Food business owners are often faced with this dilemma – do I focus on increasing sales or do I spend my time on finding ways to reduce my costs?  In-fact this is one of the biggest balancing acts (by-far not the only one) that food entrepreneurs face.

Looking at the numbers – If we were to look strictly at the numbers part of this question, the answer seems pretty clear.  Here is a hypothetical situation;

 

Assumptions Current Information Increase Revenue by $3000 Reduce Costs by $3000
Revenues $20,000 $23,000 $20,000
Variable Costs  ($14,000) ($16,100) ($11,000)
Fixed Costs ($4,000) ($4000) ($4000)
Profit $2000 $2900 $5,000

 

The table shows a clear winner – it is better to reduce costs by $3000 (in this hypothetical scenario) than to increase revenues by $3000.  So, is that the right answer?

 

Not necessarily.

 

Although knowing and understanding the numbers of your business is a crucial part of running any food business, decisions such as this should never be made by simply looking at the numbers.  There are many factors to consider when deciding on the best approach.  In the above scenario a reduction in variable costs may include a reduction in staff cost, reducing janitorial work, or even purchasing cheaper quality food ingredients.  While all these things might reduce costs in the short term they will have a detrimental impact on your business long term.

Before making a decision on whether to reduce costs or attempt to increase revenues business owners should;

  •  Walk the Gemba — walking the gemba is a process improvement term that literally means walk onto the production floor, the restaurant kitchen floor – where the action is.  As mentioned, decisions like this ought not be made by looking at the numbers alone, but looking at the reality of the operation and identifying if there is any obvious wastage that can be targeted for cost reduction.
  • Identify opportunities for reducing waste that will not impact either customer service or the quality and safety of the food being produced.
  • Identify opportunities to increase revenues and re-examining the business marketing strategy
  • Develop a detailed action plan that takes into consideration the what, how, who, when, and where as well as identifies the potential impacts these actions might have on other parts of the business.  In some cases solving one problem might end up causing another problem elsewhere in the business.

So, to reduce costs or increase revenues?  The answer is likely to be a bit of both and will depend on the specific situation of the food business.

 

Have a great week!