Food cost is the profit earned from selling food minus the cost of ingredients. Food cost is calculated as a percentage. The cost of food gives insight into how profitable a restaurant or bar is.
It sets the tone of a business establishment and sets the most profitable prices. Examining this cost and possible profit of each dish might help a struggling business become profitable. It’s an essential aspect of restaurant accounting.
What Food Cost Says About Your Profits
An adequate food cost ratio helps you price your menu to sell dishes effectively and maximize profit. Cost tracking also allows you to adjust to changes in restaurant sales and adjust prices of products on the go. Adjusting prices to increase profit requires knowledge of your company’s actual cost percentage.
In the restaurant industry, revenue is razor-thin, so it’s essential to keep track of expenses. Taking inventory frequently and minimizing the reduction in your inventory is the easiest way to reduce expenses. You can use inventory software to take inventory more efficiently.
Actual Food Cost vs. Ideal Food Cost
The actual food cost depends on the existing inventory levels of your business, while the ideal food cost is what your food cost would be in an ideal situation. Basically, the ideal cost is the cost of running a restaurant without any waste. Since shrinkage occurs in a restaurant, the actual food cost is always higher than the ideal food cost.
Why Should You Calculate Ideal Food Cost?
Even though the ideal food cost isn’t an exact estimate, you should calculate it for your restaurant. Your business’s ideal food cost will serve as your target price. It will help you with inventory, prevent losses, and cut down on wastage. Your business will be more successful if its ideal and actual food costs are as close as possible.
Calculating Your Restaurant’s Food Cost Percentage
You know what food cost, ideal cost, and actual cost mean. The next thing is to learn how to calculate food cost percentage.
The cost of an item sold divided by the income or sales made from that final meal gives you the food cost percentage. We’ll also show you how to calculate the cost of items sold, which is how much money you spent on inventory and materials in a certain period.
Knowing whether particular goods are good for business or not is quite important, and we’ll show you that now. You also have to find out whether your restaurant is on the way to profit. A lot of fast-food and full-service restaurants charge between 28% and 32% for food. What is the best way to find your restaurant’s percentage?
- Begin with a weekly inventory: Make a list of every food supply you got at the beginning of the week. Most inventory software is compatible with tablets and smartphones, allowing you to walk around your store and check items on your list like with a clipboard.
- Calculate the value of every item in dollars: How much is the price of each package of an item in your store?
- Keep a record of your purchases: Did you buy any more items the following week after the start of inventory?
- Take another inventory at the start of the next week, taking the same steps as before.
- Calculate the total amount of food sales made per shift.
Using the formula below, find out the week’s actual food cost: Food Cost Percentage = (Beginning Inventory + Items Bought – Ending Inventory) ÷ Food Sales.
Examine how the food cost percentage calculation works in this example:
Ending Inventory = $21,000
Beginning Inventory = $20,000
Food Sales = $15,000
Purchases = $7,000
Food Cost % = (20,000 + 7,000 – 21,000) ÷ 15,000
Food Cost Percentage = 6,000 ÷ 15,000
Food Cost Percentage = 0.40 or 40%
Tip: If the food cost percentage is too high or too low, double-check to see if you’ve correctly counted every item, entered the correct units, and included each purchase.
Calculating Your Ideal Food Cost Percentage
Another percentage that is important to calculate is the ideal food cost percentage. Calculating actual food costs and leaving it isn’t enough.
To make sure your restaurant is running successfully, you’ll need something to compare the numbers. Compare your restaurant’s existing food cost to its ideal food cost. Ideally, your restaurant would have no theft or food wastage.
Calculate the ideal food cost percentage without your restaurant’s beginning and ending inventory. Instead, it takes into account the overall sales and costs of each item on the menu.
How to Calculate the Cost of Food per Dish or Menu Item Cost:
Food Cost per Serving = Ingredients Cost x Amount Sold per Week.
Total Sales per Serving = Amount Sold Weekly x Sales Price.
Now you know how to get the food cost per serving, this is the formula to estimate the ideal food cost percentage:
Ideal Food Cost % = Total Cost per Serving ÷ Total Sales per Serving.
See how the food cost percentage calculation works in this example:
Total Sales Per Serving = $14,000
Total Cost Per Serving = $3,500
Ideal Food Cost % = 3,500 ÷ 14,000
Ideal Food Cost % = 25% or 0.25
In these two examples, the actual food cost is 40%, and the ideal food cost is 25%. Subtracting the ideal food cost from the actual food cost lets us know that there is an extra 15%. This 15% can be because of more purchases, wastage, not charging enough or theft. You should want your restaurant’s food cost to be equal to or less than the ideal food cost of your restaurant.
Reducing Your Food Cost Percentage
There are a lot of ways to lower your restaurant’s food cost percentage. These are some examples:
- Restructure your menu prices carefully: Increase your menu prices by a tiny bit.
- Watch the size of your portions: If your dishes are returned half-eaten, consider reducing the portions.
- Menu engineering can help you figure out which items are the most profitable and adjust your menu to match.
- If your restaurant’s actual and ideal food costs are far apart, don’t give away too many food items.
- Shop at wholesale food distributors like Sysco Corp or Gordon Food Services to get the best food prices.
- Include many carbohydrates in your menu: Bulk purchases of food items like pasta are usually less expensive.
- Save money on food by changing your menu with the seasons. Seasonal foods and produce are less expensive, and seasonal produce that is popular among customers will boost profitability.
- Make your menu’s design more innovative to promote more profitable goods to customers.
How To Price Your Restaurant’s Menu Using Food Cost Percentage
- Your food prices should suit both your profit goal and your target customers.
- Keep your target customers in mind while pricing your food.
- If a menu item is in high demand in your surroundings, make it cheaper or more expensive, depending on how the market will react.
- When you price your menu, keep rent, labor, and overhead expenditures in mind.
How to Reduce Your Restaurant’s Food Cost
Here are some ways to reduce your restaurant’s food costs:
Do More of the Preparation
Food items that are partly processed are more expensive than unprocessed food items. Instead of buying chopped carrots, buy carrots and cut them yourself. When doing this, make sure you account for labor costs to be sure that you are saving money.
Take Inventory Regularly
We recommend that you conduct inventory regularly to keep track of your food consumption and costs. Furthermore, you’ll have a better sense of what’s used or stolen. You’re also aware of how quickly food items finish. Taking inventory can also help you avoid ordering too much or too little throughout the ordering process.
Join a Bulk-Buying Group
Join a bulk-buying group to save money on groceries. There are savings in volume purchasing, and suppliers often reduce their prices this way. It is a great approach for smaller restaurants to compete with larger chains with a lot of buying power.
Key Points for Managing Food Cost Percentage
While it might be a little stressful, keeping track of your restaurant’s food cost percentage makes sure that you can pay your expenses and make a profit on each sale. To summarize, here’s how to price your restaurant’s menu to make the best profits:
- Calculate the cost per serving of each item on the menu.
- Calculate your actual food cost percentage.
- Calculate what your ideal food cost percentage is.
- Keep an eye on how customers respond to the changes.
- Adjust menu items to meet your food cost percentage.
- Look into other ways to save money on meals.
What Makes Food Cost Percentage Important?
Calculating food cost percentages is crucial since monitoring and managing it can help you maximize profits. The following are some of the advantages of knowing your restaurant’s food cost percentage:
You Can Design Your Menu Efficiently
You can change menu items that are no longer profitable using food cost percentage information.
You Can Earn and Spend Money Wisely
You can verify that each item on your menu fits within your food cost margins by pricing each item using the food cost percentage. This way, you’ll be able to determine which items bring the most profit.
You Can Experiment with Recipes Smartly
You can experiment with new recipes and evaluate if it fits your restaurant’s ideal food cost percentage. If it doesn’t, try to make changes to the recipe or save it for later.
Calculating and optimizing the food cost percentage for your restaurant might be difficult. Still, with the methods and formulas in this article, you’ll be able to calculate your restaurant’s food cost percentage.
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