Understanding your restaurant’s food costs is essential to running a successful restaurant. Read our in-depth guide to master your food costs.
As a restaurant business owner or operator, you have many different types of costs to manage in order to run a successful business. One of the most crucial costs that can make or break your profitability is food cost.
In this guide, we’ll discuss exactly what restaurant food cost is, why it’s so important, and how you can control and reduce your costs.
In one sense, restaurant food costs are obvious. They are any costs associated with buying food for and preparing dishes. And it’s critically important that you know exactly how much it costs to make each dish.
To perform tasks like menu engineering, you need to have a clear understanding of total food costs. This will help you gauge which of your dishes are profitable and which ones need to be reevaluated.
Food costing also allows you to compare your restaurant to both the competition and industry benchmarks. This helps you make strategic decisions about pricing and menu changes, as well as know if you need to implement stricter food cost controls.
What’s more, understanding your cost of food combined with your Cost of Goods Sold (COGS) can help you calculate what percentage of sales is being spent on food. This helps you stay a profitable restaurant by ensuring your menu prices are generating enough revenue to cover all expenses related to the dish.
Beyond just understanding absolute food costs, it’s also essential to know your restaurant food cost percentage.
Restaurant food cost percentage is a key metric used by restaurant owners and managers to gauge the efficiency and profitability of their operations. It measures the portion of total sales that goes towards purchasing food.
For example, if your restaurant food cost percentage is 35%, it means that for every dollar in sales, 35 cents goes towards food costs. All things equal, a lower restaurant food cost percentage is better as it means you are spending less on food items and have more room for profit.
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There are a number of reasons why your restaurant food cost and percentage are important. Those include:
Food costs typically represent a significant portion of a restaurant’s prime costs. Therefore, it’s essential to monitor and control the cost of food supplies to ensure your restaurant is profitable. Knowing your food cost percentage can help you identify where there may be opportunities for improvement and how to make strategic changes to increase profitability and reduce operating costs.
Your menu pricing strategy should be directly informed by your restaurant costs. If a particular dish costs a significant amount to make, it should be priced accordingly to ensure your restaurant is making a profit. Knowing your food cost percentage can help you make informed decisions about restaurant menu pricing and adjust accordingly.
If you’re not sure whether a particular dish is profitable, consider going through the menu engineering process. This will help you get a full understanding of what each dish costs and whether or not a dish is profitable.
If your food costs start to get out of control, it significantly impacts your bottom line. Monitoring and tracking your food costs helps you identify areas where you may be overspending and make adjustments to restaurant operations.
How do you know if your food costs are getting too high? One way is by calculating your food cost percentage and comparing it to restaurant industry averages. This helps you determine if your food costs are higher than they should be and make necessary changes to bring them back in line.
Restaurant food costs and restaurant inventory management are directly related. Poor inventory management can directly contribute to higher food costs and lower profit margins. For example, failing to manage your inventory effectively can result in:
By implementing an effective restaurant inventory management system, you can better track your ingredient usage, reduce waste, and ensure that you have the right amount of ingredients on hand at all times.
To budget and plan effectively, you need to have a clear idea of what you will be spending on food costs during the time period in question. If you’re fuzzy on what you’re spending on food, your budget will be nothing more than a guess. On the other hand, if you know what you’re food expenses are, you can budget for those expenses and avoid over or understocking.
Restaurant food cost percentage is a useful benchmark for evaluating the performance of your restaurant. Calculating it forces you to take a long, hard look at your operating expenses and provides you with valuable insights into areas where you may be overspending.
It also allows you to compare your food cost percentage to restaurant industry averages and identify opportunities for improvement. Keep in mind, however, that comparing your food costs to other establishments should be done carefully, as there are many factors that can influence food costs such as location, menu offerings, and target market.
Understanding food cost percentage helps you set appropriate menu prices. If you don’t have a firm grasp on how much you’re spending on food, you may be undercharging for your dishes, resulting in lower profit margins. On the other hand, if you’re overcharging, customers may perceive your prices as too high and choose to dine elsewhere.
By regularly analyzing your menu items and their recipe costs, you can identify which dishes are profitable and which ones are not. This allows you to make informed decisions about which items to keep, change, or remove from your menu.
By knowing the food cost percentage, you can adjust pricing to achieve your desired profit margins while remaining competitive in the market.
Now let’s look at the specific formulas involved in calculating restaurant food costs.
The starting place is calculating how much it costs to produce one serving of a specific dish. This requires determining the actual food cost of all ingredients used in that dish, including garnishes and spices. There’s not much to the formula – it simply requires summing up the cost of all the ingredients in a dish.
FOOD COST PER SERVING = Total cost of all ingredients in a dish
For example, say that one of your dishes is a bacon cheeseburger. The cost of the ingredients might look something like this:
Total cost of ingredients for one bacon cheeseburger = $3.00
Understanding your food cost percentage is particularly important for menu engineering, which involves determining the profitability of every dish on your menu. To determine how profitable a menu item is, you need to subtract the food cost per serving from the selling price of the item.
For example, if you sell the above cheeseburger for $8.00, your profit margin is $5.00.
Read our in-depth guide to menu engineering and learn how to identify your most profitable menu items.
In addition to knowing your food cost per serving, you need to know your restaurant food cost percentage. Food cost percentage represents the portion of total sales revenue that goes towards food costs. To calculate food cost percentage, you need to know the following values:
Calculating food cost percentage follows this formula:
FOOD COST PERCENTAGE = (Beginning Inventory + Total Food Purchases – Ending Inventory) / Total Food Sales
For example, let’s say you’re working with the following numbers:
FOOD COST PERCENTAGE = ($10,000 + $5,000 – $13,000) / $6,000
= $2,000 / $6,000
= 0.33 or 33%
This means that 33% of revenue goes toward food costs.
There is no hard and fast rule regarding what constitutes a good food cost percentage. That said, a general rule of thumb is to try to keep food cost percentage between 28% – 35%. Maintaining a restaurant food cost percentage in this range allows you to maintain profitability in your restaurant without sacrificing the quality of your food.
It’s one thing to know how to calculate restaurant food costs and have a sense of the benchmarks you should be shooting for. But how can you actually bring your food costs down? Here are some practical solutions.
A robust restaurant inventory system helps you stay on top of inventory costs and reduce restaurant food costs.
Your restaurant food costs are highly dependent on your suppliers, and it’s important to develop strong relationships with them. This includes not only building a good working relationship but also negotiating favorable prices and delivery terms.
When talking with vendors and suppliers, consider asking for the following types of discounts:
When was the last time you evaluated your supplier relationships? If it’s been a while, it may be worth revisiting them to look for places to reduce costs.
There are benefits to working with the same vendors for a long period of time and developing strong relationships with them. However, there may come a time when you need to reevaluate your vendor relationships and see if there are better options available.
Sometimes, switching to a new supplier can lead to better pricing and terms, which can ultimately help reduce your food costs.
Implementing defined portion control can significantly reduce restaurant food costs. By standardizing portion sizes, you’ll be able to better control the amount of food being used and reduce waste. It also ensures consistency for customers, as they will receive the same amount of food every time they order a dish.
Consider doing the following to ensure portion control is enforced in your restaurant:
To avoid food waste in restaurants, ensure that food is handled and stored properly to prevent spoilage and maintain quality. This includes proper temperature control, using the oldest ingredients first, and keeping an eye on expiration dates.
In addition, regularly inspect your ingredients for any signs of spoilage or damage. This will not only prevent food waste but also ensure that you are serving high-quality meals to your customers.
Also, regularly train your staff on proper food handling and storage techniques to maintain consistency and reduce the risk of food waste. If you are concerned about the amount of food you may be wasting, consider conducting a food waste audit.
Recipe costing is the process of determining the cost of each item on your menu and identifying ways to reduce those costs.
Yes, this can be a tedious process.
After all, you have to go through your menu one item at a time and determine how much it costs to make each dish.
But it’s also an incredibly valuable process. It allows you to:
When was the last time you did the hard work for menu costing and recipe analysis? If it’s been a while, it may be time to revisit and update your numbers. This can help you stay on top of costs and make adjustments as needed to keep them under control.
Menu prices must be regularly reviewed to ensure that profit margins are being maintained. The cost of the dish should be measured against profits. Market prices should be taken into account and prices should be adjusted as market costs fluctuate.
As noted above, menu engineering can help you ensure that you’re only serving the most profitable dishes in your restaurant. Rather than wasting money on buying ingredients for less profitable or less popular dishes, you can focus on those that bring in more revenue.
Moreover, regularly reviewing your menu prices will also help you to stay competitive and ensure that you’re offering value for money to your customers. Your pricing strategy should aim to strike a balance between profitability and affordability for customers.
Your staff plays a crucial role in controlling restaurant food costs. They are responsible for handling ingredients, preparing dishes, and serving customers. Therefore, it’s important to invest in training your staff on cost-saving techniques such as portion control and waste reduction.
Additionally, consider implementing an incentive program to motivate your staff to reduce food waste. This could include rewards for meeting certain cost-reducing goals or for coming up with new cost-saving ideas. By involving your staff in the process, they will feel more invested in the success of your restaurant and be more likely to actively contribute to reducing food costs.
The only caveat to this point is that you always want to keep the customer experience in mind. It doesn’t help you if your staff reduces costs but also compromises the user experience. Consistently remind your staff to keep the customers at the forefront.
If you have an excess of certain ingredients or ingredients that are on the verge of expiring, consider creating specials or promotions to help move these items. Utilizing ingredients that may otherwise go to waste can help save money and increase restaurant profitability.
Additionally, offering promotions such as buy-one-get-one deals or discounted prices on slower-moving items can attract customers and drive food sales.
As a last resort, you may need to consider using less expensive ingredients in your dishes. This is a fine line to walk. You always run the risk of reducing the quality of your dishes when you use less expensive ingredients. However, with some experimentation and creativity, you may be able to substitute certain ingredients without compromising on taste or quality.
Consult with a chef or conduct taste tests to ensure that the change in ingredients doesn’t negatively impact your dishes. You can also try incorporating more plant-based options into your menu, as these tend to be less expensive than meat options. Not only will this help reduce food costs, but it also caters to the increasing demand for vegetarian and vegan options.
Okay, maybe that header is overstating things a bit. But not by much. Given that restaurant food costs make up approximately one-third of your total costs, it’s a significant factor in the success or failure of your restaurant. By understanding what food costs are and how to calculate and reduce them, you can take control of this aspect of your business and set yourself up for long-term success.
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