How to calculate food cost: Three steps that profitable restaurants follow

The harsh reality is that there is only so much we can control in any business, especially in the restaurant business. However, one of the most – if not the most – controllable areas is restaurant food cost. Yet, this is one of the areas that I most often see either ignored or misunderstood. In order to keep restaurant financials in check, you have to master controlling your controllables. This is how you can increase your restaurant profit margin.

It’s hard for me to give a hard and fast number as to what a restaurant’s food cost should be without taking an in-depth look. In very general terms, food cost should be below 30%. This number can vary slightly depending on a restaurant’s menu mix and what they make in-house vs. buying already prepared. But, the long story short here is that the average restaurant food cost of 30% is a large number. In order to see more profit, it’s crucial that you get this number down. Remember, it is all about controlling your controllables!

1. Measure your restaurant food cost

If you haven't decided yet on how to calculate food cost percentage in your restaurant, consider using one of those methods: a Complex Method (also known as Inventory Method) and a Simple Method.

Complex Method of calculating food cost
Usage formula Beginning Food Inventory + Food Purchases – Ending Food Inventory = Usage
Food Cost Percentage formula Usage / Food Sales X 100 = Food Cost Percentage

With the Complex Method, your Cost of Goods Sold (CoGS) is more accurate, but this method is complex and time consuming. It’s not recommended that new restaurant owners or any restaurant grossing under $5 million per year use this method for this reason. Anyway, if you choose this method be sure you have a restaurant POS system that can make the whole process easier for you.

Simple Method of calculating food cost
Food Cost Percentage formula Food Purchases / Food Sales X 100 = Food Cost Percentage

This method can be inaccurate based on when a period ends, inventory, weekends, delivery days, etc. When calculating restaurant food cost percentage using the Simple Method, I suggest you use your last four completed weeks versus calculating on a calendar month, i.e., the last four Sunday to Monday time periods.

So which method should you use for restaurant food costing? The Simple Method is much easier and less time consuming to calculate while yielding an accurate picture of your food cost. This is my preferred method of calculating restaurant food cost and what I recommend to all restaurant owners.

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2. Set a goal to improve by 1% for the next period

All restaurant owners and operators should be setting goals (if you are not setting goals, we should talk!) that are both reachable and attainable. Setting a goal of having a 10% decrease in food costs this month, for example, is both unrealistic and probably unattainable. Quite frankly, this is just setting yourself up for failure. Let’s look at it this way: if your goal is to improve food cost by 1% per month, then over the next 5 months that becomes 5%. 

If a restaurant does $1M in sales and lowers food cost by 5%, then over that 5 month period it will see a $50,000 increase in profits over the next year!

3. Pick an area to focus on and then measure the improvement

There are seven key areas to focus on to help reach your 1% goal. It is important to note, however, that you should master each of these areas one at a time. 

Do not try to do all seven things listed at once. You will not get good enough at any of them or master the system if you do.

Remember, you are running a business not dabbling in a hobby. So pick one area of focus, perfect it over the period of a month or so, and see the improvement. Once that happens, you can decide to continue with that area if you haven’t reached its full potential or move onto another area of focus. The great thing about this method is that you’ve built a system that will continue as you incorporate another area of focus; rather than just bouncing around and trying something new every couple of days.

 

Seven areas of focus to reduce restaurant food costs

These are not listed in any particular order, so pick the one (only one!) that resonates most with you to start: 

  • Check to ensure your menu items are costed properly because you might need to increase a few prices.
  • Negotiate with your vendors to ensure you are paying fair prices, and more importantly, use the right products for your menu. For example, there might be a less-expensive or lower-quality cheese available and it works perfectly for what you are using it for. We don’t always need the best products depending on how you are using them. It’s not just about getting cheaper products. Sometimes there is a less expensive product that does the trick for what you need.
  • Take a daily key item inventory on your 5 to 10 most expensive items. Then compare the inventory to the sales and purchases on these items to ensure they are not being wasted or stolen.
  • Make sure you are serving the correct portions every single time. For example, the cost of cheese for pizza is $2.50 per pound, which is $0.16 per ounce. If you put one ounce too much cheese on your pizzas for a year (assuming 20 pizzas a day), you are losing $1,168 per year!
20 x 365 = 7,300 pizzas X $0.16 for cheese = $1,168. Imagine the number for restaurants that sell 100 pizzas per day!
  • Test your yields to ensure that food is not being wasted in preparation or production. Find your standard yield and then do random tests on yields daily or weekly to double-check that your cooks are properly preparing items to those yields.

  • Implement a waste log to bring attention to how much food is actually wasted in normal day to day operations and then set goals to decrease normal waste and eliminate unnecessary waste such as food that goes bad or overproduced.

  • Purchase less and lower your inventory. Run a tighter ship.

Calculating and controlling food costs can be a very confusing area for restaurant owners and operators. But, when you follow the steps above, it makes this task much easier. And when you start seeing the rewards of your efforts in the tune of more money in the bank, I dare say it becomes more fun too.

Remember: It’s all about controlling the controllables!

By Ryan Gromfin, author, speaker, chef, restauranteur, and founder of therestaurantboss.com, clickbacon.com, and scalemyrestaurant.com. He is the most followed restaurant coach in the world helping Restaurant Owners and Operators increase profits, improve operations, and scale and grow their businesses.


Ryan Gromfin
Founder of The Restaurant Boss, where he coaches restaurant owners on how to best increase profits, improve operations, and scale.

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