Pricing your menu items accurately is crucial for the success of your restaurant. Setting prices too high can deter customers, while pricing too low can lead to insufficient revenue. Understanding your food cost percentage is essential for profitable menu pricing. This article will guide you through understanding food cost percentage and how it impacts your bottom line.
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Understanding Restaurant Food Cost
Food cost represents the relationship between the cost of your ingredients (food inventory) and the revenue generated from selling those ingredients in your menu items (food sales). It’s typically expressed as a percentage, known as the food cost percentage.
While some restaurants use food cost to determine menu prices, others use the Cost of Goods Sold (COGS), which encompasses the total value of all inventory used in a dish, including even the smallest items like toothpicks and napkins.
Steps Before Calculating Food Cost
Effective budgeting is an ongoing process that’s crucial for maintaining profitability. Regularly review your budget to monitor your financial performance and ensure your restaurant stays on track.
Although many find dealing with numbers daunting, it doesn’t have to be complex. With the right tools, you can easily monitor cash flow and manage your budget effectively.
Accounting software can help manage your financial records and inventory accurately. A POS system with inventory management can track your inventory and purchases, syncing the data with your accounting software for automated bookkeeping.
If you prefer the traditional approach, here are key budgetary items to consider:
- Track Your Numbers: Whether using a POS system or manual methods, you must know your prime cost, or the relationship between sales and costs.
- Define Accounting Period: Restaurants commonly use a four-week accounting period, but you can choose a duration that suits your business needs.
- Set Budget Targets: Budgets should guide your restaurant toward efficiency, not just reflect current performance.
- Focus on a Weekly Operational Budget: A granular, weekly view of your operations can help you track expenses more effectively.
With a robust budgeting system, you can start effectively calculating your food costs.
The Importance of Food Cost Percentage
Taking food cost percentage seriously is essential. Maintaining a low food cost percentage (without compromising quality) will give you more gross profit to cover other expenses and maximize revenue.
What is Food Cost Percentage?
Food cost percentage is the ratio of food costs to revenue, expressed as a percentage. It is a crucial metric that influences menu pricing decisions.
Calculating Food Cost Percentage
To calculate food cost percentage, you need the following values:
- Beginning Inventory Value: The dollar value of your inventory at the start of the period.
- Purchases: The dollar value of new inventory acquired during the period.
- Ending Inventory Value: The dollar value of your remaining inventory at the end of the period.
- Total Food Sales: The dollar value of your 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 consider Johnny’s Burger Bar with the following values:
- Beginning Inventory Value: $11,000
- Purchases: $7,000
- Ending Inventory Value: $15,000
- Total Food Sales: $8,000
Applying the formula:
Food Cost Percentage = ($11,000 + $7,000 – $15,000) / $8,000 = 0.375, or 37.5%
This means 37.5% of Johnny’s Burger Bar’s revenue is spent on ingredients. If this is higher than desired, Johnny needs to determine his ideal food cost percentage.
Calculating Ideal Food Cost Percentage
To determine the ideal food cost percentage, you need:
- Total food costs
- Total food sales
For instance, let’s say Johnny’s Burger Bar’s total food costs are $2,500, and their total food sales are $8,000. The formula is:
Ideal Food Cost Percentage = $2,500 / $8,000 = 0.31, or 31%
Johnny’s current food cost percentage (37.5%) is higher than his ideal (31%), indicating a potential revenue loss of 6.5%.
What is a Good Food Cost Percentage?
Most restaurant owners aim for a food cost between 28% and 35% of revenue. However, an ideal percentage varies based on factors like the type of cuisine, overhead, and operating expenses.
There’s no one-size-fits-all answer. The target depends on your specific circumstances and offerings.
Food Cost Percentage Examples for Restaurants
For instance, a steakhouse might have a higher food cost percentage (around 35%) due to expensive ingredients, while a pasta-focused restaurant might aim for 28% due to lower ingredient costs.
Restaurants should calculate their food cost percentage individually rather than relying on industry averages. Generally, higher overall expenses necessitate higher menu prices.
Understanding Food Cost Per Serving
Before pricing your menu items, you must know the cost to make each dish. Determine the cost to make one serving of each item.
Food Cost Per Serving Formula
To calculate food cost per serving (or food cost per menu item), sum the ingredient costs per serving.
Cost Per Serving Example
Johnny wants to find the cost per serving for his famous Johnny Burger. It 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 pays $19 for 5 pounds of ground beef, calculating the 8 ounces needed for a single burger at $1.90. He does 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 Johnny Burger costs $4.40 to make.
Why Food Cost Percentage Matters
Knowing your food cost percentage is crucial for making informed decisions about dish prices, profitability, and overall cost optimization. Understanding your food cost percentage helps you make well-informed choices about your restaurant and menu.
Benefits of Calculating Food Cost Percentages
Understand Your Food Costs and Pricing
Calculating food cost percentage requires a detailed review of your ingredient purchases and costs. This might reveal unexpected expenses that impact profitability. When you understand food costs you can also adequately price your items.
Try Out New Recipes
A food cost percentage analysis might reveal that certain dishes are too expensive to maintain profitability. Understanding your food costs allows for data-driven recipe testing and experimentation with alternative, cost-effective ingredients. Testing different ingredients is a great way to find the perfect combination to match your ideal food cost percentage.
Make Smart Changes to Your Menu
Regularly calculating food cost percentages is essential for menu management, given changing supplier prices and customer preferences. Regularly calculating your food cost percentages, ensures you’re better equipped to make smart edits to your menu and ensure profitability.
Get to Know Your Best Sellers and Underperformers
Analyzing sales data helps identify popular and underperforming menu items. Understanding which items are most profitable and which ones cost less to make can significantly improve menu performance.
Understand Your Food Cost Per Location
Food costs can vary between different restaurant locations, making it important to calculate the food cost percentage for each branch. Understanding food cost percentage for all your locations allows you to compare profitability and menu item performance across your restaurants.
How to Lower Restaurant Food Costs
Find Cost-Effective Vendors
Explore alternative vendors that offer comparable ingredients at lower prices. Consider local suppliers to reduce transportation costs.
You can also negotiate better terms with existing suppliers by increasing order volume or paying upfront. Consider long-term contracts for better pricing, creating a mutually beneficial arrangement.
Leveraging bulk purchasing or committing to a long-term partnership may provide you with more favorable pricing and terms, ultimately reducing your overall food cost.
Buy Ingredients Together with Other Businesses or Join a Group Purchasing Organization
Partnering with other restaurants for bulk purchases can significantly reduce costs through discounts and shared delivery fees.
Group purchasing organizations offer collective buying power for their members, providing access to discounted pricing on food, equipment, and supplies.
However, factor in membership fees when assessing costs.
Plan Your Menus Better
Streamline your menu to focus on in-demand dishes while minimizing costs. Serve dishes with overlapping ingredients to reduce waste and inventory needs. Prioritize seasonal dishes that use affordable, high-quality ingredients.
Reducing the number of items on your menu can improve cost control and revenue.
For example, Maynard, a vegetarian and vegan restaurant, keeps its menu concise by focusing on popular dishes with high turnover.
Reduce Portion Sizes
Reducing portion sizes can lead to less waste and require fewer ingredients per dish, which then lowers your food costs.
Consider serving a 6-ounce burger instead of an 8-ounce burger to reduce portion sizes and your food cost per serving.
Doing so could increase the perceived value of your meals. Customers may appreciate the quality and presentation of a well-crafted, appropriately portioned dish over sheer quantity.
Invest in Technology
Many restaurant owners report that investing in technology like a restaurant POS system with inventory management saves them money by streamlining operations, providing data-driven insights, and identifying discrepancies.
An effective restaurant POS provides data and trends to make smarter decisions about menu items and ingredients.
How to Set Menu Prices
If Johnny’s Burger Bar’s ingredients cost $4.40 and their food cost percentage is 37.5%, the current menu price is $11.70. But how much should Johnny charge to bring his food cost percentage down to 31%?
Using the formula:
Menu Item Price = Food Cost / Ideal Food Cost Percentage
Menu Item Price = $4.40 / 0.31 = $14.20
Based on an ideal food cost percentage of 31%, the Johnny Burger should be priced at $14.20, a $2.50 increase.
That extra $2.50 per burger adds up. If he sells 75 burgers a day, that $2.50 becomes over $65,700 in additional revenue per year. Now, just imagine if Johnny optimized the food cost percentages for each menu item, not just his burgers.
Johnny decides to raise the price to $14.20 and monitor its impact on sales and profitability.
Tracking Menu Pricing’s Effect on Sales
Successful restaurants regularly track menu prices and sales, making adjustments as food costs fluctuate.
After comparing his current food cost to his ideal food cost, Johnny increased the menu price of the Johnny Burger to $14.20. There are two possible ways the higher price could affect sales:
Scenario 1: Burger Sales Slow Down
Decreased sales could indicate the price is too high. Johnny can explore cheaper vendors, smaller portions, or less expensive ingredients to justify lowering the price.
Scenario 2: Burgers Sell Like Crazy!
Increased sales could mean customers can afford a higher price.
Johnny could aim for a food cost percentage of 28%, which prices the Johnny Burger at $15.70.
In either case, monitor sales closely to assess the impact of price adjustments. A point of sale with analytics capabilities can provide detailed menu performance data and show the impact of price changes.
Ideally, the menu price is affordable to customers and has a manageable food cost. When done correctly, sales will cover your ongoing restaurant expenses and leave some leftover money in the bank.
Key Takeaways for Managing Food Cost Percentage
Carefully controlling your restaurant’s food cost percentages ensures you can cover bills and generate a profit.
To recap, here’s how to price menu items for financial success:
- Determine the 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. Believe it or not, 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, you determine the total cost of ingredients used to make a dish and can use the basic 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 (like ingredients or raw materials), indirect costs (like 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 typically ranges from 28% to 35% in the restaurant industry. Fast food restaurants may aim for lower percentages, while fine dining establishments might have higher percentages.
What is the standard price method?
The standard price method involves setting a predetermined cost for ingredients, labor, and overhead expenses 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 in advance and assess variances.
