Pricing your restaurant’s menu items is a delicate balancing act that can significantly impact your bottom line. Overpriced dishes deter customers, while underpriced items erode your profit margins. Understanding and effectively utilizing your food cost percentage is crucial for achieving this balance and ensuring your restaurant’s financial health.
This guide will delve into the concept of food cost percentage, explaining how to calculate it, why it’s essential, and how to use it to optimize your menu pricing for maximum profitability.
What is Restaurant Food Cost?
Food cost represents the relationship between a restaurant’s expenditure on ingredients (food inventory) and the revenue generated from selling those ingredients in menu items (food sales). It’s typically expressed as a percentage, known as the food cost percentage.
Some restaurants also use the Cost of Goods Sold (COGS) to measure the total value of inventory to make a dish, down to the toothpick, napkin and garnishes.
Essential Steps Before Calculating Food Cost
Effective budgeting is fundamental to running a successful restaurant. It’s an ongoing process, not just a one-time task during business plan creation. Regular budget reviews help you monitor your finances and maintain profitability.
While financial management can seem daunting, it doesn’t have to be complex. With the right tools, you can easily track your cash flow and manage your restaurant budget, providing you with peace of mind.
Accounting software can streamline your bookkeeping, inventory management, and transaction tracking. If you have a POS system with inventory management capabilities, you can sync your data with accounting software for automated efficiency.
For a more traditional approach, remember these key budgetary elements:
- Track All Your Numbers: Whether you use a POS system or manual methods, knowing your prime cost (the ratio between sales and cost) is essential.
- Define Your Accounting Period: While a four-week period is common, choose a timeframe that aligns with your business needs.
- Set Budget Targets: Budgets should guide your restaurant towards maximum efficiency, not just reflect current performance.
- Focus on a Weekly Operational Budget: A granular view of your weekly operations helps you track expenses more effectively.
With a robust budgeting system in place, you’re ready to tackle food costing.
Understanding Food Cost Percentage
Food cost percentage is a critical metric for restaurateurs. Keeping this percentage as low as possible (without sacrificing food quality) increases gross profit, which can be used to cover other expenses. Let’s explore the details:
- Definition of food cost percentage
- Importance of calculating it
- Ideal food cost percentage
- Calculation methods and examples
What is Food Cost Percentage?
Food cost percentage is the ratio of food costs to revenue, expressed as a percentage. It guides restaurants in setting appropriate menu prices.
How to Calculate Food Cost Percentage
To calculate food cost percentage, you need to know:
- Beginning Inventory Value: The value of your inventory at the start of the week.
- Purchases: The value of inventory purchased during the week.
- Ending Inventory: The value of remaining inventory at the end of the week.
- Total Food Sales: Your total sales revenue for the week, found in your sales reports.
Food Cost Percentage Formula
First, add your beginning inventory value to your purchases. Then, subtract your ending inventory value from that total. Finally, divide the result by your total food sales.
Food Cost Percentage Explained with Example
Here’s how Johnny’s Burger Bar would calculate their food cost percentage using these values:
- Beginning Inventory Value: $11,000
- Purchases: $7,000
- Ending Inventory Value: $15,000
- Total Food Sales: $8,000
Food Cost Percentage = ($11,000 + $7,000 – $15,000) / $8,000
Food Cost Percentage = ($18,000 – $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 is spent on ingredients. This is above the industry average for burger joints, so Johnny should consider adjusting his menu prices.
To confirm, he needs to calculate his ideal food cost percentage and compare it to his actual percentage.
How to Calculate Ideal Food Cost Percentage
To determine your ideal food cost percentage, you need to know:
- Total food costs
- Total food sales
If Johnny’s total food costs were $2,500 and total food sales were $8,000, the calculation is as follows:
Ideal Food Cost Percentage = $2,500 / $8,000
Ideal Food Cost Percentage = 0.31 or 31%
Johnny’s Burger Bar’s ideal food cost is 31%. Since their current food cost percentage is 37.5%, they are missing out on 6.5% more revenue.
What is a Good Food Cost Percentage?
Most restaurant owners aim for a food cost percentage between 28% and 35% of revenue. The ideal percentage varies based on the type of food served and the restaurant’s overhead and operating expenses.
It’s a misconception that every restaurant should aim for a single “perfect” number. A healthy percentage depends on the products sold, food cost control, and the market served.
Food Cost Percentage Examples for Restaurants
A steakhouse might operate with a food cost percentage close to 35% due to the higher cost of ingredients. Conversely, a pasta restaurant, with lower bulk costs, might aim for around 28%. Both can be acceptable depending on the restaurant’s context.
Each restaurant should calculate their own food cost percentage rather than relying on general averages. Generally, the higher your total restaurant expenses (including food costs), the higher your menu prices need to be.
Understanding Food Cost Per Serving
Before setting menu prices, determine the cost to make each dish. Specifically, calculate the cost of ingredients to make one serving of each menu item.
Food Cost Per Serving Formula
To calculate your food cost per serving (or food cost per menu item), sum up the ingredient cost per serving.
Cost Per Serving Explained
Johnny wants to determine the cost per serving for his famous Johnny Burger, which contains 8 ounces of ground beef, 1 sesame seed bun, 1 tablespoon of sauce, 2 slices of cheese, 2 slices of tomatoes, and 2 potatoes.
Johnny buys ingredients in bulk and pays $19 for 5 pounds of ground beef. He calculates that 8 ounces of ground beef for a single burger costs $1.90. He performs similar calculations for the remaining ingredients.
- 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
Cost per Serving = $1.90 + $0.25 + $0.10 + $0.90 + $0.50 + $0.75 = $4.40
The ingredients for one Johnny Burger cost $4.40.
The Importance of Food Cost Percentage
Understanding your food cost percentage allows you to make informed decisions about dish prices, profitability, overall costs, and optimization opportunities. The more you know, the better equipped you’ll be to make strategic choices for your restaurant and menu.
Benefits of Calculating Food Cost Percentages
- Understand Your Food Costs and Pricing: Calculating your food cost percentage involves a detailed examination of ingredient purchases and individual costs. You might discover that an ingredient is more expensive than expected and should no longer be used.
- Try Out New Recipes: If your analysis reveals that certain items would need to be overpriced to remain profitable, you may want to reconsider the ingredients. Understanding food costs encourages recipe testing based on data, exploring alternative ingredients to lower prices or increase profitability.
- Make Smart Changes to Your Menu: Menu management is crucial for success. By regularly calculating food cost percentages, you can make informed edits to your menu to ensure profitability, accounting for supplier changes, price increases, and shifting customer preferences.
- Get to Know Your Best Sellers and Underperformers: Do you sell out of certain items? Are there dishes that are rarely ordered? Are your most popular items also the most profitable? This information can make a huge difference when analyzing your menu.
- Understand Your Food Cost Per Location: If you operate multiple locations, food costs may vary. Knowing the food cost percentage for each location helps you understand performance and compare menu item popularity and profitability across restaurants.
How to Lower Restaurant Food Costs
- Find Cost-Effective Vendors: Can you get the same quality ingredients for a lower price elsewhere? Would local suppliers save on transportation costs? Negotiate better terms with existing suppliers or explore long-term contracts for better pricing.
- Buy Ingredients Together or Join a Group Purchasing Organization: Partner with other food businesses for bulk purchasing discounts and shared delivery fees. Consider joining a group purchasing organization (GPO) for collective buying power.
- Plan Your Menus Better: Serve dishes with overlapping ingredients to reduce waste and inventory. Focus on seasonal dishes with affordable, high-quality ingredients. Reduce the number of items on your menu and focus on best-selling dishes to better control costs and revenue.
- Reduce Portion Sizes: Smaller portions lead to less waste and lower ingredient costs.
- Invest in Technology: An effective restaurant POS system with inventory management can save money by streamlining operations, automating tasks, and providing data-driven insights.
How to Set Menu Prices
Johnny’s Burger Bar’s burger costs $4.40 to make, and their current food cost percentage is 37.5%, making the current price $11.70. How much should he charge to bring the food cost percentage down to 31%?
To determine this, use the following formula:
Menu Item Price = Cost Per Serving / Ideal Food Cost Percentage
Menu Item Price = $4.40 / 0.31
Menu Item Price = $14.20
Based on a 31% ideal food cost percentage, the Johnny Burger should be priced at $14.20, a $2.50 difference!
This seemingly small amount adds up quickly. Selling 75 burgers a day, that $2.50 becomes over $65,700 in additional revenue per year. Imagine the impact of optimizing the food cost percentages for all menu items!
Johnny decides to increase the burger price to $14.20 and track the impact on sales and profitability.
How to Track Menu Pricing’s Effect on Sales
Successful restaurants regularly track menu prices and sales, adjusting as food costs fluctuate.
After increasing the price of the Johnny Burger, there are two possible scenarios:
- Scenario 1: Burger Sales Slow Down: This could mean the price is too high. To lower the menu price, explore cheaper vendors, smaller portions, or less expensive ingredients.
- Scenario 2: Burgers Sell Like Crazy! This could mean customers can afford a higher price. Consider aiming for a 28% food cost percentage, pricing the Johnny Burger at $15.70.
In either scenario, vigilant monitoring of sales impact is essential. A POS system with analytics capabilities like Lightspeed’s Advanced Insights provides a detailed breakdown of menu performance and the impact of price changes.
Ideally, the menu price is affordable for customers and has a manageable food cost. Sales should cover expenses and leave a profit.
Key Takeaways for Managing Food Cost Percentage
Carefully controlling your restaurant’s food cost percentages ensures your restaurant can pay its bills and turn a profit. In an industry with notoriously low profit margins, every cent counts.
To recap, here’s how to price menu items for financial success:
- Determine your food cost per serving for each menu item.
- Calculate your current food cost percentage.
- Find your ideal food cost percentage.
- Adjust menu items to match your ideal food cost percentage.
- Monitor how sales react to those adjustments.
- Explore alternatives to lowering food costs.
Once you decide on menu prices, you can revisit your menu design and reconsider how you’re positioning each dish, from how you describe menu items to the layout you choose. The way a menu is designed has a proven correlation with increased sales.
Maximize Your Profits with Technology
With Lightspeed’s restaurant POS, you can offer tableside ordering, start a loyalty program, and view reports to see what’s working. Chat with one of our restaurant experts to see how software can help you streamline your operations and make informed decisions.
FAQs about Food Cost Formula
How do you calculate food costs?
To calculate food costs, determine the total cost of ingredients used to make a dish using the food cost percentage formula:
Food Cost Percentage = (Cost of Ingredients / Selling Price) x 100
What is the formula for cost per portion?
The formula for cost per portion is:
Cost per Portion = Total Cost of Ingredients / Number of Portions
What is the formula for costing?
The formula for costing a product or service often includes direct costs (ingredients), indirect costs (overhead), and labor:
Total Cost = Direct Costs + Indirect Costs + Labor Costs
What is the formula for labor cost per meal?
The formula for labor cost per meal is:
Labor Cost per Meal = Total Labor Cost / Number of Meals Served
What is a good food cost percentage?
A good food cost percentage ranges from 28% to 35% in the restaurant industry, varying based on restaurant type and pricing strategy.
What is the standard price method?
The standard price method involves setting a predetermined cost for ingredients, labor, and overhead based on expected standards or historical data.
What is the standard costing model?
The standard costing model is an accounting method used to estimate the expected cost of production. Variance analysis is used to identify and manage differences between actual and standard costs.
