Many restaurateurs don’t calculate food cost percentage for individual items on their menu because it can be time-consuming and confusing.
In this post, we’ll share our food cost formula and explain why it's important that every restaurateur knows how to calculate 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? Look at your weekly inventory.
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales.
Quick Tip: Is your food cost percentage dramatically too high or too low? Make sure you’ve counted each item correctly, entered the right unit, and accounted for each purchasing invoice.
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.
In these two examples, ideal food cost is 25% and actual food cost is 30%. Now we know 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.
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.
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 mis-priced by 75 cents, then Joe could lose $100,000 in revenue per year.
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.
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.
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.
In 2018, a poor growing season left the world with a shortage of vanilla, making the price for the spice skyrocket. Bakeries and other restaurant concepts with an emphasis on desserts and sweeter fare felt the impact of this shortage in their pockets. Keeping an eye on farming trends and even international trade negotiations – the 2018/2019 US-China trade war has had a huge impact on American farmers – is an important part of understanding and managing inventory costs.
Make a new recipe and see if it fits within your ideal food cost percentage. If it doesn’t, see if you can adjust the recipe or keep it on the sideline for your next family dinner.
There are many ways to optimize food cost percentages. Here are a few:
However, when you’re pricing your menu, you might want to take Donald Burns’ advice, and take both the competition and market behavior 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.
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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.