Owning a bar or restaurant can be a lucrative business, but it does require keeping an accurate inventory and being aware of how much money is both spent and earned. Understanding these values will allow you to appropriately price dishes, make purchasing decisions, and ensure that you are bringing in the necessary revenue to keep your restaurant mission alive and well. Food costing is just one important method that can help you successfully manage your business.
Calculating Food Costs
In order to calculate food costs, you need to determine four main values:
- Beginning inventory value: the amount of money spent on inventory at the start of the week.
- Purchases: the amount of money spent on additional inventory throughout the week.
- Ending inventory: the value of the inventory that is left at the end of the week.
- Total food sales: the amount of money earned through food sales over the course of the week. This number should be found in your weekly sales report.
Remember that the best way to manage food cost calculation is to take inventory at the beginning of each week and carefully track purchases throughout the week. Use the same process each week and consider using a shelf-to-sheet system.
This approach to taking restaurant inventory works by systematically counting every item on the shelf and then finding it on the Inventory Taking Sheet. By looking at what is on the shelf and not the sheet, you won’t miss any inventory and you may end up finding new inventory that was purchased that week but not yet entered into the system. Taking thorough inventory and including all beginning and ongoing purchases is essential to accurate food costing.
The key to the shelf-to-sheet system is to choose a systematic method of counting. It doesn’t matter if you start from top to bottom or left to right as long as you use the same approach throughout the entire process. If more than one person works on inventory, they should be using the same counting approach.
Food Costing Explained
Once you have determined the four essential values, you can begin to calculate food costs. Food costing is a simple formula that is used to determine how much it will cost to create a meal. This helps restaurants appropriately price menu items and understand which dishes are profitable. The food cost ratio is the cost of ingredients divided by the amount of revenue produced by selling that food. This number is typically expressed as a percentage. Rather than relying on general food cost numbers, every restaurant should take the time to calculate their own food costs.
Food Costing Formula
The food costing formula can be calculated by adding the beginning inventory and purchases values and then subtracting the ending inventory value. Next, divide this number by your total food sales for the week.
(Beginning inventory + Purchases – Ending inventory) / Food sales
For example, let’s assume that you spent $16,000 on inventory at the beginning of the week. Throughout the week, you make an additional $4,000 in purchases and end the week with $18,000 in inventory. During that week, you earned $12,000 in food sales. Your food costs would read as follows:
(15,000 + 4,000 – 16,000) / 12,000
3000 / 12,000 = .25
.25 X 100 = 25% Food Cost Percentage
If your final food cost percentage seems too high or low, you may want to double-check your work and make sure that all of your numbers are correct.
Interpreting Food Cost Percentages
For restaurants, the main goal should always be to keep the food cost percentage as low as possible without compromising taste or quality. This means that you will be able to enjoy a larger gross profit that can be used to cover operating costs and provide revenue. As a general rule, a profitable restaurant needs to keep food costs between 28% to 35% of the total revenue. It is also important to keep in mind that food cost percentages will vary based on the overhead and operating costs of each restaurant. Restaurants with higher operating costs and more complicated steps of service will require higher menu prices in order to remain solvent.
Fortunately, many of today’s inventory management systems make it easy to keep track of inventory and determine essential values. Inventory software can be accessed from tables and other mobile devices for maximum convenience.
Cost Of Goods Sold
Costs of Goods Sold (COGS) is another formula that is commonly used by restaurants. This approach tends to be more comprehensive and measures the value of every piece of inventory that is necessary to create a meal, including garnishes, toothpicks, napkins, etc. Keep in mind that implementing more sustainable practices may help you reduce costs and increase your food cost percentage.
Benefits of Food Costing
Ultimately, the main benefit of food costing is that it allows you to maximize your food cost percentage and drive profits. Incorrectly pricing menu items can have a significant impact over time. If an item is priced just $.50 too low and you serve 400 people per day, that can add up to a revenue loss of $73,000 over the course of a year. It may seem like a lot of work to determine food cost percentage and cost of goods sold, down to the utensils and every piece of bread, but it is well worth the time investment. Here are some additional benefits of food costing worth considering.
Once you understand food cost percentages, you will have a better idea of which dishes are earning the ideal profit margins. As a result, you can promote more valuable dishes and increase profits.
A specially curated menu
Based on your food cost percentages, you can make intelligent decisions about which dishes to get rid of, update, or re-price. This creates an expertly engineered menu that is profit driven.
Better understanding of the impact of food supplies
Managing inventory costs is another important part of leading a successful restaurant. For example, bakeries and restaurants suffered in 2018 when a poor growing season created a global vanilla shortage. Even political events like the US/China trade war can impact American farmers and increase inventory costs.
Strategically create new recipes
You can use food cost percentages to help inform new recipes and create dishes that align with your goals. If certain circumstances are creating higher inventory costs on certain supplies, you can always save the recipe for when the markets normalize again.
Food Costing Wrapped Up
Tracking inventory and calculating costs may not be the most exciting aspect of running a restaurant, however, it is an important tool that will help you ensure that you’re able to keep your doors open. Fortunately, new tools can help make food costing as simple and straightforward as possible.
What is food cost percentage?
Food cost percentage represents the amount of total revenue that is spent on food and restaurant inventory. Ideally, you want to keep food costs between 28% and 35% so that you are still earning enough revenue.
What are the benefits of food costing?
Food costing allows you to accurately price menu items to maximize profits, understand which menu items should be promoted, decide when to update, exclude or re-price dishes, understand how food supplies and prices play a role in overall success, and intelligently design new recipes.