Anyone who owns or manages a restaurant should understand the concept of food cost percentage. This important metric shows how much of your overall restaurant sales are dedicated to food ingredients—it’s an absolutely essential part of your restaurant’s larger budget. Keeping tabs on your food costs can help you make informed menu decisions and maximize profits at every opportunity.
Whether you’re new to the game or you just want to stay on top, here are four things you should know about food cost percentage, as well as an overview of how it fits into your overall budget and why budgets matter in the first place.
First, What is Food Cost?
Food cost is the ratio between how much it costs you in raw materials to make a dish and how much revenue you generate from that dish. There are two ways to measure food cost- one will take the literal cost of a dish by breaking down each unit and pricing the dish accordingly. The other, considers how much you hold in assets, ie. the value of your inventory, to determine how much it costs to make a dish for every dollar your business makes.
By finding the value of your inventory and your food cost percent, you can cost your dishes both accurately and effectively. Your food cost percent is an important number to your business, which will guide many crucial business decisions.
As simple as food cost sounds in theory, it’s can be that difficult to measure in practice. The process of food costing takes a lot of dedication, organization, and mindfulness. Despite the challenges, food costing can and should be done.
Budgeting is the First Step to Calculating Food Cost Percentage
Budgeting is a crucial part of running a business. It’s not something you do only when you create your business plan, but an ongoing process that you monitor to keep your restaurant profitable. Reviewing your budget on a regular basis helps you keep track of your finances and achieve success.
Although many of us feel anxious or confused when we have to think about numbers, the process doesn’t have to be difficult and complicated. Monitoring your cash flow and managing your restaurant budget can be easily done with the right tools, and you’ll have peace of mind knowing you’re on top of everything.
An accounting software helps you manage your books and records, as well as your inventory and transactions quickly and accurately. If you have a POS system with inventory management capability that tracks all your inventory and purchases, you can simply sync your data with your accounting software and the rest will be taken care of.
However, if you want to go about it the old-fashioned way, here are a few budgetary items to keep in mind:
- Track all of your numbers. Whether your POS system does it for you or you do it yourself, you have yo know your prime cost, or the ratio between your sales and cost.
- Define your accounting period. While most restaurants follow a four-week accounting period, you can set it to whatever time length makes the most sense for your business.
- Set budget targets. Budgets aren’t just reflections of what’s happening in your restaurant—they should be guides that lead your restaurant to maximum efficiency.
- Focus on a weekly operational budget. High-level views of your restaurant’s financial health are important, but there’s something to be said for having a more granular view of your operations as well. It can help you to track your expenses more easily because the scale is smaller and more manageable.
Now that the gist of budgeting is all laid out, it’s time to zero in on one small, but mighty, part of any restaurant’s budgeting process: food cost percentage.
A deep understanding of your food cost percentage, why it’s important, and how it will impact your restaurant, is simply essential to success.
1. Food Cost Percentage is Not a One-Size-Fits-All Number
A common misconception about food cost percentage is that every restaurant should aim for a perfect number. In reality, a healthy percentage can vary greatly depending on the products you sell, food cost control, and the the market you serve. For example, a steakhouse can run a food cost percentage close to 35 percent, because the cost of its ingredients are much higher. On the other hand, a restaurant that serves primarily pasta, which is cheap to buy in bulk, might run somewhere around 28 percent. Both percentages are acceptable according to the context of the restaurant.
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There are Two Methods for Measuring Food Cost Percentage:
1. Calculating each dish by measuring each ingredient, unit by unit.
What does this look like? Let’s say you have a hamburger. You measure how much of each ingredient you use for one hamburger and how much it costs: ¼ pound meat (80 cents) + one bun (60 cents) + Tomato (20 cents) + Lettuce (15 cents) + Onion (10 cents) + Aioli (30 cents) = $2.15.
Once you breakdown the cost of a dish, add a percentage to that cost that includes overhead such as rent, utilities and labor. Once you measure those costs, you can determine the percentage increase of a dish. That amount will clearly vary depending fixed costs of each restaurant. However, once you decide on the appropriate markup, add that to the cost of a dish.
Although this method certainly works, it is very tedious and not necessarily accurate. Since this method doesn’t take into account how much assets you are holding in inventory, it doesn’t accurately display what the true business costs are. Therefore, there is another method:
2. Find your Cost of Goods Sold to determine your food cost percentage.
Cost of Goods Sold, or COGS, is another way of saying “the measure of how much it costs you to make a product.” However, unlike breaking down a dish to find this value, your COGS will measure the value of your inventory to determine your business costs. This method is considered more accurate because it takes into consideration how much money your business has tied up in assets, reflecting the actual cost to your business for making a dish. The number that you get when you measure your COGS, illustrates the cost of making dishes per month in your restaurant business.
Here’s the formula: Value of your Beginning Inventory + Value of your Purchases – Value of your Ending Inventory = COGS
Example: Beginning Inventory ($20,000) + Purchases ($4,000) – Ending Inventory ($22,000) = COGS ($4,000). Your business spends $4,000/month on foods and drinks served.
To find your food cost percent, simply divide your COGS by the total sales for that very same time period. Therefore, if you sold $13,000 worth of food in the same month your food cost percent would be: Food Cost Percent = $4,000 / $13,000 = .307 x 10 = 30.7%. This means that for every dollar your business makes, you’re spending about 31 cents to make that dish.
2. Average Restaurant Food Cost Percentages Can Vary by Meal
In the same way that food cost percentage targets can vary between restaurants, they can also vary within a restaurant. This is especially true if your restaurant serves both breakfast and dinner, or you have both a coffee bar and a sit-down restaurant. Breakfast foods, like eggs and bread, are much less expensive than the seafood and high-quality meats you might serve at dinner. It’s essential to take these variations into consideration when calculating overall food cost percentage and taking inventory on your ingredient costs.
3. Your Ideal Restaurant Food Cost Percentage is Defined by Your Restaurant Inventory Processes
Maintaining a healthy food cost percentage requires streamlined restaurant inventory processes. Every month, you should have a beginning and starting inventory number to view and measure.
Your end-of-month restaurant inventory numbers help showcase which plates are bringing in the most revenue. They also allow you to address concerns quickly if you notice that you’re losing money or that you are short on a certain ingredient. Since your restaurant inventory directly affects the price you pay for food, accurate inventory prices ensure a proper food cost percentage.
Wondering how to find your optimal inventory level? Use this formula to find out what you should be spending on inventory per day: Average Monthly Food Sales x Food Cost Percentage / Days in the Month.
4. Your Menu Can’t Be Priced Appropriately Without Accurate Food Cost
Your food cost percentage is essentially a food cost calculator. Gaining an exact projection of food costs helps you price each plate down to the last cent. This allows you to keep tabs on which ingredients are most profitable and which ones need to be swapped out. If the price of a certain meat cut continues to fluctuate, for example, you can tweak the recipe to include a cheaper ingredient with a more consistent price. It’s also a good idea to start by pricing the menu item first. Think: What’s a realistic price that my customers would pay for a steak dinner? Then, create a recipe that fits within that budget to maximize restaurant profits.
As you dive into budgeting and food cost calculating for the first time (or in a new way), remember is that doing it yourself is a learning process. Expect to make a mistake here and there. If you’re not able to risk that, it might be worth your while to hire an accountant or an experienced manager to help out with the financial processes.
How Can You Reduce Food Costs Overall?
- Invest in technology: Time and time again, restaurant owners say that the money they spent on technology, such as an effective POS system and an inventory management system has saved them money tenfolds. This is because the right technology will save you time, provide you all the data you need and will spot any indescrepencies such as theft, leakage or waste immediately.
- Reduce waste: Whether you’ll holding more inventory than you need, you realize that your portion sizes are too big and food consistently gets thrown out, or you can maximize your ingredients more efficiently, finding ways to reduce waste at your restaurant as much as possible will most certainly reduce your food costs.
- Use menu engineering techniques: Use your sales reports to determine which dishes on your menu are Stars, Plow Horses, Dogs and Puzzles. This way you can determine what dishes need to stay on your menu and what needs to be tweaked. There are some smart techniques you can utilize to reduce your food costs and increase your sales.