost broken down by the ounce, not the bottle.
One effective method of cost control is refining purchasing processes. This could involve negotiating better prices with suppliers, buying in bulk where savings can be made, or sourcing locally to reduce transportation costs.
Another is to optimize labor costs. This doesn't mean working with a skeleton crew, which leads to overworking people and destroys morale; it could mean setting clear roles and responsibilities, improving scheduling to match demand, and investing in training to increase employee efficiency and cross-training.
Furthermore, cost control can also involve leveraging technology. Investing in cost-effective technologies can streamline operations, reduce waste, and improve service delivery, leading to increased customer satisfaction and loyalty.
For instance, in the context of a bar or restaurant, one common issue is bartenders overpouring, which leads to significant waste and increased costs over time. By implementing strict pouring measures and training staff appropriately, this type of waste can be significantly reduced, leading to improved cost control.
However, cost control is not a set-it-and-forget-it strategy. It requires regular monitoring and adjustment. As market conditions change, so too should your cost control strategies. This adaptability is what allows businesses to maintain profitability even in challenging market conditions.
In short
Cost control is not just about cutting costs—it's about making decisions that enhance operational efficiency, improve service quality, and ultimately, drive profitability. By understanding and implementing effective cost control measures, hospitality businesses can ensure their financial sustainability and success in the long run.
The key to effective cost control is regular monitoring and adjustment. As the market evolves, so too should your cost control strategies. Stay informed, stay adaptable, and your hospitality business will not only survive but thrive.