How to Calculate Food Cost Percentage & Maximize Profits
When owning a restaurant, you need to track and analyze certain performance metrics to know the health of your business, so you can better manage it. By regularly evaluating these metrics, you can catch problem areas early and address them proactively.
One important restaurant metric to get right is your food cost percentage. In fact, 52% of restaurateurs cited high operating and food costs as a top challenge, according to Toast's 2019 Restaurant Success Report.
We’ll share what food cost percentage is, why it matters, how to calculate it, and the ways you can optimize it.
What Is Food Cost Percentage?
Food cost percentage is your cost of goods sold (COGS) divided by your sales. Cost of goods sold is the amount of money you’ve spent on ingredients and inventory in a given time period.
WHY FOOD COST PERCENTAGE MATTERS
Food cost percentage is important, because closely tracking and optimizing food cost percentage can help you achieve maximum profit.
Imagine Nick runs a successful restaurant that serves 400 customers per day. If he doesn’t pay attention to his food costs, and his menu items are mispriced by $0.70, Nick could lose $100,000 in revenue per year. What you might think is small pocket change can add up to a lot on an annual basis.
How to Calculate Food Cost Percentage
Calculating your food cost percentage can be challenging. By using the below formulas and resources, you'll be able to calculate and optimize food cost percentage.
While it's nice to know if individual items are profitable as explained below, you need to know whether your entire business is on track for success. Food cost percentage is on average 28-32% in many full-service and limited service restaurants.
Here are the six steps to accurately calculating your food cost percentage:
- List all the food supplies you received at the start of week for your beginning inventory. Many inventory management systems work on handheld devices, so you can do this more easily.
- Sum up the dollar value of each item. How much did you pay for each box of lettuce in your back-of-house?
- Track purchases that you made within the week after beginning inventory.
- Take your inventory again at the beginning of next week, following the same process in steps 1 and 2.
- Add total food sales per shift. Many POS systems with restaurant analytics can provide you with this information automatically.
- Calculate actual food cost for the week with the following food cost formula:
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales
See the below example to check out how the food cost percentage formula works:
- Beginning Inventory = $16,000
- Purchases = $4,000
- Ending Inventory = $17,000
- Food Sales = $10,000
- Food Cost Percentage = (16,000 + 4,000 – 17,000) ÷ 10,000
= 3,000 ÷ 10,000
= 0.30 or 30%
Looking to make this process easier?
You can save time, reduce the operational load, and gain more accuracy with Avero's Toast integration. You can pull in your near real-time sales data from your Toast POS system, automatically generating your COGS and food cost percentage within Avero, which is restaurant software that analyzes your POS data to help you make more informed business decisions. Avero is also integrated with US Foods®, so US Foods customers can track their starting and ending inventories, and purchases for all food categories and each ingredient used.
CALCULATING YOUR IDEAL FOOD COST PERCENTAGE
In addition to calculating your total food cost, you need to compare your actual food cost with your ideal food cost, which can help identify sources of food waste or theft in your restaurant. It will help ensure that your restaurant is on track.
The calculation for ideal food cost percentage accounts for the total costs and sales associated with each dish or menu item, leaving out your beginning and ending inventories.
Calculating Food Cost Per Dish (or food cost per menu item):
- Food Cost Per Dish = Food Cost of Ingredients x Weekly Amount Sold
- Total Sales Per Dish = Sales Price x Weekly Amount Sold
Once you know your food cost per dish, here’s the formula for calculating ideal food cost percentage:
Ideal Food Cost Percentage = Total Cost Per Dish ÷ Total Sales Per Dish
Check out the example below to see this ideal food cost percentage formula in action:
- Total Cost Per Dish = $2,500
- Total Sales Per Dish = $10,000
- Ideal Food Cost Percentage = 2,500 ÷ 10,000
- Ideal Food Cost Percentage = 0.25 or 25%
In the above examples, ideal food cost percentage is 25% and actual food cost percentage is 30%. There’s an extra 5%, due to waste, theft, and/or additional purchasing. Ultimately, you want your actual food cost to match or even be below your ideal food cost.
Four Ways to Optimize Food Cost Percentage
Once you’ve calculated your food cost percentage, what do you do with it? Here are four ways knowing your food cost percentage helps your restaurant:
1. Maximizing Your Menu's Profitability
By pricing each menu item based on food cost percentage and cost of goods sold, you can ensure that each menu item fits within your food cost margins. From there, you’ll know which menu items are most profitable and, in turn, which items to promote.
2. Efficient Menu Engineering
With food cost percentage data integrated with your point of sale, you can update menu items that are no longer profitable. Menu engineering based on food cost percentage gives you the insights to decide whether to retire, change or re-price a menu item.
3. Knowing food supplies' impact on your business
A poor growing season in 2018 left the world with a shortage of vanilla, making prices skyrocket. Bakeries and other restaurant concepts with an emphasis on desserts and baked goods felt this shortage's impact.
Keeping tabs on farming trends by using resources like the Farmer’s Report on US Foods’ website is an important part of understanding and managing inventory costs.
4. Using the data to try new recipes
Experiment with a new recipe and see if it aligns with your ideal food cost percentage. If it doesn’t, try adjusting the recipe using different ingredients – or maybe you can store it away for later.
Your menu is the key to your revenue. And Avero's Toast integration can help you calculate your COGS and food cost percentage, making it easier for you to figure out individual recipe costs and menu prices for your restaurant.
About Toast: Toast, a CHECK® Business Tools partner, powers successful restaurants of all sizes with a technology platform that combines restaurant POS, front-of-house, back-of-house and guest-facing technology with a diverse marketplace of third-party applications. By pairing technology with an unrivaled commitment to customer success, Toast helps restaurants streamline operations, increase revenue and deliver amazing guest experiences. Toast was named to the 2019 Forbes Fintech 50, 2019 SXSW Interactive Innovation Finals, 2018 Forbes Cloud 100, and recognized as the third fastest-growing technology company in North America on the 2017 Deloitte Fast 500. Learn more about Toast by visiting POS and Restaurant Management Platform.
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