Mastering Restaurant Food Cost Analysis: Strategies, 1 Formula, and Values for Success

What is Food Cost Analysis and why is it so important?

Managing food costs is essential for the financial health of any restaurant, regardless of its reputation or customer base. Food costs represent the expenditure on raw ingredients for menu items relative to the revenue generated from selling those dishes. This cost, expressed as a percentage known as the food cost percentage, typically falls between 25% and 32% in profitable restaurants. Precise food cost calculations are vital not only for menu pricing but also for ensuring your restaurant remains profitable. Even a minor discrepancy in food costs can result in significant revenue losses. Lets take a look at the food cost analysis below.

How to Calculate Food Cost Percentage:

food cost analysis
KNOW YOUR INGREDIENTS!

To determine your restaurant’s food cost percentage, you’ll need to gather several key metrics. Start with the Cost of Goods Sold (COGS), representing the money spent on ingredients. Calculate COGS using the following formula:

Starting Inventory + Purchased Inventory – Ending Inventory = COGS

For weekly calculations, your starting inventory should include leftover stock from the previous week. Purchased inventory accounts for new raw materials received, and ending inventory reflects what remains after a week of service. Ensure that your inventory includes items like seasonings, spices, oils, and other ingredients that contribute to menu items. The same approach applies for monthly COGS calculations.

For example, if your starting inventory is $3,500, purchased inventory is $9,500, and ending inventory is $7,000, your COGS would be $6,000:

$3,500 + $9,500 – $7,000 = $6,000

With your COGS calculated, determine your total food sales for the same period. Then, use this formula to find your food cost percentage:

COGS ÷ Total Food Sales = Food Cost Percentage

If your COGS is $6,000, and your total food sales are $24,000, your food cost percentage would be 25%:

$6,000 ÷ $24,000 = 0.25 (25%)

Ideal Food Cost Percentage:

To maximize the impact of your food cost percentage analysis, compare it with an ideal food cost percentage. The ideal food cost represents what your restaurant’s food cost percentage would be in a perfect world—where ingredients never spoil, orders are always accurate, and inventory is never lost or stolen. Calculate your ideal food cost percentage by dividing your total food cost (the cost of ingredients for each menu item) by your total food sales:

Total Food Cost ÷ Total Food Sales = Ideal Food Cost Percentage

Total food cost differs from COGS as it focuses solely on the cost of materials used for each menu item, not the overall inventory. You must analyze the cost of each dish, multiply it by the number of times the item is prepared, and then sum the costs of all the menu items sold during the period to find your total food cost.

For example, if your total food cost is $7,200, and your total food sales for the week are $30,000, your ideal food cost percentage would be 24%:

$7,200 ÷ $30,000 = 0.24 (24%)

By comparing your food cost percentage (e.g., 25%) with the ideal food cost percentage (e.g., 24%), you can identify any discrepancies. This knowledge empowers you to make adjustments in sourcing inventory, menu pricing, portion sizes, and other areas to reduce your food cost percentage and increase profits.

Calculating Food Cost by Menu Item:

For a more detailed analysis, you can calculate food costs on a menu item-by-item basis. Begin by calculating the food cost per dish, considering the cost of ingredients and the number of times the dish is sold:

Food Cost of Ingredients × Amount Sold = Total Food Cost Per Dish

Then, determine the food cost percentage for each menu item by dividing the total food cost per dish by the sales generated by that item:

Total Cost Per Dish ÷ Total Sales Per Dish = Ideal Food Cost Percentage

This analysis can be conducted over various timeframes, such as weekly or monthly, and allows you to calculate COGS specific to each menu item.

Improving Food Cost Percentage:

If you find discrepancies between your food cost percentage and the ideal food cost percentage, take proactive steps to optimize your restaurant’s profitability:

  1. Consider modest price increases for menu items.
  2. Incorporate cost-effective ingredients like carbohydrates (potatoes, pasta, rice) when possible.
  3. Review and negotiate with wholesale suppliers for better ingredient pricing.
  4. Reevaluate menu design to highlight items with favorable food cost percentages.
  5. Monitor food waste and adjust portion sizes and plating accordingly.

Small changes can have a significant impact on your profits. For instance, even a 50-cent menu item pricing error can result in a daily loss of $50 for every 100 customers served. Incremental price adjustments are just one way to improve your food cost percentage.

Recognizing that food costs are an external factor beyond their control, restaurant operators have increasingly turned to innovative solutions to mitigate the impact on their budgets. One notable strategy involves the implementation of robotics and automation, which can streamline operations and reduce expenditures, particularly in the realm of payroll management.

News outlet says food prices are expected to continue on a upward trend. Understanding food cost is only temporary and should be reviewed at least every quarter to ensure correct profitability. Customers should not be tied with forever rising price of food cost, what are some alternative measures a restaurant can reduce its expenditures? Click here to find out.

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