In a restaurant, Cost of Goods Sold (CoGS) is one of the most important things you can measure and goes hand-in-hand with taking inventory. In simple terms, it’s the cost of producing your menu items.
While you probably already calculate the Theoretical Cost of your items, that is your ideal spend, and it doesn’t take into account waste, spoilage, inconsistency, or shrinkage. By periodically calculating your restaurant’s cost of goods sold, you can see what you are actually spending on creating menu items in a given time period.
How to Calculate Cost of Goods Sold
The equation for calculating your restaurant’s COGS is:
Cost of Goods Sold
Your first step in the equation is to determine your beginning inventory. This is the amount of product you have leftover from the previous period.
Let’s say you’re calculating CoGS weekly and your work week starts on Monday. If you have $4,000 worth of inventory in your kitchen on Monday morning, this is your beginning inventory.
This is the dollar amount of purchases you have coming up within the next week. If you have two orders coming in this week that will cost you $1,500 and $500 each, your purchased inventory number will be $2,000.
Once you get to the end of the week – in this example that would be Sunday – you calculate the dollar amount of inventory that you have left. Let’s say on Sunday you have $3,000 worth of inventory on your shelves; that is your ending inventory number.
So, using the example above, let’s plug it into the equation.
Beginning Inventory: $4,000
Purchased Inventory: $2,000
Ending Inventory: $1,000
Cost of Goods Sold: $5,000
This means you spent $5,000 during this week in order to create your menu items. This number should be treated as an expense and deducted from your gross profit.
What this Number Means for Your Restaurant
So you’ve calculated your cost of goods sold, now what can you do with this number? Some say the ideal cost of goods sold percentage is around 30-40%. However, for restaurants, there are a lot of factors that go into this including how labor-intensive your items are, how much you are able to charge for them, your location and rent, and more.
It is possible for items to have a higher CoGS percentage but bank more money, so it’s important to also look at the dollar amount each item is bringing in. Selling a dish that cost you $5 to make that you charge $15 for (33.3% CoGS) will bring in $10, but a higher end dish that costs you $25 in inventory but you can charge $50 for (50% CoGS) will still bring you more money at the end of the day.
How to Lower your Cost of Goods Sold
If you find that your CoGS numbers are not where you want them to be, there are a few things you can do to lower them.
Relationships are everything in the restaurant industry so this can be a tough one. Maybe your fish vendor is someone your restaurant has worked with for decades, but there’s another supplier whose prices are exceptionally lower. Talk to your current vendor to see if they are able to match the other person’s deals to try and lower your expenses.
Buy in Bulk if Possible
In our industry buying bulk can be tricky when food spoilage and waste is a major concern. Save money where you can by buying the largest bulk order possible. Look at nonperishable items and items you sell out of quickly and see where you can condense orders. Just make sure you have the room to store it all!
Take Inventory Accurately
With traditional methods of taking inventory, there’s a lot of room for error. By using an integrated inventory system that connects with your menu and POS you can get a better idea of how much you will need without over-ordering, which can save upwards of 8% in food costs.
Bonus: Using an integrated inventory system can save you upwards of 30-50 hours a month vs. the old pen-and-paper method.
Get Ahead of Food Waste
No matter how accurate your inventory taking is, food waste will always be a concern in this industry and it’s a major part of high CoGS numbers. If you’re getting close to the end of the week and there’s a large amount of ingredients that are going to turn soon, let your chefs get creative with dreaming up some new specials.
Re-evaluate Your Menu Design
How your menu looks can have a huge impact on what your guests are ordering. Anything from the layout to the font color to the menu description could be preventing people from ordering a high-profit menu item that they might otherwise love.