Your restaurant group is looking to the new year and making plans. Because your food costs are one of your largest expenses, creating a focused food cost strategy can have an enormous impact on your business.
Your food cost percentage is key to optimizing your profit levels. Not only can your food cost help you better understand your restaurant group’s budget, but it can also drive your menu pricing and inventory control at all your locations. It helps you make data-driven decisions about your menu, and ensure you are taking every opportunity to maximize your profits.
You may already have systems in place for calculating your food cost percentage on an individual dish level, as well as a percentage of your business overall. But as you enter a new year, it’s the perfect time to review your systems and see if there is room for improvement.
How to calculate food cost percentage
Your restaurant food cost is also known as your Cost of Goods Sold (CoGS), the total cost of all the ingredients you use to prepare the menu items that you sell during a given period. Your food cost percentage is this food cost number as a percentage of sales.
Basically, your food cost percentage shows the relationship between how much it costs you to make a dish and how much profit you make from that dish. You can calculate your food cost percentage on the store level at each of your locations, comparing your overall inventory CoGS to your sales, or on an individual dish level.
Food costing is a powerfully simple tool, but it requires robust restaurant management systems to generate accurate numbers.
Consistent, accurate recipe costing is key. Recipe costing breaks down menu items to the correct cost for the portion size and individual ingredients. With up-to-date information about vendor pricing, combined with standardized recipes from your kitchen, your food cost percentage numbers are calculated based on the exact food cost of a dish.
In order to generate accurate data, consider using inventory management software that is integrated with your accounting and Point of Sale (POS) system to map inventory against sales. While it is possible to calculate food cost percentage manually, it is incredibly time consuming and can be difficult to maintain consistency.
If you don’t have automated tools for inventory control and recipe costing, use this formula to calculate your food cost percentage at the store level:
(beginning inventory + purchases) – ending inventory ÷ total food sales = food cost percentage
Calculate your ideal food cost percentage
You don’t want to just calculate where your food cost is, without understanding where it should be (or vice versa). You want to make sure you know where your food cost percentage should ideally be, given your ingredient costs and standardized recipes, while also knowing what number your kitchens are actually hitting every day.
One of the most powerful tools for food cost percentage is to compare your actual vs. theoretical (AvT) food cost percentage. Understanding the variance between your actual and theoretical numbers shows you where you can add efficiencies back into your CoGS.
To calculate your ideal food cost percentage, leverage your theoretical food cost, the cost of making all menu items over a given period time assuming perfect portion sizes, no waste, no mistakes, and no theft. Your theoretical food cost number as a percentage of sales is your ideal food cost percentage.
Then, you can compare your theoretical to your actual food cost, which is the food cost given your real-time sales and inventory levels. The variance between these two numbers is food waste, breakage and theft.
Any variance represents a leak in your profit margin that is worth examining with your restaurant operations reporting software. You won’t always hit your ideal food cost but knowing where to look to gain efficiencies is the first step toward closing the gap.
Price your menu with food cost percentage in mind
When you understand your food cost, you can make better-informed decisions about your menu. You likely already have a profit margin goal for your restaurant. However, it’s easy to forget that your target profit margin is only possible if you are hitting your target food cost.
In the restaurant industry, a general rule of thumb is to keep food cost percentages around 28-32%. However, this is more of a guideline and less of a universal rule for every restaurant. Average food cost percentage differs between quick service restaurant concepts and fine dining as well as different cities. It may even differ within the same restaurant, changing with the menu for each day part.
No matter what food cost percentage your restaurant has, keeping this number in mind while pricing out your menu can help you ensure each menu item contributes to your profit margin. Your food cost percentage may not be the same with every dish. However, overall, you want to be able to hit your goal food cost percentage.
Understanding your food cost will also help you make menu engineering decisions. Knowing your food cost percentage helps you see which menu items are not as profitable, so you can make changes such as raising prices or adjusting ingredients to hit a new food cost percentage. You can also see which menu items have a low food cost, and then promote or feature these items to encourage sales and maximize your profit margin.
Control inventory in your restaurants to reduce waste
As you start to examine your food cost, one of the most effective ways to immediately streamline your numbers is to examine your restaurant inventory management. Remember, your food cost percentage takes into account all of the inventory you use to produce menu items. If you have high levels of waste, your food cost percentage will be higher.
So to optimize your food cost, examine how you can reduce your waste throughout your inventory control system.
If you are evaluating your actual vs. theoretical food costs, start by examining where the variances are the widest in each of your locations. These gaps represent the low-hanging fruit that you can help fix. Start with the locations that have the widest variances, then drill into the food types that have high variances. Tools like waste logs can help your store-level managers keep track of what is happening day to day in the kitchens. By working with your managers and kitchen staff, you can begin to spot mistakes, spillage, and waste to address the underlying cause of the variances.
Also make sure that you are implementing a regular inventory process to prevent opportunities for food waste in the first place. Train your entire team on inventory control but designate a few key people who are in charge of making sure it gets done regularly. Make it easy for your team by choosing an inventory management platform with easy mobile or tablet access for tracking. And complete inventory regularly, around the same time and same day of each time period, to ensure consistent data.
Regular inventory management can help you spot common mistakes like ordering too much inventory, portioning incorrectly, or not rotating ingredients properly, ultimately cutting down on your food waste and inventory costs.
Forecast your inventory for uncertainty
Forecasting tools use historical sales to predict what you will need to purchase and prepare for the next comparable sales period. If you have an all-in-one, integrated inventory management solution, you can take advantage of your historical sales data from your restaurant accounting software combined with your inventory levels to project what inventory you’ll need for a given time period.
Over-ordering and over-prepping product can result in food waste that drives up food costs. However, if you are able to use smart forecasting tools, you can plan for what you expect, not just what you think will happen. You know that Mondays and Saturdays will likely have different sales levels, and you can account for this fluctuation.
When looking at your forecasting for the new year, try to use whatever historical sales data you can to create a baselin and better project needed inventory levels. At the same time, consider implementing practices that prepare your inventory for flexibility in the face of uncertainty. Your delivery, takeout, and curbside business may require a different kind of inventory.
You can try to run a streamlined inventory by strategically limiting menu items. Work with your vendors to see if you can order different levels of products. And to keep your menu flexible for particularly perishable items, you can also promote specials that can use up surplus ingredients.
As you plan for your next year of restaurant operations, you’re probably looking at all different areas of your business, from labor to equipment. However, because your food cost is such a large portion of your budget, spending some dedicated time examining your food cost percentage can pay dividends to your restaurant business. With these tips in hand, you’re better prepared to optimize and streamline your food costs this year and beyond.
If you’d like to equip your store-level managers with inventory management tools, recipe costing, and sales forecasting to help control food costs in your restaurants, consider an all-in-one restaurant management system, now with the new Smart Ops Release. Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank.