Complete Guide to Calculating & Controlling Food Cost in Restaurants
Running a profitable restaurant is about far more than just great food and a nice ambiance, with, perhaps, one of the biggest concerns being the maintenance of control over food costs.
Generally, a restaurant's profit margin is around 3-5% but can also range between 0-15% depending on the location and establishment. A crucial part of optimizing expenses and expanding this profit margin is to control the amount of money spent on inventory and ingredients. This is when accurately calculating and carefully tracking food cost percentages becomes beneficial.
A restaurant's food cost percentage reveals how much of the total revenue is dedicated to food and drink ingredients. Knowing this piece of information is the key to helping businesses make informed decisions when it comes to budgeting for inventory.
Frequently calculating food cost percentage can help restaurants avoid losses by keeping track of ingredient costs, food waste, and shrinkage.
Why Food Cost Matters
A profitable restaurant spends about 28 to 35% of its overall sales on ingredients alone. Therefore, by determining the food cost percentage and identifying areas where this cost can be limited, businesses can make operational decisions that will directly influence its bottom line and maximize profits.
Here are the top reasons why tracking foods cost matters-
- Reveals top and low performing dishes - Knowing food costs comes in handy when deciding which dishes have high-profit margins and which are costing the restaurant too much money to make. Food costs can also indicate which dishes are higher in demand, as they will require replenishment more frequently than the less popular dishes. Identifying such factors prevent food spoilage and decrease waste.
- Makes it easier to optimize menu prices - After determining which items are bringing in the most profit and which are falling short, prices can be readjusted accordingly.
- Sheds light on food supplier impact - Food cost also gives owners and managers a better idea of how food suppliers impact profitability by highlighting how much ingredients cost. For example, if a supplier's rate for tomatoes is causing food costs to rise, the restaurant can either negotiate a better rate or find a more affordable supplier.
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Calculating Food Cost Percentage
To calculate how much of a restaurant's revenue is taken up by inventory, refer to the following formula-
Total Food Cost % = (Total Cost of Goods Sold / Total Revenue) x 100
In order to use this formula, follow these steps-
1. Find Total Cost of Goods Sold (CoGS)
The Total Cost of Goods Sold refers to the total costs procured in the process of producing the goods being sold in a given time period. This amount is found by-
[(Value of Beginning Inventory) + (Value of Additional Inventory Purchases)] (Value of Ending Inventory) = CoGS
When calculating the total CoGS within a given time period, start by determining the initial amount of capital spent on purchasing inventory. By conducting manual inventory counts, businesses can determine how much has been spent on stock. For restaurants utilizing inventory management software, they can simply refer to their inventory reports for their spending history. Next, add any additional inventory costs accrued during this period.
Lastly, subtract the value of the inventory from the initial inventory costs and inventory purchased from the given time period.
2. Find Total Revenue
This can be done fairly quickly when utilizing a POS system. The POS system automatically calculates how much a restaurant has earned in a day, week, month, or year.
3. Divide Total CoGS by Total Revenue.
4. Multiply results by 100 to find the Total Food Cost %
Value of Inventory at Beginning of July- $12,000
Value of Additional Inventory Purchases in July- $4,000
Value of Inventory at the end of July- $5,000
The CoGS for July would be = $11,000 [($12,000 + 4,000) - 5,000]
Total Revenue = 30,000
($12,000 CoGS / $30,000 Total Revenue) x 100 = 40% (Total Food Cost Percentage)
How to Calculate the Ideal Food Cost Percentage
Once the total food cost has been calculated, a restaurant needs an ideal food cost percentage to compare it to. An ideal food cost percentage refers to what a restaurant's authentic food cost would be (excluding zero supply waste or theft).
If the actual food costs are above the ideal percentage, this can bring to attention a number of issues including food waste, theft, or overpriced ingredients.
Keep in mind, this percentage doesn't take into account a restaurant's beginning and final inventory expenses, as it only looks at a menu item's total cost and sales.
To calculate the ideal food cost percentage, the following must be identified-
- Total food costs
- Total food sales
If the total cost per dish for a pasta menu item is $1,500 and the total sales per dish is $5,000, the restaurant's ideal food cost percentage would be expressed by the following equation-
$1,500 $5,000 = 0.3
If a restaurant's actual percentage is above the ideal, there are a few ways to lower expenses, including-
Increasing menu prices - An actual food cost falling above the ideal may indicate that a restaurant's prices are too low. This can often happen when a business doesn't increase prices to reflect inflation. A simple fix would be to do a quick comparison of similar menu items with competitors and adjust the pricing accordingly.
Reducing portion sizes - Another reason for high costs may be due to large portion sizes. Along with cutting back on waste, reducing the portions keeps the price comparable while decreasing the amount spent on ingredients.
Finding vendors with cheaper prices or negotiating better rates - High costs can indicate that a restaurant is paying too much for ingredients. If food costs are above the ideal percentage, this may indicate that it's time to negotiate a better rate with suppliers or to find a new one.
How to Calculate Food Cost per Menu Item
By calculating the food cost per serving, aka food cost per menu item, a restaurant can determine which dishes are the most and least expensive to produce. This information can help owners evaluate the items and decide whether certain dishes are too costly to keep on the menu.
To calculate the food costs per serving-
Amount of Menu Item Sold Per Week x Cost of Ingredients to Make Item = Food Cost Per Dish
If 200 pasta dishes are sold every week and it costs the restaurant $3 to produce each dish, their food cost per serving calculation would be-
200 x 3 = $600
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Pricing Menus with Food Cost Percentage in Mind
The industry standard for a profitable restaurant's food cost usually ranges from 28% to 35%. Once a restaurant determines the actual food cost percentage, solutions to best engineer their menus to drive maximum profits while satisfying customer demands can be implemented.
When it comes to optimizing menu pricing, there are key factors to keep in mind.
- Finding a balance - Figure out a balance between high margin, affordable dishes, and low margin, expensive dishes. This will come down to knowing when to use pricier ingredients that will add value to the dish while bringing in higher profits and making the customer happy.
- Market trends - Be aware of the changing market trends. If a particular ingredient is popular, you can either charge more or less, depending on how you think customers will respond.
- Additional costs - Don't forget about the additional financial factors of running a business, such as rent, employee wages, and other operational costs which will affect how you price your menu.
Optimizing Inventory Procedures to Limit Costs
Setting proper inventory procedures in place will help restaurants calculate food costs, conduct inventory counts, account for price fluctuations, and make menu adjustments easier by keeping track of supplies ordered and in stock. By increasing accuracy and accountability, businesses can reduce theft and spoilage.
Useful inventory procedures include-
- Cloud-based POS systems to track inventory - Most businesses have POS systems. However, a cloud-based POS system that integrates directly with inventory management software can streamline processes and eliminate the need for human calculations, thereby, eliminating room for human errors.
- Setting frequent inventory checks - Having an inventory procedure in place helps restaurants plan for the long term by setting up daily, weekly, or monthly inventory counts. By designating a regular time to review inventory volumes, a restaurant can quickly identify when stock is low and is in need of replenishment or when they have overstocked an ingredient. This also helps cut back on food waste by ensuring all inventory has been accounted for and is stocked only at the optimal level.
- Use inventory management software - Perishable inventory needs specific attention as their short shelf lives create an urgency to sell these ingredients quickly. Inventory management software can help track and account for these perishable items by automating and digitizing the process of inventory counts and integrating directly with the POS system to provide the most accurate and up to date stock volumes.
Tips for Optimizing and Reducing Food Costs
In order to decrease food costs, there are various measures businesses can take. This includes integrating current inventory management practices with technology, as well as staying aware of seasonal changes that may affect ingredient costs.
To minimize food inventory costs, here are a few quick tips-
- Utilize Technology - Investing in inventory management software that can integrate with a restaurant's POS systems is crucial to streamlining inventory procedures. Finding software that can take the work out of keeping track of expenses and stock helps restaurant owners save an invaluable amount of time and money.
- Seasonality - Knowing when certain menu items are in season (making them more affordable) and out of season (making them more expensive) will help in adjusting menu items and prices. Seasonality can also affect demand, such as cold dishes being more popular in the summer and hot dishes being more popular in the winter. Keeping track of seasonal inventory helps restaurants identify fluctuations in demand due to weather changes or holidays throughout the year. This helps managers know when to replenish stock before a favorable season and avoid stock-outs, which would lead to lost sales and customers taking their business to competitors.
- Menu Engineering - When food cost reports are easily accessible with inventory management software, a restaurant can easily identify which menu items are bringing in the most profit and which are falling short. This information can be utilized during menu engineering processes to determine which dishes need to be repriced, removed, or updated.
- Reduce Waste - Inventory management software tracks ingredients accurately to ensure everything is stored properly, thereby cutting down on costs relating to food waste. Having a system that identifies which ingredients are ending up in the bin due to spoilage will help restaurants optimize their ordering procedures.
By setting up a consistent schedule for inventory counts that checks for items sold and spoiled helps restaurants make smarter inventory purchases that reduce food costs.
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