For any restaurant, keeping a close eye on finances is as crucial as crafting a delicious menu. A significant portion of your revenue, typically between 20% and 40%, is spent on food. Considering other operational costs like labor, rent, utilities, and marketing, effectively managing food expenses is paramount. Do you have a clear understanding of your restaurant’s food spending?
Knowing your restaurant’s food cost percentage empowers you to make informed business decisions. This knowledge is vital for optimizing menu prices to maximize profitability and for determining when to seek out more cost-effective suppliers. By utilizing a food cost formula to gain deeper insights into your total food costs, you can enhance your profits and safeguard your bottom line.
This article will guide you through:
- Understanding what food cost percentage signifies.
- Applying formulas to calculate costs for individual meals and dishes.
- Recognizing the importance of food cost percentage calculation for your restaurant’s success.
- Leveraging food cost percentage to strategically set menu prices.
- Simplifying the process of food cost calculation.
Restaurant owners reviewing financial documents at the bar, focusing on cost analysis and inventory.
Deep Dive into Food Cost Percentage Calculation
To gain control over your restaurant’s finances and boost your business’s profitability, mastering the calculation of restaurant food costs using a food cost formula is the first step.
Defining Food Cost Percentage
Food cost percentage represents the proportion of your revenue allocated to purchasing food and beverage supplies for your restaurant. This metric can be assessed in various ways to provide different levels of insight.
Total food cost percentage offers a broad view, examining the cost of all food supplies against the total revenue generated over a specific period. Think of this as a comprehensive overview of your food-related expenses.
Food cost percentage per dish, in contrast, provides a detailed breakdown, showing the cost associated with each menu item. This granular view allows you to identify high and low-cost dishes, similar to analyzing individual subject grades on a report card. A low percentage for a popular dish like chicken piccata indicates efficiency, while a high percentage for a less popular item like lamb roast might signal a need for price adjustment or recipe revision.
By analyzing food cost information, you can effectively manage overall expenses and pinpoint menu items that offer opportunities for price optimization.
Formulas for Calculating Food Cost Percentage by Meal and Dish
Now that you understand the difference between total food cost percentage and cost per dish, let’s delve into the specific formulas and steps for calculating these crucial figures.
Step-by-Step Guide to Calculate Food Cost Using Formulas
Total Food Cost Percentage Formula: Understanding Cost Per Meal
To determine the fraction of your restaurant’s revenue consumed by food costs, use the following formula for total food cost percentage:
Total Food Cost Percentage = (Total Cost of Goods Sold / Total Revenue) x 100
Here’s a detailed breakdown of how to apply this formula:
- Calculate Your Total Cost of Goods Sold (CoGS).
Your Total Cost of Goods Sold (CoGS) represents the cost of food and beverages sold during a specific period. Calculate CoGS using this formula:
CoGS = [(Beginning Food and Beverage Inventory Value) + (Inventory Purchase Value)] – (Ending Inventory Value)
To find your CoGS:
- First, determine the value of your food and beverage inventory at the beginning of the period.
- Add the cost of all new inventory purchased during the same period.
- Finally, subtract the value of your remaining inventory at the end of the period.
Example: Let’s consider Sandra, the owner of Chez Sandra. She wants to calculate her restaurant’s total food cost percentage for December. She starts by noting her inventory was valued at $10,000 at the beginning of December. Throughout December, she purchased an additional $4,000 worth of supplies. By the end of December, her remaining inventory was valued at $6,000.
- Beginning Inventory Value (December 1st): $10,000
- Inventory Purchases (December): $4,000
- Ending Inventory Value (December 31st): $6,000
Sandra’s Cost of Goods Sold (CoGS) = [(Beginning Inventory Value) + (Inventory Purchases)] – (Ending Inventory Value) = [$10,000 + $4,000] – $6,000 = $14,000 – $6,000 = $8,000
Sandra’s CoGS for December is $8,000, indicating the value of food and beverage inventory used.
- Calculate Your Total Revenue for the Period.
Access your Point of Sale (POS) system reports to determine your restaurant’s total revenue for the chosen period (week, month, year).
Example: Sandra uses her TouchBistro POS system and finds that Chez Sandra’s Total Revenue for December was $26,000.
- Divide Total CoGS by Total Revenue.
Example: Sandra’s Total CoGS for December was $8,000, and her Total Revenue was $26,000.
$8,000 / $26,000 = 0.307
- Multiply by 100 to Get Total Food Cost Percentage.
Example: 0.307 x 100 = 30.7%
Chez Sandra’s total food cost percentage for December is 30.7%.
This formula can be applied to any time frame to analyze food costs over specific periods.
Now, let’s break down the calculation for food costs per individual dish, which requires a more detailed approach.
Delicious chocolate mousse dessert, highlighting individual portion setup and ingredient presentation.
Calculating Actual Food Cost Percentage Per Dish Formula
To assess the profitability of individual menu items, calculate the food cost percentage per dish. This involves understanding the cost of ingredients for each serving.
Food Cost Percentage Per Dish = (Total Cost of Dish Per Serving / Price of Dish to Customer) x 100
Let’s examine the steps in detail:
- Calculate the Total Cost of Dish Per Serving.
Determine the cost of ingredients for one serving of a specific dish. Start by listing all ingredients in the recipe. Then, calculate the cost of each ingredient required for a single serving.
Example: Chez Sandra features a chocolate mousse as a holiday special in December. Sandra wants to evaluate its profitability to decide if it should become a regular menu item.
She lists the ingredients: chocolate, cream, eggs, and sugar. She then determines the quantity of each ingredient needed for one serving by dividing the recipe quantities by the number of servings the recipe yields. She finds one serving requires: 1 oz of chocolate, ¼ cup of cream, ½ egg, and 2 teaspoons of sugar.
Next, Sandra calculates the cost of each ingredient per serving. For example, she buys four dozen eggs for $12.00. Thus, half an egg costs approximately $0.125 (12 dollars / 48 eggs = $0.25 per egg, $0.25 / 2 = $0.125).
After calculating all ingredient costs, Sandra finds the Total Dish Cost for her chocolate mousse:
- 1 oz chocolate: $2.50
- ¼ cup cream: $0.25
- ½ egg: $0.13
- 2 tsps sugar: $0.10
Total food cost per serving of chocolate mousse: $2.98
- Determine the Price of Dish to Customer.
This is straightforward. Refer to your menu to find the selling price of the dish.
Example: Sandra sells her chocolate mousse for $6.00. So, the Price of Dish to Customer is $6.00.
- Divide Total Cost of Dish Per Serving by Price of Dish to Customer.
Example: The chocolate mousse costs $2.98 to make and is sold for $6.00.
$2.98 / $6.00 = 0.497
- Multiply by 100 to Find Food Cost Percentage Per Dish.
Example: 0.497 x 100 = 49.7%
The chocolate mousse has a food cost percentage per dish of approximately 49.7%. Is this acceptable? Let’s analyze the implications.
The Significance of Food Cost Percentage in Food Pricing Strategies
Understanding your actual food costs is essential for making strategic menu pricing decisions that directly impact your restaurant’s profitability.
Key Benefits of Calculating Actual Food Cost
Knowing your food costs provides several advantages:
- Benchmarking Your Food Spending:
Comparing your restaurant’s food cost percentages to industry benchmarks helps you assess whether your spending is within the normal range or requires adjustments. Industry benchmarks provide a guideline for healthy food cost percentages.
| Food and Beverage Category | Industry Benchmark Food Cost % Range |
|---|---|
| Overall | 20 – 40% |
| Food | 25 – 40% |
| Non-alcoholic beverage | 10 – 30% |
| Wine | 30 – 50% |
| Draft beer | 20 – 40% |
| Bottled/canned beer | 30 – 35% |
| Liquor | 10 – 20% |
| Mixed drinks | 5 – 25% |
How does your restaurant’s food cost and dish-specific costs compare to these benchmarks?
- Assessing Menu Item Profitability:
By comparing your food costs to industry benchmarks, you gain insights into the profitability of your menu items.
Revisiting Chez Sandra: Her total food cost percentage of 30.7% is within the healthy industry range. However, the chocolate mousse’s nearly 50% food cost percentage per dish exceeds the 25% to 40% benchmark for food items.
This indicates that the chocolate mousse is a high-cost item compared to industry standards and may not be profitable enough to remain on the menu at its current price and cost. To make it a permanent menu item, Sandra needs to either increase the price or reduce ingredient costs by sourcing more affordable suppliers without sacrificing quality.
Understanding food cost percentage is crucial for setting menu prices that ensure profitability.
A customer thoughtfully reviewing a restaurant menu, considering meal choices and pricing.
Restaurant Food Cost: Utilizing Food Cost Percentage for Strategic Menu Pricing
Food cost percentage data is invaluable for determining if you are: 1) underpricing menu items, 2) overpricing items (leading to low sales and potential waste), or 3) overspending on food supplies.
Here’s how to use food cost percentage to set menu prices that are both profitable and appealing to your customers.
First, calculate the food cost percentage per dish for every item on your menu. Identify items that fall above or below industry benchmarks.
For menu items with a food cost percentage exceeding the ideal range, consider:
- Increasing Menu Prices: Adjust the price to bring the food cost percentage within the benchmark range. Monitor sales after the price change to see how it affects customer demand. If demand significantly decreases, consider removing the item. In Sandra’s case, to achieve a 25% to 40% food cost percentage, the chocolate mousse price should be in the $7.45 to $11.92 range.
- Seeking New Vendors: Explore options for sourcing ingredients at lower costs without compromising quality. Network with other restaurant owners for vendor recommendations. If Sandra believes customers are unwilling to pay more than $6.00 for the mousse, she must reduce her ingredient costs to between $1.50 and $2.40 per serving to maintain profitability.
For menu items with a food cost percentage below the ideal range:
- Increasing Menu Prices: You have an opportunity to increase revenue. Gradually raise prices and monitor sales data to gauge customer response.
Even for items within the ideal food cost range, there is room for optimization:
- Increasing Menu Prices: If your food cost percentage is at the higher end of the benchmark (e.g., 40% for food), aim to reduce it to the lower end (e.g., 25%). A 15% reduction in food cost can significantly boost your bottom line without necessarily impacting sales volume.
- Exploring New Vendors: Continuously seek opportunities to negotiate better prices with current vendors or find new suppliers offering more competitive rates on food and beverage items.
If pricing adjustments and vendor changes are insufficient, consider menu redesign strategies to optimize profitability. Menu engineering can increase profits by 10% to 15%.
Another approach is to adjust portion sizes while maintaining prices, effectively reducing the cost per serving and minimizing waste.
Food Cost Control and Streamlining Food Cost Management
Manually calculating food costs can be time-consuming and complex. It requires meticulous tracking of inventory, invoices, and sales reports. Even for organized restaurant operators, this process can be daunting.
Fortunately, technology simplifies food cost control and ingredient cost management. Beyond processing transactions, a modern restaurant POS system can automate food cost percentage calculations, cost of goods sold, cost per dish analysis, and more. You can access critical food cost data in seconds, eliminating manual calculations.
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Understanding your food cost numbers is transformative for your restaurant’s financial health. Knowing the precise cost of each menu item empowers you to optimize menu prices and enhance profit margins. Comprehensive knowledge of your restaurant’s finances, including food cost percentage, cost of goods sold, and prime costs, facilitates informed decisions regarding purchasing, pricing, marketing, and staffing.
By Katie McCann
Katie is a former Content Marketing Specialist at TouchBistro, passionate about food and restaurant industry insights.
Topics: Inventory Management
