Food costs can be the bane of your existence or they can be the most helpful restaurant metric you’ll ever calculate.
However, many restaurateurs don’t calculate food cost percentage for individual items on their menu because it can be time-consuming and confusing.
- Shares the top five most popular items on restaurant menus in your state and concept
- Allows you to dive into these menu items to calculate food costs
- Helps you determine cost per pound and/or cost per cup of each ingredient
- Gives you the ability to create your own custom menu items
Plus, Toast’s inventory management software gives restaurants insight into food cost variances and waste, as well as total food cost for your entire restaurant.
In this post, we’ll share our food cost formula and explain why it's important that every restaurateur know how properly to calculate food cost percentage.
The Step-by-Step Guide to Calculating Food Cost Percentage
As a chef, it’s nice to know if individual items are profitable or not using recipe cost calculators like Toast’s free tool. However, as an owner, you need to know if your entire business is on track for success.
The average food cost percentage is 35% for a fine dining restaurant and 25% for a quick service restaurant. How do you find this number? You look at your weekly inventory.
- List all food supplies you received at the start of week. Many inventory software systems work on tablets, so you can walk around the back of house checking off items like you would on a clipboard.
- Sum together the dollar value of each item. How much did you pay for each box of chicken in your back of house?
- Track your purchases. Were there any other purchases that you made within the week, after beginning inventory?
- Take inventory again at the beginning of next week. Follow the same exact process. Many recommend a shelf-to-sheet system, where your inventory tracking system is set up as your back of house is.
- Add together total food sales per shift. Many POS systems with restaurant analytics can give you this information automatically.
- Calculate actual food cost for the week. Complete the following food cost formula:
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales.
Check out the example below to see this formula in action.
Beginning Inventory = $15,000
Purchases = $4,000
Ending Inventory = $16,000
Food Sales = $10,000
Food Cost Percentage = (15,000 + 4,000 – 16,000) ÷ 10,000
Food Cost Percentage = 3,000 ÷ 10,000
Food Cost Percentage = 0.30, or 30%
Quick Tip: Is your food cost percentage dramatically too high or too low? Make sure you’ve counted each item correctly, inputted the right unit, and have accounted for each purchasing invoice.
How to Calculate Ideal Food Cost Percentage
It’s often not enough to calculate total food cost and call it a day.
You need something to compare it to in order to know whether your restaurant is succeeding. And no, I’m not suggesting you compare your restaurant to other restaurants (that's a quick path to failure). I’m suggesting you compare your actual food costs to your ideal food costs. In an ideal world, there would be no waste or theft in your restaurant. This model doesn’t take beginning and ending inventory and instead simply calculates total costs and total sales for each item.
Calculate total cost per item, or recipe food cost:
Recipe Food Cost = Food Cost of Ingredients x Weekly Amount Sold
Calculate total sales per item:
Total Sales Per Item = Sales Price x Weekly Amount Sold
Calculate ideal food cost:
Ideal Food Cost = Total Cost Per Item ÷ Total Sales Per Item
In this example:
Total Costs = $2,500
Total Sales = $10,000
Ideal Food Cost = 2,500 ÷ 10,000
Ideal Food Cost = 0.25 = 25%
In these two examples, ideal food cost is 25% and actual food cost is 30%. Now we know that there’s an extra 5% of profit from this restaurant, either due to waste, theft, or purchasing. Ultimately, you want your actual food cost to match or even be below your ideal food cost, or what some call your “maximum allowable” food cost.
Why Food Cost Percentage is Important
Often, restaurateurs don’t take food cost percentage seriously. And I get it: food cost percentage isn’t a number that goes directly into the bank. However, optimizing your food cost percentage can help you reach maximum profits - and that will definitely inflate your bank account.
All the most successful franchises understand the value behind food costs. For example, McDonald’s sells 68 million burgers a day, so if they are off a single penny on their costs of goods sold, then they are losing $680,000 per day… or $248 million per year.
In a more relevant example, Joe runs a successful and busy restaurant that serves 350 customers per day. If he doesn’t pay attention to his food costs, and his appetizers, salads, entrées, beverages, desserts, or coffee are mispriced by 75 cents, then Joe could lose $100,000 in revenue per year.
Obviously, going through the extra trouble of calculating food cost percentage and cost of goods sold down to the individual cookie, slice of bread, or burger, can actually help your restaurant in the long run.
Better data allows you to make better decisions. Here are four benefits to knowing food cost percentage.
1. Have better control over the profitability of your restaurant.
Price each menu item based on the costs of goods sold. Make sure each menu item fits within your food costs margin (ex. 25%). Know which menu items to promote because they are the most profitable.
2. Make sure you have no wasted opportunities.
With this restaurant data at your fingertips, you can remove or change old menu items that are no longer profitable. Menu engineering based on food cost percentage will give you the insight you need to retire that recipe, change it up, or re-price it.
3. Have a better understanding of how each order impacts costs and profitability.
The avian flu caused the price of eggs to spike. If you serve breakfast or make baked goods (i.e. – use a lot of eggs), then this spike will have a bigger impact on your costs of goods sold and profits.
4. Experiment intelligently with new prospective recipes.
Make a new recipe and see if it fits within your ideal food cost percentage. If it doesn’t, then see if you can adjust the recipe - or keep it on the sideline for your next family dinner.
How to Optimize Food Cost Percentage
There are many ways to optimize food cost percentages that restaurant consultants recommend. Here are a few:
- Raise prices on your menu by a small amount, or rather, just be smart about your menu pricing.
- Try menu engineering, and get rid of dishes that are dogs first.
- Add carbs to your menu, because potatoes and pasta are usually cheaper to buy in bulk.
- Get creative with your restaurant menu design, promoting more profitable items over others.
- Shop around at different wholesale food sellers like Gordon Food Service for the best prices.
- Make sure you are serving appropriate portion sizes; are many dishes coming back half eaten?
- Watch your meal composition; use more of the less expensive items in a meal.
- Don’t give away too many freebies, such as bread and butter, if your actual and ideal food costs are way off.
- Seasonal menu changes can help you save money - what’s in season in nature will be cheaper and will help with profitability and what’s hot with customers will help with popularity. The National Restaurant Association predicts what’s hot each year and Toast covers it on this blog.
How to Price Your Menu with Food Cost Percentage In Mind
Your menu prices need to meet the needs of your bottom line, but also the needs of your target market. Toast’s Food Cost Calculator suggests menu prices for the top 5 items in a concept and state based on ideal food cost percentage. Here’s the formula we use (although it isn’t foolproof):
- Find portion cost, or total cost of ingredients within a recipe.
- Divide by a target food cost percentage. You can choose what this percentage should be and move it around as you wish.
- Round up or down. Most restaurants have menus with simple prices, like $10, and many don't even show the dollar sign on the menu.
However, when you’re pricing your menu, you might want to take Donald Burns’ advice, and also take competition and the market into consideration. With high demand for a menu item in your area, you may want to sell it for more or less, depending on what the market can bear. You could also be comfortable with a higher food cost percentage, especially if it means more money in the bank.
You’ll also want to consider labor cost, rent, overhead costs, and more when pricing your menu, as your menu is your main (and for many, only) revenue source. Use the Food Cost Calculator to help, and then use your and experience to optimize your specific menu.
Your Thoughts on Food Cost Percentage?
Food cost percentage can be a very polarizing metric. What are your thoughts on the importance of this restaurant metric? What is your food cost formula?
Share your ideas below, and feel free to ask any questions below. For more articles like this, subscribe to the Toast Restaurant Management Blog for daily articles on menu engineering, inventory management, and food costing tips.
Plus, don’t forget to check out Toast’s Food Cost Calculator to calculate individual recipe costs, automatically convert units, and get suggested menu prices for your restaurant!