Restaurant food cost determines your profit margins and if your eatery will be a success or failure. Studies show that 50% of businesses will fail within the first five years of operation, and a major factor is a lack of cash flow.
Menu costing and calculating food cost will help you:
- Price dishes accurately
- Maintain healthy cash flow
If you don't know what a food cost formula is or how to calculate all of these figures, we'll outline everything for you below.
What is Food Cost for Restaurants?
Your food cost is the ratio of:
- Ingredient cost
- Revenue from each dish
A food cost percentage formula is used to determine one of two things: price for making the dish, or Cost of Goods Sold (COGS). We'll be following the first equation of trying to calculate food cost for a specific dish.
Calculating Food Cost Percentage
Your basic food cost equation will be ((starting inventory + purchases) - ending inventory) / total food sales. Understanding all of the key components of the equation first will make this formula a little easier to grasp:
- Starting inventory is how much you spent on inventory for the week.
- Purchases include any additional ingredient purchases throughout the week.
- Ending inventory is the value of the ingredients that you have at the end of the week.
- Total food sales are the total value for all items sold in the last week.
Let's assume that you spent $2,000 on inventory to start the week, purchased $500 in additional ingredients and ended with $100 in inventory. Total food sales for the week were $7,000, so your formula would look something like this:
- $2000 + $500 = $2,500
- $2,500 - $100 = $2,400
- $2,400/$7,000 = .343
- .343 * 100 = 34.3%
Your restaurant food cost percentage for the week is 34.3%, but there are other costs that will make your profits lower. For example, if you need to calculate profit margins, you must add in all other costs, such as salaries, utilities, rent or mortgage payments, etc.
If you find that for your eatery type, this percentage is too high, you have one of two options:
- Work with a new supplier, or buy in bulk to lower the ingredient costs. Of course, you must consider food waste into the equation because if you're wasting food, it will negatively impact your profit margins.
- Raise your menu prices. Customers are sensitive to price increases, so you must ensure that your prices are aligned with industry standards and do not rise too much overnight. For example, if you sell chicken fingers for $10 and, all of a sudden, you raise the price to $20, you risk losing a lot of loyal customers in the process.
Many restaurants will use a similar equation to understand the cost of goods sold. For example, if you sell hamburgers, you would use all of your ingredients (COGS) / price.
So, if it costs $3 to make your burgers and you sold them for $10, it would be 3/10 = .3 * 100 = 30%. You spend 30% of the revenue you earn on the ingredients of the burger, meaning you're making $7 for each burger, but then you need to add in other costs to understand profit margins.
Finding Your Ideal Food Cost Percentage
Ideal food costs and actual food costs are two very different things. In the ideal world, you wouldn't have excess inventory. So, your ideal food cost may be $2000/$7000 or 28.5%.
Why?
Perhaps $400 of ingredients go to waste during a normal week, and if you can eliminate this waste, you will sell your food for a lower percentage of your revenue. Small tweaks inside of your business's inventory management system can help a lot in this regard.
How to Lower Your Food Costs
If you find that your food costs are high or you want to lower them without impacting quality, it's a smart business decision. You may find that a menu item's popularity has waned to the point where you're purchasing unnecessary inventory and need to scale back on your ordering.
In this case, you'll want to go through your sales records and recipes to find unpopular dishes that are leading to the highest food waste.
And in addition to this, you can lower your food costs in a few ways:
Work with Cost-Effective Vendors
It's not uncommon to work with multiple vendors to source your ingredients. For example, you may have three vendors and purchase certain ingredients from each one. Reach out to each vendor and discuss:
- Bulk order pricing
- Exclusive agreements
You must take the time to negotiate with your vendors and find a win-win for all parties. Suppliers want to be sure that they're earning a healthy profit and one way to seal the deal is to increase order volumes or pay for the ingredients for the month upfront.
If you have a good supplier, you might even sign a few-month agreement to use them exclusively as a supplier for a discount.
Bulk purchasing is common in the industry. It's always worth it to pursue new vendors when they're available because you need to secure the best price for the highest quality ingredients.
Join Group Purchasing Partnerships
Bulk purchasing in large quantities is expensive. You'll spend a lot of money upfront and as a small eatery, you may be unable to afford this cost.
What can you do?
Join a group purchasing organization.
How does this work?
- Pool all of your money together
- Buy ingredients as one joint partnership
- Secure your ingredients for less
Larger restaurants and chains earn higher profit margins because they have massive purchasing power. Joining a partnership is a way for smaller eateries to compete on costs, save money and grow together.
You can use the food cost formula - and the other ones we provided - to better control your food costs. Lowering your food costs without impacting quality is one way to instantly improve your profitability.
All restaurants should take the time to routinely calculate food costs and total waste to maximize profits.