It’s no secret that owning and operating a restaurant can be one of the riskier small business ventures you can undertake. Trendy “It” spots in seemingly ideal locations open and shutter rapidly, and even a seemingly successful establishment with a consistent customer base can find itself struggling to stay above water. It goes without saying that operating with peak efficiency is of the utmost importance. According to a 2019 survey by point of sale company Toast, 52% of restaurant professionals cited operating and food costs as their No. 1 challenges. This shouldn’t come as much of a surprise; the costs of ingredients can be volatile, and if not properly tracked and monitored, may literally be the difference between success and failure.
Many restaurants operate with margins as low as 2-3%, meaning that if any area of your business is leaking cash, it could drop you into the red. And food costs are often a likely culprit. There are a number of reasons why you may be spending too much on ingredients while not getting back an appropriate return. You may be offering the wrong sized portions, certain menu items may be priced wrong, or you may be buying too much of an ingredient and letting a percentage of it go to waste. This is why it’s vitally important to be able to accurately calculate your food costs.
In this article, we’ll let you know what percentage of food cost you should be targeting and how to make sure you’re hitting that goal.
What’s Included In The Food Cost Formula?
Now let’s get to the good stuff. How exactly do we calculate food costs? It’s actually a fairly simple equation — with a catch. The first thing you’ll want to do is figure out your actual food cost.
Actual Food Cost = (Starting Inventory + Purchases – Ending Inventory) / Sales
Easy enough right? So, as an example, let’s say that you value your inventory at the beginning of the week at $10,000 (because we love the Base 10 system). You then make $3,000 in purchases. At the end of the week, your inventory is valued at $12,000. Using the calculation, we see that the first number would be $1,000. If you also had $3,000 in food sales, then you would divide $1,000 by $3,000 for an actual food cost of 33.3%. Make sense so far?
$10,000 (starting inventory) + $3000 (purchases) – $12,000 (ending inventory) / $3,000 (sales) = 0.333 (an actual food cost of 33.3%)
Industry standards vary slightly, but generally, an actual food cost percentage of roughly 30% should be your target. If you’re coming within a couple of percentage points on either side, you’re probably doing something right. Now, if you’re math-averse, unfortunately, that’s not the only calculation you should be making. There’s also the ideal food cost.Â In a perfect world, this percentage would match up directly with your actual food cost total, but nothing is ever that simple. The difference between these numbers is what helps you detect where you may be losing profits, either through waste or potential theft.
Ideal Food Cost = Cost per menu item / Sales per menu item
To go off of the above example, if your total inventory cost each week for the ingredients in a dish is $900 and your sales on that menu item add up to $3000, you are left with an ideal food cost of 30%.
$900 (cost per menu item) / $3,000 (sales per menu item) = 0.30 (an ideal food cost of 30%)
Exactly where you want to be, right? However, let’s look back at the actual food cost we calculated earlier. There’s a 3.3% discrepancy in your actual and ideal numbers. Now you can start trying to figure out the reason behind that gap. Keep in mind that, although the goal is for those numbers to be as close as possible, you’re likely never going to cut down on waste entirely.
Download Our Food Cost Calculator For Restaurants
Restaurant owners (and managers) are busy people! We know. Sometimes you just want a tool that will do the work for you, with minimal time or effort required. I mean, honestly! Who wants to spend hours totaling up inventory purchase orders just to see how much you’ve spent?
(Spoiler alert, if you’re doing this manually it’s time to invest in a better system.)
To that end, we’ve put together a handy food cost calculator for you. This downloadable file will help you calculate both your ideal and actual food costs and highlight the difference between the two.
Get Our Food Cost Calculator Google Sheet
Or Download The Excel File
Strategies To Manage Your Food Costs & Increase Your Profit Margins
In the above scenario, a difference of 3.3% between ideal food costs and actual food costs probably isn’t going to make or break you. However, if you find the gap to be higher than that, you should probably try to lock down the culprit as quickly as possible. Left unchecked, a food cost discrepancy could bleed tens of thousands of dollars from your bottom line over the course of a year.
Here are a few reasons why you may not be getting an optimal return on your food costs.
- Menu Items Mispriced: Menu pricing can be tricky, and restaurant owners often make choices based on gut instincts. But even micro-adjustments, particularly to popular items, could make a significant difference in bettering your food cost percentage. You can also try to redesign your menu to increase profitable items’ visibility. Keep your customers in mind and stay on top of current food trends; if you have seasonal items on your menu, make pricing adjustments accordingly.
- Overspending On Ingredients: It’s important to shop around to make sure that you’re getting the best value for the items you include in your dishes. Buying in bulk can be a cost-saver, but you can offset those savings if you’re purchasing too much and letting ingredients go to waste. Carb-heavy items like breads and pastas are usually cheaper, so implementing more of those menu options could increase your profits. If your ideal and actual percentages are off by a large margin, you may want to hold back on giving away items at tables (like bread or chips).
- Dishes Portioned Incorrectly:Â One easy thing to check that may end up making a big difference is simply whether the dishes you’re serving are too large. If you see the same dish coming back half-eaten again and again, that may be a sign that you need to adjust your recipe. Make sure that all of your cooks are on the same page. Even one lone cook with a penchant for adding more sauce or dishing up a larger portion can affect the bottom line.
- Not Utilizing Your POS:Â If you’re running a full-service restaurant, chance are good you have a strong point of sale system. If any of the above measures seem too daunting, a strong inventory management and reporting system can do the bulk of the heavy lifting. A POS with strong inventory can help you keep precise counts of ingredients and can tell you what items sell best and if there are things like seasonal trends that you can utilize to your advantage.
Find A POS System That Helps You Control Your Food Costs
That last bullet-point above is of particular interest to us because helping you find the perfect POS system for your business is kind of what we do. Most POS systems will have some form of inventory management, but they are not all created equal. If inventory management is going to be crucial for your restaurant, there are some areas where you’ll want to make sure your system excels.
First, if you have a large number of SKUs, having a system that can import and edit items in bulk is going to virtually be a necessity. Most good systems, but not all, will allow you to import via a CSV file and some will even let you import existing barcodes. Features like this in the back end that cut down on how much you’ll need to input manually will save you countless hours. Along those same lines, having a system that allows you to create and print your own purchase orders is a huge benefit. While this is a common feature, it can occasionally be a time-consuming process depending on the POS, so be sure to utilize a free trial or demo when you’re shopping around.
Raw ingredient tracking could be the feature in inventory management that will help you cut down on food costs the most. And again, while most restaurant POS systems worth their salt will have this feature, some are more robust than others. Make sure your system provides real-time alerts to let you know if stock is running low. You can also usually set levels to automatically place a new purchase order when an ingredient is nearly out. Other systems automatically track waste, which can save you time when trying to calculate your ideal food cost. It’s also nice if your inventory syncs with your reporting, giving you detailed numbers on how much of a certain ingredient is selling and how much profit individual dishes are turning. In short, your POS can (and should) do a lot of the heavy lifting for you when it comes to calculating your inventory to make sure you’re running at peak efficiency.
The Bottom Line: Managing Food Costs Is Key To Improving Your Profit Margins
If you’re running a restaurant, you’re already aware of how volatile the industry can be. When you’re working with narrow margins, you need to find ways to cut costs anywhere you can. And while food costs are one of a restaurant’s biggest expenses, the good news is that it’s possible to shave down those costs if you’re vigilant. Calculating your actual food cost and your ideal food cost may seem like a tedious and perhaps arduous process. However, a POS system with a robust and easy to use inventory management system can make things much easier. In the process you might find some key areas of waste or some simple fixes that could save you thousands of dollars in the long run.
Get Our Food Cost Calculator Google Sheet
Or Download The Excel File
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