Let’s face it, running a restaurant is tough tough business.
High turnover, low margins, and an incredibly fast pace can drive anyone crazy.
By taking a deep dive into understanding your food costs, you can improve your chances for success.
Food costing is the most effective means to not only differentiate your restaurant from competition, but is also often the difference between a failing and thriving restaurant.
Sound boring or complicated?
Don’t worry, we have you covered.
In this article, we will walk you through the exact steps you need to take to calculate your ideal and actual food costs so you can identify where you might be able to save money. You can also skip all this and download our free food cost calculator that will get you started right away!
What is Food Cost Calculation?
Before we jump into the specifics for calculating your food cost, let’s first understand what food cost calculation actually means.
“Food Cost” is the ratio of the cost of ingredients (inventory) and the revenue that those ingredients generate when dishes are sold (food sales).
Food Cost is always presented as a percentage.
We’ll see how we determine this percentage below.
Why is Food Cost Percentage Important?
Food Costing is one of the most important indicators of profitability for a restaurant.
With razor thin margins (3-5%), the slightest change in the price of goods and/or the amount of sales can affect a restaurant’s bottom line significantly.
By monitoring your food cost (typically between 20-35%) a restauranteur can know when to change prices, products and purchase quantities to improve his or her percentage.
Before we move on, let’s look at a few important definitions:
- Recipe Cost: Cost of ingredients in a plate
- Recipe Sale Price: Price a customer pays for a plate
- Ideal Food Cost: Cost of ingredients used in all plates / total sales
- Ideal Food Cost per Serving: Recipe Cost / Recipe Sale Price
- Actual Food Cost: Ideal Food Cost - Inventory Lost
- Actual Food Cost per Serving: Ideal Food Cost per Serving - Inventory Lost per Serving
Ideal Food Cost vs. Actual Food Cost
Ideal food cost is the theoretical food cost percentage that would exist in a perfect world. Actual food cost takes into account beginning and ending inventory levels and will always be a higher percentage than the ideal food cost.
Let’s first take a look at how we can calculate the ideal food cost.
Calculating Ideal Food Cost
To begin, we need to:
This sounds more complicated than it really is.
Below, I walk you through a simple example, which will make everything very clear.
Bill’s Buffalo Chicken serves just 1 dish consisting of 2 ingredients. In this case, Bill’s “food cost” is identical to its “food cost per serving.”
Here are the costs of ingredients used in buffalo drum stick plates:
- Drum Sticks = $0.50/drum stick
- Buffalo Sauce Portion= $0.50/portion
Bill’s Buffalo Chicken sells drum stick plates for $21/plate. Each plate consists of 8 drum sticks and 1 portion of buffalo sauce.
Let’s plug those numbers into the ideal food cost formula.
Ideal Food Cost = Recipe Cost / Recipe Sale Price
First start with the Recipe Cost. Let’s break that formula down into parts:
- Recipe Cost = Cost of ingredients in recipe
- Cost of Ingredients in recipe:
- ($0.50 (drum stick price) * 8 (amount of drum sticks on plate)) + $0.50 (buffalo sauce price) = $4.50
Divide your recipe cost by the sale price of the recipe to get your ideal food cost:
$4.50 (cost) / $21.00 (sale price) = 21%
Now remember, this is the ideal food cost.
This doesn’t take into account a lot of things that can go wrong in a restaurant like serving inconsistent portions, lack of training, waste and spillage.
Let’s see how to calculate our actual food cost.
Calculating Actual Food Cost
Below we lay out the exact steps you need to track your inventory.
We will use these numbers to calculate your actual food cost.
- Beginning Inventory value Is the total cost of every item in your inventory.
- Purchases value is the amount spent on new inventory that week or period.
- Ending Inventory value is the total cost of every item in your inventory at the end of the week and after all purchases have come in.
- Food Sales is the total retail food sales to customers that week or period.
Once you have these numbers you’re ready to use the food cost formula:
Actual Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales
Let’s continue our example from before.
At the beginning of the week you have the following inventory:
- 14 cases chicken drum sticks- $5/case = $70
- 6 bottles of buffalo sauce - $2/bottle = $12
- Total Beginning Inventory = $82
Sales of buffalo drum sticks for the week come to $210.
- Food Sales = $210
During the week you purchase 7 cases of drum sticks ($35) and 6 bottles of buffalo sauce ($12).
- Purchases = $47
At the end of the week you take inventory and add up the costs again:
- 12 cases drum sticks - $5/case = $60
- 5 bottles buffalo sauce - $2/bottle = $10
- Total Ending Inventory = $70
Now we will plug those numbers into the actual food cost formula.
Actual Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales
Let’s start with the numerator:
Beginning Inventory ($82) + Purchases ($47) - Ending Inventory ($70) = $59
Take that number and divide by your food sales to get your food cost percentage:
$59 / Food Sales ($210) = 28%
Here it is all together: ($82 + $47 - $70) / $210 = 28%
We just calculated our food cost percentage taking into account our beginning and ending inventories.
An actual food cost percentage of 28% is pretty good, but our ideal food cost was 21%.
Let’s figure out what is causing the discrepancy:
- If you started with 14 cases of drum sticks, added 7 and ended up with 12, that means you went through 9 cases (14 + 7 - 12 = 9)
- The cost of 9 cases = $5 * 9 = $45
Since we sold 10 plates, we should have only gone through 8 cases of drum sticks, not 9.
Put differently, our actual cost of drum sticks = $45 but it should have been $40 in a perfect world.
Then we must do the same thing for buffalo sauce bottles:
- If you started with 6 bottles, added 6 and ended up with 5, that means you went through 7 bottles (6 + 6 - 5 = 7)
- The cost of 7 bottles = $2 * 7 = $14
Since we sold 10 plates, we should have only gone through 2.5 bottle of buffalo sauce, not 7.
Our actual cost of bottles used = $14 but it should have been $5 in a perfect world.
So what does this mean?
Something is happening with our buffalo sauce!
Either the portion size is way too large, someone is stealing bottles or they’re being thrown out by accident. But now we know there is an issue and we can start to investigate and prevent further unnecessary spending.
Let’s Revisit the Question: How Important is Food Cost?
Let’s say you have a restaurant with $400,000 in revenue. Look at these two scenarios.
Scenario A: total recipe cost = $100,000
25% Food Cost = $100,000 total ingredient costs / $400,000
Scenario B: total recipe cost = $120,000
30% Food Cost = $120,000 total ingredient costs / $400,000
Conclusion: a 1% decrease in food cost is 5% more cash you can keep in your pocket.
Rule of Thumb:
30% or below = Food Cost Percentage that restaurateurs should aim for.
Common Mistakes to Avoid When Calculating Food Cost
Tracking inventory and applying some of the math we went through before can be incredibly powerful in pinpointing food waste issues within your restaurant. However, it’s easy to make a mistake or miss a step.
Remember, be wary of these common mistakes when using food cost to optimize your restaurant business:
- Don’t mistake your ideal food cost for your actual food cost. This will give you a false sense of profitability.
- Don’t forget to factor in the purchases during the allotted period when calculating your change in inventory. Taking correct inventory is paramount for determining accurate food cost.
- Clerical errors can throw everything off. Be mindful of the correct units and always use updated price information.
Four Things You Can Do to Improve Your Food Cost
Beyond calculating your ideal versus actual food cost to detect food waste issues, there’s a number of other best practices you can take to help improve your food cost.
In this section, we walk you through our top 4 recommendations.
1. Incremental Price Increases
Roll out small, incremental price increases on menu items that require a higher sales price to achieve your ideal food cost.
2. Reduce Waste
Monitor how much food is left on dishes that come back to the kitchen and adjust portion sizes accordingly. Reducing waste drives revenue and it’s better for the environment.
3. Beware of Seasonal Price Fluctuations
Beware of seasonal price fluctuations and adjust your menu options accordingly. If ingredients go up in price or dishes become less popular, change your menu to meet the preferences of your customers.
4. Analyze Recipe Composition
Carefully analyze your recipe composition and try to use more of the less expensive ingredients and fewer of the pricey ones. Be careful to not diminish the overall quality of the dish, which can result in a decrease in sales and increase in food cost.
How to Price Your Menu Based on Food Cost
Pricing a menu is not as simple as looking at the costs of ingredients and applying a sales price that keeps your food cost low. This would result in soups priced too inexpensively and steaks being unaffordable.
A well priced menu consists of a healthy food cost and an optimal product blend that generates sales of both high margin, inexpensive items and low margin, high price items.
Things to start thinking about when starting to price your menu:
- Figure out where and when to use expensive ingredients. Find a balance of price and quantity that will bring in enough money per plate while also satisfying the customer.
- When you add a new menu item, always ask yourself; 1) What is the food cost of this plate and 2) What plates will people not order because of this plate. You don’t want to cannibalize your high-performing menu options.
- Don’t over analyze menu pricing to the point where you compromise your identity as a restaurant. Make sure you meet or exceed your customers’ expectations of menu options.
- Figure out your best and worst case dining scenarios. If a customer comes in and only orders a coke, what does that cost your restaurant in terms of time and table space.
You may also use technology solutions like POS systems in order to manage food costs and inventory along with many other aspects of running your restaurant.
Did we miss anything?
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