Pricing your dishes accurately is crucial for the success of any restaurant. Overpricing can deter customers, while underpricing can lead to insufficient revenue. Understanding and calculating your food cost is the key to setting profitable menu prices and ensuring your restaurant’s financial health. This guide provides a comprehensive overview of how to calculate and manage your food costs effectively.
Understanding Restaurant Food Cost
Food cost is the ratio of a restaurant’s cost of ingredients to the revenue generated from those ingredients when menu items are sold. It is typically expressed as a percentage, known as the food cost percentage. Some restaurants use food cost to determine the price of making a dish, while others prefer the Cost of Goods Sold (COGS), which includes all costs, even down to the smallest details like toothpicks and napkins.
Essential Steps Before Food Costing
Effective budgeting is essential for restaurant profitability. Regularly review your budget to monitor cash flow and maintain financial stability. While numbers might seem daunting, using the right tools can simplify the process.
Consider these budgetary items:
- Track All Numbers: Monitor the prime cost, which is the ratio between sales and cost.
- Define Accounting Period: Choose a consistent accounting period, typically four weeks, but adjustable to your business needs.
- Set Budget Targets: Budgets should guide your restaurant towards maximum efficiency, not just reflect current operations.
- Focus on a Weekly Operational Budget: A granular view of weekly operations helps in tracking expenses more effectively.
Once your budgeting system is in place, you’re ready to start food costing.
Deep Dive into Food Cost Percentage
Maintaining a low food cost percentage (without sacrificing food quality) is essential for maximizing profit. Here’s what you need to know:
What is Food Cost Percentage?
Food cost percentage is the value of food costs relative to revenue, expressed as a percentage. This figure helps restaurants set appropriate menu prices.
How to Calculate Food Cost Percentage
To calculate food cost percentage, you need these values:
- Beginning Inventory Value: The value of inventory at the start of the period.
- Purchases: The total value of inventory purchased during the period.
- Ending Inventory Value: The value of inventory at the end of the period.
- Total Food Sales: The total revenue from food sales during the period.
Food Cost Percentage Formula
The formula is:
Food Cost Percentage = ((Beginning Inventory + Purchases) – Ending Inventory) / Total Food Sales
Food Cost Percentage Example
Let’s say Johnny’s Burger Bar has the following values:
- Beginning Inventory Value = $11,000
- Purchases = $7,000
- Ending Inventory Value = $15,000
- Total Food Sales = $8,000
Using the formula:
Food Cost Percentage = (($11,000 + $7,000) – $15,000) / $8,000
Food Cost Percentage = $3,000 / $8,000
Food Cost Percentage = 0.375 or 37.5%
This means that 37.5% of Johnny’s Burger Bar’s revenue goes toward paying for ingredients.
Calculating Ideal Food Cost Percentage
To find your ideal food cost percentage, you need:
- Total Food Costs
- Total Food Sales
If Johnny’s Burger Bar has total food costs of $2,500 and total food sales of $8,000, the calculation is:
Ideal Food Cost Percentage = $2,500 / $8,000
Ideal Food Cost Percentage = 0.31 or 31%
Comparing the current food cost percentage (37.5%) to the ideal (31%) shows Johnny is missing out on potential revenue.
What is a Good Food Cost Percentage?
Most restaurants aim for a food cost percentage between 28% and 35% of revenue. However, this varies depending on the type of food, overhead, and operating expenses. A steakhouse might have a higher percentage due to expensive ingredients, while a pasta-focused restaurant could aim lower due to cheaper ingredients.
Each restaurant should calculate its own food cost percentage rather than relying on averages.
Understanding Food Cost Per Serving
Knowing how much it costs to make a single serving of each menu item is essential for pricing.
Food Cost Per Serving Formula
The formula is simple:
Food Cost Per Serving = Sum of Ingredient Costs Per Serving
Cost Per Serving Example
Johnny wants to calculate the cost per serving for his famous Johnny Burger, which includes 8 ounces of ground beef, 1 sesame seed bun, 1 tablespoon of sauce, 2 slices of cheese, 2 slices of tomatoes, and 2 potatoes.
He calculates the cost of each ingredient:
- 8 ounces of ground beef = $1.90
- 1 sesame seed bun = $0.25
- 1 tbsp of sauce = $0.10
- 2 slices of cheese = $0.90
- 2 slices of tomatoes = $0.50
- 2 potatoes = $0.75
Food Cost Per Serving = $1.90 + $0.25 + $0.10 + $0.90 + $0.50 + $0.75 = $4.40
Therefore, the ingredients for the Johnny Burger cost $4.40.
Why Food Cost Percentage is Crucial
Understanding your food cost percentage is essential for:
- Deciding dish prices
- Assessing dish profitability
- Optimizing overall costs
Benefits of Calculating Food Cost Percentages
- Understand Food Costs and Pricing: It forces a detailed look at ingredient costs, helping identify overpriced ingredients.
- Try Out New Recipes: It allows for recipe testing based on cost data, finding affordable alternatives.
- Make Smart Menu Changes: Regularly calculating food cost percentages helps in making informed menu adjustments.
- Identify Best Sellers and Underperformers: This data helps in understanding which items are most profitable.
- Understand Food Cost Per Location: For multiple locations, knowing the food cost percentage at each helps in comparing performance.
Strategies to Lower Restaurant Food Costs
Find Cost-Effective Vendors
Can you find the same quality ingredients for a lower price? Consider local suppliers to reduce transportation costs. Negotiate better terms with existing suppliers, such as increasing order volume or paying upfront.
Group Purchasing
Partner with other food merchants to buy ingredients together, reducing costs through bulk discounts and shared delivery fees. Alternatively, join a group purchasing organization (GPO) for collective buying power.
Plan Your Menus Better
Offer dishes with overlapping ingredients to minimize waste and inventory requirements. Focus on seasonal dishes with affordable, high-quality ingredients.
Streamline your menu by reducing the number of items and focusing on best-selling dishes.
Reduce Portion Sizes
Reducing portion sizes can decrease waste and lower ingredient costs per dish. Instead of an 8-ounce burger, serve a 6-ounce burger.
Invest in Technology
Effective restaurant POS systems with inventory management can save money by streamlining operations, automating tasks, and spotting discrepancies.
Setting Menu Prices
With a food cost of $4.40 and a current food cost percentage of 37.5%, Johnny’s Burger Bar’s current menu price is $11.70. To achieve an ideal food cost percentage of 31%, the formula is:
Menu Item Price = Food Cost / Ideal Food Cost Percentage
Menu Item Price = $4.40 / 0.31
Menu Item Price = $14.20
Therefore, the Johnny Burger should be priced at $14.20.
Tracking Menu Pricing’s Effect on Sales
After adjusting menu prices, monitor the impact on sales.
Scenario 1: Burger Sales Slow Down
If sales decrease, the price might be too high. Consider partnering with cheaper vendors, reducing portion sizes, or using less expensive ingredients.
Scenario 2: Burgers Sell Well
If sales remain strong, consider increasing the price further to aim for a lower food cost percentage, such as 28%.
Regardless of the scenario, vigilant monitoring is key.
Key Takeaways for Managing Food Cost Percentage
Controlling your restaurant’s food cost percentages ensures profitability.
To price menu items for financial success:
- Determine food cost per serving for each item.
- Calculate your current food cost percentage.
- Find your ideal food cost percentage.
- Adjust menu items to match the ideal percentage.
- Monitor sales reactions to adjustments.
- Explore alternatives for lowering food costs.
Maximize Your Profits with Technology
With the right technology, you can streamline operations and make informed decisions.
FAQs About Food Cost
How do you calculate food costs?
Food Cost Percentage = (Cost of Ingredients / Selling Price) x 100
What is the formula for cost per portion?
Cost per Portion = Total Cost of Ingredients / Number of Portions
What is a good food cost percentage?
Typically 28% to 35% in the restaurant industry, but varies based on restaurant type and ingredient costs.
Understanding and effectively managing your food costs is essential for the financial success of your restaurant. By following these guidelines, you can set profitable menu prices and optimize your operations for long-term sustainability.
