Understanding how to calculate a food cost percentage is essential for every restaurant owner. If you are in the food service business, you already know how important it is to keep your costs under control. Being able to compare and calculate your food and beverage costs month by month will help in the overall management of your business.
Once you have the food cost percentage for the items on your menu you’ll be able to determine if you need to raise or lower your prices in order to cover your overheads. You will also know whether to change either the menu price or the type of ingredients you use should ingredient prices fluctuate. Remember, every restaurant has different food costs. Let’s go deeper into this.
What is the food cost percentage and why it is important
Why do we need to know the food cost and how do we determine it? The main purpose of the food cost is to control the costs of each dish as well as the costs of the restaurant as a whole, helping you maximize profits. The three largest sets of restaurant expenses are rent, staff salaries, and the cost of food. While the first two indicators don’t change every month, there is always the risk that food prices will rise unexpectedly; as a result, the food cost will rise too. Therefore, the delivery of products should be carefully monitored.
All the most successful franchises get bigger because they understand the value of food costs. For example, Starbucks sold 671,396,071 cups of coffee last year; if they had been off just one cent on their costs of items sold, they would have lost $671,396 that year. So we are going to show you, not only why you need to do this, but also all the food cost formulas and calculations that you need to know for your restaurant or cafe. It’s very difficult to track and run a highly profitable restaurant without knowing how much you spend on your menu items. This is definitely something you should be tracking consistently. It allows you to properly price out the dishes, thus optimizing your menu. We have to admit that many restaurants managers, chefs, and owners don’t know exactly how much every menu item costs to prepare.
This is quite a long and time-consuming process that includes tons of manual calculations. Sounds not that exciting, isn’t? The first thing to do is to think through menu setup for a restaurant. After everything in on order, you'll see how things get in place.
Another misconception is that the food cost is how much you spend on food. If you’re determining your food cost this way, your numbers will vary hugely. So let’s get right into this. There are two types of food cost in your restaurant or bar. First is plate cost which is extraordinarily simple to understand and everyone without any excuse should know how much every plate, every glass of wine, every item in their restaurant costs. The second one is period cost. This is more complicated but you still need to know this.
How to calculate food cost
Some people think that to figure out the food cost of a restaurant in total, it needs to be calculated for each dish separately followed by calculating the arithmetic mean. However, this method is only correct if you sell all menu items in equal proportions. In practice this doesn’t occur, therefore such calculations will be wrong.
Correct food cost formula:
Food cost = (how much it costs to prepare/how much do you sell it for) × 100%
The difference in these two ways of calculating the food cost percentage could be as much as 10%. Let’s look at an example.
First variation of food cost calculation (incorrect):
1.5/5.0 × 100% = 30% — food cost for burger;
3.0/11.0 × 100% = 27% — food cost for pizza;
1.0/2.5 × 100% = 40% — food cost for sandwich ;
0.5/2.0 × 100% = 25% — food cost for omelette;
1.0/2.5 × 100% = 40% — food cost for mozzarella sticks;
0.7/2.0 × 100% = 35% — food cost for french fries;
0.9/3.0 × 100% = 30% — food cost for cheesecake;
0.5/1.6 × 100% = 31% — food cost for muffin;
0.5/3.0 × 100% = 17% — food cost for coffee;
0.2/1.0 × 100% = 20% — food cost for black tea;
(30 + 27 + 40 + 25 + 40 + 35 + 30 + 31 + 17 + 20)/10= 29.5% — total food cost.
(1.5 + 3.0 + 1.0 + 0.5 + 1.0 + 0.7 + 0.9 + 0.5 + 0.5 + 0.2)/(3.0 + 11.0 + 2.5 + 2.0 + 2.5 + 2.0 + 3.0 + 1.6 + 3.0 + 1.0) = 9.8/31.6 × 100% = 31.01%
31.6 − 29.5 = 2.1% — the blunder.
To figure out your period cost you need to understand something called the formula for cost of goods sold — COGS. To calculate this you need to know these parameters:
Beginning inventory — many POS software systems work on mobile devices, so you can walk around the store room checking stock items. To calculate the inventory, you need to sum together the dollar value of each item at the current moment. One more thing — if you already have calculated the ending inventory for the previous period, you can use this as the beginning inventory for the current period.
Your purchases — other purchases that you made within the specified period, after the beginning inventory.
Ending inventory — the same process as for the beginning inventory, but at the end of the required period.
Total food sales — many POS systems will show this information automatically.
So here’s the calculation for your cost of goods sold formula:
Beginning inventory + Purchases − Ending inventory = USAGE
USAGE — how much food you used in this inventory period.
(Usage/Sales)× 100% = COGS.
This food cost formula can be used to determine the period food cost for any category in your restaurant. Here are two things you really do need to double check when you are using the cost of goods sold formula. First, make sure you’re comparing the correct category purchases and inventory to the correct category sales. So, if you are trying to figure out your coffee cost you need to make sure that you are using the coffee inventory, coffee purchases, and coffee sales, not total sales. This is extremely important. The second thing — you need to be sure you’re comparing the purchases and correct inventory period to the correct sales period. If we want to get a period food cost for August here’s what we need to know:
- August beginning inventory (July ending inventory) — $7,000.
- August food purchases — $29,000.
- August food ending inventory — $6,000.
- Food sales — $100,000.
$7,000 + $29,000 − $6,000 = $30,000 — Usage.
$30,000/$100,000=0.30 × 100%=30% — August food cost.
To be completely sure, you need to compare actual food costs to your ideal food costs. The ideal food cost is the theoretical value which exists in the perfect world without extra money wastage. All you need is to calculate total sales and total costs for each item.
Total costs per item = Food cost of ingredients x Amount sold
Total sales per item = Sales Price x Amount Sold
Ideal Food Cost = Total Cost Per Item /Total Sales Per Item
Let’s look at an example:
Total Costs = $26,000
Total Sales = $100,000
Ideal Food Cost = (26,000/100,000) × 100% = 26%
Conclusion: the ideal food cost is 26% and the actual food cost is 30%. Now we know that there’s an extra 4%, either due to food waste, or theft. There is nothing to worry about, because the actual food cost is not the ideal unit, so divergences are possible and even inevitable: a kitchen is a living organism, and nothing will be perfect in real life. The actual food cost is a characteristic you should work with. Reducing product waste, optimizing and planning costs, monitoring storage — these are just some of the tasks that can be easily handled using food cost knowledge.
What percentage should the food cost be in a restaurant?
Nobody can tell you that it is essential to have a particular food cost, based on your type of restaurant. There are too many other factors you need to know. A lower food cost means more profit, but there will be cases when the food cost exceeds the average 25%-35%. In particular, when the last day of the month falls on a Friday and you make purchases for the weekend, you will have spent money this month, though the proceeds will be received only next month. A similar situation occurs with the bar if the last day of the month falls on the alcohol supply date, purchased for a week’s work. Or, for example, if you bought alcohol all at once for 12 weeks’ work, costs for the month will be huge. However, food costs for the next two months will be quite low because you no longer need to spend money on buying, you will just receive sale proceeds.
Don’t always chase the perfect food cost percentage. Many restaurant owners who have a high food cost, for example, 45%, try to reduce their purchases. This increases the likelihood of appearing in a number of positions in the stop-list. A stop-list is a list of dishes that, for whatever reason, were not cooked that day. Anyway, at the end of the day, you will receive less revenue than usual.
How to control the food cost?
Usually, restaurant owners share food cost control with a manager, chef, and accountant, basically, everyone who deals with purchasing and performing the analysis. It is much easier to do with a restaurant, cafe and food truck POS software. Such an approach is the most promising because the food cost has many pitfalls.
The main way to reduce the food cost is to control the cost of the dishes, which is the choice of alternative ingredients at a price (minimum on the market) and quality (optimal for the concept), minimizing waste. The food cost of the dish depends on many factors, such as: fluctuating food prices, recipe changes, changing the cost of the dish, prices on the menu, proportion of sales and even discounts. Also, don’t forget that the food cost equally depends on the products themselves. For example, if you received a low-quality potato, then the percentage of waste will be higher. So the cost price of the dish and the food cost will rise. There are more reasons for a high food cost such as inaccurate cooks, theft, a poorly working refrigerator, etc.
First, you need to find out where your money has gone. For example, if a bar with a stable revenue suddenly begins to consume more money, there are two options: either purchase prices have risen, or the bartender is deceiving you. In the first case, it makes sense to review pricing policy, in the second - deal with the barman. But first, remember that maybe in the past month you bought, for example, the annual supply of single malt whiskey. Then the high food cost would be fully explained.
Analyze production in the same way. Look at the reports of the previous month: Perhaps the purchase prices are okay while the amount of food waste has increased. So, you may conclude that either your cooks have missed something, or you need a vacuum packer, or maybe the number of restaurant guests had decreased. Usually, after the first ten days of the month, it is already possible to forecast costs, and this will allow you to estimate how much money remains for purchases not to exceed the value of the food cost.
How to price your menu
As you know, the success of a restaurant will be influenced by many factors. Maybe it’s the location, the professionalism of the staff, the chef’s talent, a memorable interior. But as an absolute for all establishments, it is necessary to have a balanced menu, aimed at obtaining maximum income for the restaurant. The price of every dish on the menu has to cover the ingredient costs along with your restaurant overheads such as the cost of the dish preparation time, utilities, rent, salaries, etc. And of course, the food cost affects the prices on the menu. Basically, how much you spend on food will define how much you should charge for it. As we already know, ideally, the food cost should be somewhere around 25-35 percent. In other words, if to prepare a dish costs you $1, you need to charge at least $2.85.
Thus, pricing consists of three factors. First: What is the total markup you want for your restaurant? Second: What prices are acceptable to your guests? And third: How many items from the menu will they order? However, do not forget your competitors: After carefully studying their offers, you will find something that will make your restaurant stand out profitably from the others. You may have heard the term menu engineering. This idea was brought into the restaurant industry in the 1980s by Professor Donald Smith. Go through each of your menu items, and using data for a recent time period, place each menu item into one of the following categories:
- Stars — high profitability and high popularity. The basis of the profitable menu.
- Plow-horses — low profitability and high popularity. Don’t remove them from the menu, but you strive to reduce the cost price or increase the selling price.
- Puzzles — high profitability and low popularity. It is necessary to stimulate demand for such positions.
- Dogs — low profitability and low popularity. Must be removed from the menu. Such dishes only distract guests.
This system helps organize menu prices in the right way and as a result increase the restaurant’s profit. There is another factor affecting menu prices. For example, regulars know that in city N the standard cup of cappuccino usually costs, let’s say, $2.70. If your coffee shop offers it more expensively, then people may well give preference to another coffee shop. This also applies to Caesar and Greek salads, Carbonara, and many other popular dishes. Always check the prices in competitor restaurants. Of course, you should also guarantee the quality of dishes and the exact timing of their preparation and provide a high-level service for your guests. The restaurant business doesn’t stand still; every year there are new trends, which you can always read up on our blog.
As you have noticed, the food cost depends on many factors and plays a very important role in the life of every restaurant. And remember, every establishment has its own food cost. No one can accurately determine in advance how many guests will visit and what kind of price-class dishes they will order. Reality may coincide with theory or may differ significantly — both plus and minus. But one thing we know for sure — it’s necessary to pay attention and control the food cost in your restaurant. We hope that our article has helped you understand this question much better!
Best of luck!