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Restaurants make money by selling food, so understanding how to calculate restaurant food costs is the ‘bread and butter’ of the business. Essentially, food costs are a ratio between the cost of ingredients and the revenue they generate. This ratio is expressed as a percentage, and it determines how much of a profit the business can make on food — so it’s imperative to calculate it accurately.
- Using a food cost formula is an efficient, data-driven way to think about your restaurant’s finances, and doing so provides more insight than simply looking at your total profits and losses.
- When it comes to how to figure out food costs, the more exacting and meticulous you can be, the better.
- The average cost of food for restaurant owners is increasing, and coupled with the high average cost of opening a restaurant, keeping food costs under control can be a challenge.
- There are plenty of ways you can improve your food cost percentage and narrow the gap between your actual food cost and your ideal food cost.
How to Calculate Food Cost Percentage
Calculating food cost percentage requires a bit of math, but crunching the numbers pays dividends when it comes to making a restaurant profitable. Take a look at these steps you should follow when calculating your food cost percentage:
- Take inventory of all the food and beverage items you order each week and determine the combined cost to find your beginning inventory value.
- Track any incidental food or beverage purchases you make throughout the week and add up the costs to find your purchases.
- Take inventory again at the beginning of the next week (before you order anything else) and calculate the dollar value of what’s left to get your ending inventory value.
- Calculate your total food sales for the week.
- Calculate your food cost percentage by using the food cost formula: (beginning inventory + purchases) - ending inventory/ food sales.
- Convert the final number to a percentage, and you’ll have your food cost percentage.
Why Is Food Cost Control So Important?
Restaurants run on notoriously thin profit margins, so every penny truly counts. Food is one of the biggest expenses a restaurant has to cover, and it’s also how a restaurant makes its money — meaning that it’s crucial to balance how much ingredients cost with how much money is being made on them. Controlling food costs — even by increasing profits on items by just a few cents — can prevent unnecessary revenue loss.
What Is a Good Food Cost Percentage?
Food cost percentage varies between different types of restaurants. Things like the type of cuisine, style of service, and even geographical location all play a part in determining what constitutes a “good” food cost percentage. However, most operators aim for somewhere between 28%-35%.
Benefits of Tracking Food Cost Percentage
Tracking food cost percentage is a key strategy for maintaining a profitable restaurant. Savvy operators are meticulous, and they’re experts on how to calculate food costs. There are a range of benefits to using the food cost formula, and tacking it properly can work to your advantage.
- Menu Engineering: Menu engineering means optimizing your menu so that it’s as profitable as possible. Tracking your food cost percentage will allow you to do so by making you aware of dishes that might need to be removed, as well as dishes you should train your service staff to promote.
- Goal Setting: Food cost percentage is valuable data. You can use it to set achievable goals that will encourage you and your team to push your business in the right (and by that we mean, profitable) direction.
- Supplier Monitoring: If you’re on top of your food costs, you’ll be more apt to notice the impact a supplier raising the price on a specific ingredient can have on your bottom line. Staying aware can encourage you to shop around, change the quantity in which you purchase certain items, or eliminate an expensive ingredient from a recipe.
- Discover Pitfalls: Unless you’re tracking your food cost percentage, you won’t have reliable, data-driven metrics at your disposal. Paying attention to your food costs can indicate issues like food waste, spoilage, issues with staff, etc.
How to Improve Food Cost Percentage
Even if you think you have your food costs under control, chances are, you could probably improve them by making a few strategic changes. If you need encouragement to implement new procedures and best practices, just remember: even a small improvement in food cost percentage can lead to big changes in terms of revenue.
- Put technology to work: Most modern POS systems have features that can help you accurately calculate, track, and improve your overall food costs. Inventory management features can also make things easier.
- Focus on reducing food waste: Adhering to best practices like “first in, first out”, being diligent about labeling, and ensuring you’re storing your ingredients correctly can all help reduce food waste. Tracking how much food you’re throwing away can also help you make changes in the quantity of food you’re ordering each week.
- Amp up employee training: Mistakes happen, but by amping up staff training, you can make them happen less frequently. Reducing human error saves you from losing food you aren’t making a profit on due to items being sent back or being made incorrectly.
- Price menu items appropriately: If you price items too high, customers might not order them as readily. If you price them too low, you won’t be recouping enough of the money you spent on ingredients. Finding the sweet spot can be difficult, which is why it’s so important to track your data so you can make informed decisions. For more information and tips, visit our article about menu costing.
How Do You Calculate Ideal Food Cost Percentage?
Ideal food cost is another ratio between how much money your business is spending on food versus how much it’s making on food. The main difference between food cost and ideal food cost is that the latter doesn’t take into account inventory losses — so it represents what your profit would be in a perfect world where spoilage, waste, and mistakes didn’t happen.
The formula is simple: total food costs / total food sales. When expressed as a percentage, you can use this number as a goal post when you’re trying to improve your actual food cost percentage. The closer the two numbers are, the better.
Food Cost Percentage vs. Food Cost Per Serving
While food cost percentage represents how much of a profit your business is making on its food sales as a whole, food cost per serving is a more specific metric that clues you into how much each of your individual dishes costs. Understanding food cost per serving can help you price your menu items appropriately.
How to Calculate Food Cost Per Serving or Per Menu Item
To calculate food cost per serving or per menu item, all you have to do is add up the costs of all of the ingredients in a specific dish. The tricky part is that you have to first calculate how much each ingredient costs per serving. So, if a loaf of bread costs $5.00 and contains 10 slices, and the BLT on your menu uses two slices, you’d need to account for $1.00 for the bread in your calculations.
What’s the Average Cost of Opening a Restaurant?
The cost of opening a restaurant can vary wildly, and it depends on things like location, size, cuisine, etc. The median cost is $375,000, and although that might seem shocking at first glance, there are plenty of restaurant financing options that can help make it feasible. From restaurant business loans to investors, there are more options available than you may think.
Whether you want to know how to open a restaurant, or you’ve been running one for years, understanding restaurant food cost percentage is crucial if you want to maximize profits. Not only can calculating your food cost percentage give you insight into where you are in terms of generating revenue, but it can also help you make changes that will ultimately set your business up for success.