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It's important to learn how to manage cost for restaurant business. Food costs can make or break a business. That's why there are so many restaurant management books about the subject. There's a reason why the restaurant failure rate is so high.
Whether you run a 50-seat metropolitan martini bar or a small mom-and-pop diner, knowing and controlling this cost will keep your business going. To ensure accuracy, restaurant owners and bar managers need to know how to take inventory and update their restaurant chart of accounts.
You don't want to let your costs get out of control because you didn't calculate things properly. We'll help you understand the purpose of calculating food cost and the steps involved.
Food Cost: What Is It?
Food cost is the ratio of ingredient cost to revenue generated from food sales using those ingredients. This metric is always displayed as a percentage. Food cost provides insight into a restaurant or bar's profitability.
This number is used to establish prices and helps set the tone and quality of a business. Looking at this cost and optimizing the return on each dish can turn a floundering business into a profitable one. It's a valuable part of restaurant bookkeeping.
Why Is Food Cost Important?
Maintaining the proper food cost ratio will help you price your items correctly and maximize profit. Tracking cost will also allow you to react to changes in restaurant sales and adjust pricing (psychological pricing, anyone?), ordering, and offerings on the fly. Knowing your business's actual cost percentage is necessary for this.
Profit margins are thin in the restaurant industry, so you really need to know how to price a menu. Staying on top of cost is imperative. The best way to do this is to take inventory often and minimize inventory shrinkage. You can take inventory quickly and easily using bar inventory software.
Ideal Food Cost vs. Actual Food Cost
Ideal food cost is a calculation that does not factor in inventory losses, while actual cost is calculated using real inventory levels. Ideal cost is what your cost would be if you ran the perfect restaurant with no waste. Since shrinkage occurs in the real world, actual cost is always a higher percentage than ideal.
Though ideal cost isn't an accurate measure, you should calculate it for your business. This number will give you a target cost. It can help motivate you to take inventory, work to reduce waste, and prevent losses. The closer your ideal and actual food casts are, the more profitable your business.
Food Cost Calculator: How to Calculate Food Cost
Here we’ll lay out the actual food cost formula and give you the steps and tools to calculate your own costs.
Food Cost Formula:
The food cost formula is:
Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales
How to Calculate Food Cost
Step 1: Determine Inventory Usage
To calculate your food cost, you'll have to calculate inventory usage. This is how much product your restaurant or bar has used over a certain period of time. Use the formula below to calculate usage:
Beginning Inventory + Purchases - Ending Inventory = Inventory Usage
Beginning inventory is what you have before opening on the 1st of the month. Your ending inventory is what remains after closing on the last day of the month. You'll also have to add in any inventory you ordered during the month (purchases). For our example, we'll assume you use $1,800 worth of inventory this month.
Step 2: Find Total Sales
Sales can easily be found in your bar's point of sale system. If you don’t have a POS system, you can manually calculate the sales by product. Multiply the amount of product sold during the month by sales price. For example, for a $10 salmon dish:
45 (Plates Sold) x $10 (Sales Price) = $450 (Total Sales for Salmon)
Do this for all products sold then add them all together for your restaurant or bar's total sales. Assume total sales for the month were $5,000.
Step 3: Use Food Cost Formula
Finally, use the food cost formula to calculate your cost with the two values you've obtained in the steps above. For our example:
$1800 (Inventory Usage) ÷ $5000 (Food Sales) x 100 = 36% (Food Cost)
Food cost is 36%. That means it costs your restaurant an average 36% of a dish’s sale price to make it.
Food Cost Percentage: How to Calculate Food Cost Percentage
Food cost percentage is just another term for food cost. It is a measure of cost of goods sold against sales and can help you determine if you're charging your customers the correct amount.
Food Cost Percentage Formula
The food cost percentage formula is:
Food Cost Percentage = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales
Food Cost Spreadsheet
You can also calculate your business's food cost is using this free downloadable food cost spreadsheet.
Once you download it, you can edit the cells and it'll do the calculations for you. Input the ingredients on hand in ounces, the price paid, and ounces used.
You’ll see an example of a costed-out panko-encrusted salmon recipe that's there for reference’s sake. Once you understand how it works, try using your own recipes.
Average Restaurant Food Cost
Average food restaurant cost varies by meal and the individual restaurant but should generally be between 28% and 35%. The correct food cost for your restaurant can only be determined by you. Luckily, there are steps you can take to discover your goal cost.
To start, calculate your prime cost. This number is the total of all costs of goods sold and labor cost for the restaurant. Then, divide this number by your total sales to get your prime cost percentage.
Ideally, his number will be below 60%. You can adjust your goal food and labor costs within this percentage as long as you don't go over 60%. If you find you're not hitting this target, adjust your portion sizes or ingredient costs.
Many restaurateurs run into issues where their portions are so large that they can't turn a profit. Food sales are as high as wine profits, so staying on top of the cost is imperative.
How to Calculate Food Cost for a Recipe
For recipe costing, add the total cost per item purchased then divide by the amount called for in the recipe. For example, if you've purchased a 3-pound pack of chicken for $12 and the recipe calls for one-and-a-half pounds, this portion of the cost is $6. Do this for every ingredient in the dish and you've found the total food cost for the recipe.
How to Reduce Food Cost in Restaurant Management
Comparing ideal and actual food costs to detect food waste issues is just one way to manage restaurant expenses. Here are five other steps you can take to lower your costs and improve your bottom line.
1. Institute Incremental Price Increases
Instead of quickly increasing prices to prevent or counteract loss, start with smaller incremental price increases. Your customers are less likely to complain about increases in price if they're smaller. This is especially useful for menu items that already require a higher sales price to cover ingredient cost.
2. Reduce Food Waste
In addition to tracking inventory, you should monitor all dishes that come back to the kitchen. If a particular dish often comes back with a large amount of food left on the plate, adjust portion sizes accordingly. Reducing food waste is better for the environment and for your profitability. You also won't waste your budget for restaurant marketing strategies on food that doesn't work.
3. Pay Attention to Seasonal Price Fluctuations
Your wholesalers will likely have seasonal price fluctuations as some ingredients are more readily available than others. Adjust your menu options or prices accordingly. If ingredients go up in price or if you notice a particular dish losing popularity, change your menu and upsell more popular and profitable dishes or use seasonal LTO food offerings to avoid getting too close to your break even cost. Your job is to make your customers happy while maximizing revenue.
4. Analyze Recipe Ingredients
Regularly review the makeup of your recipes. If possible, adjust higher-cost dishes so that they use more of the less expensive ingredients and fewer of the pricey ones. Don't lessen the quality too much or you'll risk upsetting your customers and all the savings will be lost. You should also try to mix up your menu and include more dishes that can be made in large quantities with cheaper ingredients. Creating a wine food pairing menu can help save money as well. This will allow you to start menu engineering and focus on only the best dishes that will offset your prime cost.
5. Buy Strategically
The USDA pegs the rise of food cost at 2–3% through 2021. That makes it imperative that restaurants order food strategically. Getting the right amount of stuff at the right price reduces spoilage and optimizes food cost. That's where the value of platforms like BlueCart and BinWise shine. They aim to tackle all of these issues at once. With integrated apps that makes procurement and inventory management snap, you can tread the fine line between quantity and price that optimizes food cost and reduces waste.
Why Are Food Costs Always Rising?
There are three major factors that contribute to rising food costs – inflation, supply chain disruptions, and regulations. Even without using a food cost calculator, you can see that prices of food products have been rising after the COVID-19 pandemic. Let’s see how these three factors affect food costs for both businesses and households.
- Inflation. The Federal Reserve usually aims for yearly inflation of 2%. However, sometimes inflation can be higher than that. Food products are among the first category of goods that are affected by higher inflation. Even if inflation stays within the 2% target, that means that food that costs $10 today will cost $11.04 in 5 years due to compounding inflation.
- Supply chain disruptions. Even disruptions on the other side of the world can cause serious spikes in various food groups. For example, increased natural gas prices can lead to a limited supply of fertilizer which can cause lower crop yields and affect the prices of grains and other food products. Volatility in energy prices can have a serious effect on the food supply chain. If the disruptions are persistent, it might take years for them to be fixed by the market.
- Changes in regulations. Food manufacturing and food service businesses are among the most regulated ones. These regulations should be taken into account when using a food cost calculator. New laws and regulations might require businesses to increase their capital investment. Naturally, this leads to higher food prices and food costs for restaurants and households.
How to Manage Food Cost in Restaurant: Mistakes
Tracking inventory and the math above can be helpful in lowering food waste issues. However, it's easy to make a mistake or miss a step in a busy hospitality industry establishment.
Watch out for these common mistakes when using food cost to optimize your business:
- Don’t substitute ideal cost for actual cost. This will make you think you're more profitable than you are.
- Always add in the purchases for the time period you're calculating inventory for. Missing this step will skew your final numbers.
- Double and triple-check your math. We all make mistakes when doing math, but it really counts here. A single decimal out of place can throw off all your numbers. Stay on top of your restaurant balance sheet and you'll avoid these issues.
- Get everyone involved. Chef's and managers are primarily in charge of calculating food cost, but all kitchen staff should be cognizant of how their work impacts it. Try to include this line cook job description in your if possible.
Don't Let Food Cost Get Out of Control
Hopefully, you now understand how to calculate your food costs and why it is important that you can master this skill. Optimizing cost against prices can keep your business profitable and let you maximize the value of your inventory. Do the same with beer pricing, alcohol pricing, and your wine bottle price to eliminate pain points in your business.
You should also make sure to do the same process for your drink menu. Calculating pour cost with a liquor cost calculator is equally important, particularly if beverages are a large part of your business. This can help you determine if you need to teach your bartender to master free pours to keep your bar profitable. You can easily automate your bar inventory with BinWise Pro.