Of all the costs your restaurants generate, your food is one of the biggest — and one of the riskiest.
The cost of the food you serve can be affected by so many different outside influences, some of them more obvious, like the rise and fall of fuel costs or the effects of good or bad weather. Others are less so, like the sudden pop-culture status of a particular food (think avocados, bubble tea, or cupcakes).
Keeping a close eye on the cost of food and how it affects your restaurant will help you determine, predict and track profitability.
But there’s more to it than adding up your inventory bill and comparing it to your sales.
There are other considerations. Let’s get a good understanding of the importance of calculating restaurant food cost, how it factors into your profitability, what you can do to keep costs down, and how you can do that.
Why Restaurant Food Costs Matter
The cost of food and beverages is a bit of a moving target. It is affected by seasonality, market prices, and even pop culture.
Let’s look at the reasons you should be calculating food cost percentage regularly.
Once you figure out your food cost, you can set a menu price that gives you a 10 percent profit per item.
Measure the Success of Your Restaurant
Keeping a close eye on food costs will help you track whether or not your restaurant is making money.
Food and beverages make up half of your prime costs (along with labor). And while it can vary by restaurant, your prime costs should hover somewhere around 60 to 65 percent of the total volume of sales.
A good average food cost percentage is harder to determine. It all depends on the kind of restaurant and what’s on your menu.
A restaurant that serves fresh swordfish with grilled vegetables, or instance, will probably have a higher food cost percentage than a fast-casual restaurant that serves fried fish and chips, since the fish may come in frozen and the french fries can be bought in bulk.
Set Menu Pricing
If you know how much it costs to make every dish, and you know how it’s affecting your revenue, you can better set menu prices.
According to The Restaurant Manager’s Handbook, once you figure out your food cost, you can set a menu price that gives you a 10 percent profit per item.
Know When to Raise Food and Beverage Prices
Knowing the cost of food can help you determine when you should raise menu prices.
Think about how much food prices can rise and fall over time.
According to the USDA, prices for pork, fats and oils, and processed fruits and vegetables went down in 2018. But beef, fish, and poultry prices increased.
In fact, food prices have been on a steady 2.6 percent increase in the last 20 years.
The USDA also points out that other factors, like the cost of electricity and diesel, can affect the prices, as well. The rising cost of those commodities will most likely affect the cost of food in 2019. (What they call food-away-from-home prices are expected to rise between 2 and 3 percent in 2019.)
If you’re keeping an eye on the market, then you can anticipate and plan for rising costs.
If the food on your restaurant’s menu is effected, you have two options: You can raise your menu prices, switch up or even eliminate dishes altogether.
It all depends on the popularity of a dish. If, for instance, you’re a popular hamburger joint, raising prices in response to the market probably makes sense. But if your grilled chicken sandwich doesn’t do that well, it may be worth moving it off the menu entirely.
If you have food like lobster on your menu, where costs are constantly fluctuating, you’ll need to stay on top of it.
Calculating Food Cost Percentage
Now we know why your food cost percentage is important. So, how do you calculate it?
Food cost percentage is the ratio of the cost of food inventory to the amount of revenue it generates.
Put as simply as possible, it looks like this:
So, if the total cost of your food and beverages for a given month is $3,000 and your total sales are $10,000, then your food cost percentage is 30 percent.
That’s a pretty good food cost percentage, on the surface. But there are a lot of factors to consider.
Food Cost vs Prime Cost
Just to eliminate any confusion, your food cost is different from your prime cost. Your prime cost is calculated from your food cost and your labor cost, and then divided by your revenue. It looks more like this:
A lot of restaurants calculate this to help determine profitability.
Of course, this is a very basic way to look at your restaurant food cost. There are many other factors to consider when you’re calculating this.
First of all, how do you get a total food cost?
Considering All of Your Expenses
There’s a little more to it than taking your food bill and dividing it by your revenue. You have to determine exactly what you’re spending on food.
One way to do that is to itemize every ingredient that goes into a dish.
The other, more accurate, way is to take all of the elements that go making a dish to determine the total value of your inventory.
Let’s take a look at the other elements that impact your restaurant food cost percentage.
According to Restaurant Business Magazine, one mistake many restaurant owners make in calculating their food and prime costs is not including everything that goes into food preparation.
Think about the oils you use to fry, the water you use to boil, and the salt and sugar packets on the table. All of this is part of the food preparation and delivery and should be included in your final calculation.
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You’ll also have to add in a percentage of your overhead to the final cost of your food. The gas or electricity, utensils, and machinery used to cook the food should also factor into the final price.
Once you’ve determined that total value of your restaurant’s inventory, you can calculate food cost by starting with the value of the inventory you already have, say at the beginning of a month, adding the cost of purchases, and then subtracting your final inventory at the end of the month.
Beginning inventory + monthly purchases - ending inventory = total food and beverage cost.
So if you have an inventory worth $30,000 (including overhead and all food costs) and you spend another $5,000. You would add that up ($35,000) and subtract it by your ending inventory, say $32,000. That leaves you with a food cost of $3,000.
Plug that into your equation for food cost percentage.
Menu Changes and Seasonality
Your food cost percentage can vary from season to season, and even from meal to meal.
If you’re open for breakfast, lunch, dinner, your restaurant food costs are going to vary by the type of food you’re serving at each meal. Your lunch cost may be lower than your dinner cost, and your breakfast cost, considering the recent rise in the price of eggs, may be higher than both.
If your menu changes seasonally, or if your food offerings are more popular during a particular season, that will affect your food cost, too.
Tips for Reducing Your Food Cost Percentage
You’ve probably noticed that there are a lot of factors that can change your restaurant food costs, for good or for bad. But there are steps you can take to keep food costs in check.
Reconcile Food Costs Regularly
First of all, put a process in place to keep track of food costs. It can be a software tool or a spreadsheet, but keep a running list of what you’re spending on food and what you’re revenue is month-to-month.
Doing that regularly and frequently will help you see red flags before they become a real problem. If you’re considering changing menu items or raising food prices, having an itemized history of your food expenses will help you make that decision.
Standardize Your Recipes
Standardizing recipes so that everyone is using the same quantity of ingredients is best practice. Not only will this reduce the overuse of food inventory, but if you’re managing multiple locations, it will ensure a consistent dish across shifts and across restaurants.
Standardize Your Purchasing Specs
Do the same when you’re buying ingredients. With every purchase, the same ingredients of the same quality should be purchased at an agreed cost. If the cost rises, the person responsible for purchases should consult with management before pulling the trigger.
Train Employees to be Mindful of Food Costs
Employees should care as much about food costs as you do. They should understand that pouring out more flour than they need or cutting off too much meat means money wasted.
Train them on proper food storage procedures so nothing spoils or spills.
And put a standardized inventory procedure to keep track of food quantities. Not only will it prevent over-ordering, but if something is running out more quickly than it should, you can investigate the cause.
Keep a Mix of High- and Low-Cost Menu Items
Unless you’re a fast food restaurant, where low-cost food is expected, you can’t fill a menu with food and drinks that are cheaper to make.
Another industry best practice is keeping a good balance of high- and low-cost items. Doing so will create a sense of value, variety, and quality with your patrons.
Just make sure you’re not keeping any high-cost items that aren’t popular. If your swordfish isn’t selling, investigate why and then determine whether or not you should keep it on the menu.
Track and Eliminate Waste
According to the National Restaurant Association, between 4 and 10 percent of food is thrown away before it even reaches the table.
Use tracking software, or even a simple spreadsheet to follow food from purchase to table (or trash can). Include the cost of each item and how much of it went to waste. You can then analyze which items to buy less of and which are spoiling and so need to be used more quickly.
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Recommended Food Cost Managment Tools
You don’t have to do all this on your own with nothing but a piece of paper and a pencil. If you’re great with Excel formulas, you can always set up your own worksheets (or you can use ours). But there are a number of tools out there that can do the hard work for you.
SaaS platforms like BlueCart will also help you manage inventory, calculate food costs and streamline ordering.
However you choose to do it, calculating your restaurant food cost percentage on a regular basis will help you keep track of where you’re money is going. It will help you keep food costs down, and can even increase efficiency in your kitchen.