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Margins matter. Of course, we all know that. But when you’re checking your sales figures and balance sheets at the end of the month, wondering why it’s not higher, it’s possible you’re overlooking the hidden figure that can reveal exactly where you might be leaking money.
It’s called gross margin variance, and it’s essentially the difference between the profit you'd make in a perfect world, and the profit you actually made. Some difference between the two can be natural, but when the gap is significantly large or it’s negative for a long time, it can really attack your profitability, while going under the radar.
And that’s not ideal.
Let’s take a look at:
- What we mean by gross margin variance
- What causes gross margin variance
- What you can do about gross margin variance
What is gross margin variance?
Gross margin variance is the difference between your actual gross margin variance and your theoretical gross margin. It gives you a figure for how much profit you should have made, compared to what you actually made, after covering the direct costs of the items.
Your theoretical gross margin is your ideal profit, if everything was perfect – no waste, no over-portioning, and perfect inventory management. Alas, it’s not always like this in the restaurant world.
Your actual gross margin is the real-life sales revenue profit you make, the actual revenue. It will take into account things like waste, spoilage, and operational inefficiencies – the stuff you don’t want in a perfect environment.
The gap between these two figures is where you’re losing money.
Let’s say your restaurant is famous for its cheesecake. It costs you around £3 per portion, and sells for £10. Serving up 100 portions should mean you spend £300 on ingredients, and make £1,000 in sales, leaving you with a profit of £700 (your theoretical gross margin).
But if only things were so clear-cut.
Instead, you find, you actually ended up spending £500 on ingredients. Now, your 100 portions is only leaving you with a profit of £500 (your actual gross margin).
The difference between these two figures (£700-£500) of £200 is your gross margin variance. That’s cash you should have had, in theory, lost to your business.
Let’s look at why.
The real reasons your numbers don’t match
If you’re finding that your theoretical and actual gross margins aren’t matching, it’s a strong sign you’re losing profits in a way that might be preventable. Tackling some of the most common reasons for a discrepancy can lead to easy wins and big results.
Here’s what to look for:
Poor inventory accuracy: If your inventory counts aren’t precise, it’s hard to work out exactly where you’re losing. That means recording your beginning and ending inventory counts, as well as actual purchases accurately.
Over-portioning or under-charging: Your chef is just adding to the buzz when she adds that extra scoop of expensive ice cream on every pie. But if it’s not accounted for, she’s giving it away without charging for it – and it’s all adding up. Likewise, if your staff or your payment systems have an unfortunate habit of charging things at a lower price, you’re going to be losing money.
Theft: Whether it’s customers or employees lifting things without paying, the result is the same: your cost of goods sold is going up.
Waste: Anything from spillages and preparation mistakes, to ingredients going past their use-by date or not being stored correctly, and over-production, contributes to discrepancies.
Menu engineering blind spots: Your menu might remain the same for a long time, because who has time to be constantly replacing them? But suppliers’ costs aren’t staying the same. Not updating your menu to take account of this means your dishes might not be as profitable anymore.
Staff training: Do your staff know and understand vital kitchen skills like portion control, cooking procedures, and inventory handling? What you want is consistency in the way food and drink is handled, prepared, and served across every single order in your business. A new chef might, for example, use more of a certain ingredient, while an untrained waiter might spill or drop more items.
How to close the gap (for good)
There are multiple ways a gap can happen, and multiple ways to fix it. Often a combination of these can work wonders.
Accurate, real-time inventory tracking: Swap manual spreadsheets and reporting for a digital, real-time system that updates inventory as it's used, and gives you a 360-degree view of what’s happening in your kitchen.
Accurate demand forecasting: Tackle waste by analysing historical sales data, seasonal trends, and upcoming events, to predict how much of each ingredient you'll actually need. Less overbuying. Less spoilage. More profit.
Consistency in recipes and costing inputs: Every single dish needs a precise, measured-out recipe that specifies the quantities of ingredients to be used – and the recipe should be updated regularly with up-to-date supplier prices.
Link your systems: When you’re running different parts of your business on different systems, mistakes or missing data are always going to happen. Platforms like Nory bring together inventory, staffing, payroll and more to streamline your entire operation and increase your margins where it counts.
Use AI technology: Instead of laboriously sifting through reams of data, a restaurant management platform like Nory can combine real-time information with AI predictive analytics to help you operate with consistency, certainty and profitability. When issues come up, they can be turned into actionable insights you can take to make an immediate difference.
Nory helps restaurants increase profit margins by providing AI-powered insights into real-time performance, staffing optimisation, and improved menu engineering. It’s built to help you reduce costs, boost revenue, and ultimately improve your bottom line.
Ready to start making more of your margins? Book a demo today.
FAQs
- Why is there a difference between theoretical and actual gross margin in restaurants?
Gross margin variance is the difference between your actual gross margin variance and your theoretical gross margin. It gives you a figure for how much profit you should have made, compared to what you actually made, after covering the direct costs of the items.
Your theoretical gross margin is your ideal profit, if everything was perfect – no waste, no over-portioning, and perfect inventory management. Alas, it’s not always like this in the restaurant world.
- What causes food cost variance
Poor inventory accuracy: If your inventory counts aren’t precise, it’s hard to work out exactly where you’re losing. That means recording your beginning and ending inventory counts, as well as actual purchases accurately.
Over-portioning or under-charging: Your chef is just adding to the buzz when she adds that extra scoop of expensive ice cream on every pie. But if it’s not accounted for, she’s giving it away without charging for it – and it’s all adding up. Likewise, if your staff or your payment systems have a habit of charging things at a lower price, you’re going to be losing money.
Theft: Whether it’s customers or employees lifting things without paying, the result is the same: your cost of goods sold is going up.
Waste: Anything from spillages and preparation mistakes, to ingredients going past their use-by date or not being stored correctly, and over-production, contributes to discrepancies.
Menu engineering blind spots: Your menu might remain the same for a long time, because who has time to be constantly replacing them? But suppliers’ costs aren’t staying the same. Not updating your menu to take account of this means your dishes might not be as profitable anymore.
Staff training: Do your staff know and understand vital kitchen skills like portion control, cooking procedures, and inventory handling? What you want is consistency in the way food and drink is handled, prepared, and served across every single order in your business. A new chef might, for example, use more of a certain ingredient, while an untrained waiter might spill or drop more items.
- How do I calculate gross margin variance?
Let’s say your restaurant is famous for its cheesecake. It costs you around £3 per portion, and sells for £10. Serving up 100 portions should mean you spend £300 on ingredients, and make £1,000 in sales, leaving you with a profit of £700 (your theoretical gross margin).
But if only things were so clear-cut.
Instead, you find, you actually ended up spending £500 on ingredients. Now, your 100 portions is only leaving you with a profit of £500 (your actual gross margin).
The difference between these two figures (£700-£500) of £200 is your gross margin variance. That’s cash you should have had, in theory, lost to your business.
- How can restaurant operators reduce gross margin variance?
There are multiple ways a gap can happen, and multiple ways to fix it. Often a combination of these can work wonders.
Accurate, real-time inventory tracking: Swap manual spreadsheets and reporting for a digital, real-time system that updates inventory as it's used, and gives you a 360-degree view of what’s happening in your kitchen.
Accurate demand forecasting: Tackle waste by analysing historical sales data, seasonal trends, and upcoming events, to predict how much of each ingredient you'll actually need. Less overbuying. Less spoilage. More profit.
Consistency in recipes and costing inputs: Every single dish needs a precise, measured-out recipe that specifies the quantities of ingredients to be used – and the recipe should be updated regularly with up-to-date supplier prices.
Link your systems: When you’re running different parts of your business on different systems, mistakes or missing data are always going to happen. Platforms like Nory bring together inventory, staffing, payroll and more to streamline your entire operation and increase your margins where it counts.
Use AI technology: Instead of laboriously sifting through reams of data, a restaurant management platform like Nory can combine real-time information with AI predictive analytics to help you operate with consistency, certainty and profitability. When issues come up, they can be turned into actionable insights you can take to make an immediate difference.
- What role does inventory accuracy play in gross margin?
If your inventory counts aren’t precise, it’s hard to work out exactly where you’re losing. That means recording your beginning and ending inventory counts, as well as actual purchases accurately.
Accurate, real-time inventory tracking is vital. Swap manual spreadsheets and reporting for a digital, real-time system that updates inventory as it's used, and gives you a 360-degree view of what’s happening in your kitchen.
- Can technology help reduce actual vs theoretical food cost gaps?
Swap manual spreadsheets and reporting for a digital, real-time system that updates inventory as it's used, and gives you a 360-degree view of what’s happening in your kitchen.
Tackle waste by analysing historical sales data, seasonal trends, and upcoming events, to predict how much of each ingredient you'll actually need. Less overbuying. Less spoilage. More profit.
When you’re running different parts of your business on different systems, mistakes or missing data are always going to happen. Platforms like Nory bring together inventory, staffing, payroll and more to streamline your entire operation and increase your margins where it counts.
Instead of laboriously sifting through reams of data, a restaurant management platform like Nory can combine real-time information with AI predictive analytics to help you operate with consistency, certainty and profitability. When issues come up, they can be turned into actionable insights you can take to make an immediate difference.