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Restaurant operators have to balance delighting customers, maximizing revenues, and minimizing costs.
Restaurant food costs are a major part of overall operating costs — making your food cost percentage an essential restaurant metric that needs to be continuously monitored.
This is a tall task these days given the volatile, rising-cost landscape.
Be that as it may, a sound understanding of food cost formulas and the right mix of technology can help you consistently calculate your food cost percentage, take control of costs, and lay the groundwork for optimizing your restaurant finances.
Keep reading to understand the numbers behind the food cost percentage formula. See how to calculate food cost percentage manually. And learn more about the benefits of automated restaurant food cost control platforms.
Why is food cost percentage so important?
Restaurant food cost percentages help operators to track overall costs and individual ingredient prices — empowering operators to make data-driven decisions for optimized spending that helps foster profitability.
Let’s say that Josephine runs a successful restaurant that serves 350 customers per day. If she doesn’t pay attention to her food costs, and her menu items are incorrectly priced by $0.75, Josephine could lose nearly $100,000 in revenue per year.
(350 customers x 365 days in a year) x $0.75
127,750 customers per year x $0.75 = $95,812.50
Even seemingly subtle pocket change can quickly add up — and that's only the case if your costs are nearly locked in. If you have tons of room to slice away food costs, the savings could be a major boost to your bottom line.
And if you take it further by calculating plate costs, you can combine recipe portions to uncover the exact impacts of each item on your menu.
For example, Underbelly Hospitality was able to cut about three percent off of food costs across their operation — with the help of xtraCHEF by Toast — equating into over $300,000 in annualized savings.
Here are four benefits to calculating restaurant food cost percentage.
1. Spend and earn smarter
By pricing each menu item based on food cost percentage and COGS, you can check 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. Efficiently engineer your menu
With food cost percentage data integrated in your restaurant POS system, you can update menu items that are no longer profitable. Menu engineering based on food cost percentage will give you the insights you need to implement a favorable menu pricing strategy.
3. Better understand how food supplies impact costs and profitability
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 baked goods felt the impact of this shortage. 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.
4. Intelligently experiment with new recipes
Make a new recipe and see if it aligns with your ideal food cost percentage – more on the ideal food cost percentage below. If it doesn’t, see if you can adjust the recipe at all, or maybe you store it away for another time.
How to calculate food cost percentage
Food cost percentage is calculated by taking the cost of goods sold and dividing that by the revenue or sales generated from that finished dish. The cost of goods sold is the amount of money you’ve spent on ingredients and inventory in a given period – we’ll show you how to calculate that, too.
It’s nice to know if individual items are profitable or not, as we’ll explain below. But it’s critical to know if your entire business is on track for success.
To start, look at your weekly inventory.
1. List all the food supplies you received at the start of the week. Many inventory management systems work on tablets or handheld devices, so you can walk around back of house checking off items like you would on a clipboard.
2. Add together the dollar value of each item. How much did you pay for each box of chicken in your back of house?
3. Track your purchases. Were there any other purchases that you made within the week, after beginning inventory?
4. Take inventory again at the beginning of next week. Follow the same process. Many recommend a shelf-to-sheet system, where your inventory tracking system is set up like your back-of-house is.
5. Add together total food sales per shift. Many POS systems with restaurant analytics can provide you with this information automatically.
6. Calculate actual food cost for the week using the following food cost formula:
Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) ÷ Food Sales
Check out the example below to see this food cost percentage 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 high or low? Make sure you’ve counted each item correctly, entered the right unit, and accounted for each purchasing invoice.
What is a good food cost percentage?
On average, the food cost percentage is 28-32% in many full-service and quick-service restaurants.
Of course, there is no exact “good” percentage — it varies depending on the type of food served and costs of operating the restaurant. To figure out what percentage is the best for your restaurant, you’ll need to calculate your ideal food cost percentage.
Learn how a better point of sale system can help you run your restaurant.
How do you calculate ideal food cost percentage?
Here's how to calculate the ideal food cost percentage for your restaurant:
Ideal Food Cost Percentage = Total Cost Per Dish ÷ Total Sales Per Dish
For this percentage to be the most helpful, you need something to compare it to -- and ensure that your restaurant is on track.
You can do so by comparing your actual food cost with your ideal food cost. In an ideal world, there would be no food waste or theft in your restaurant.
The calculation for ideal food cost percentage doesn’t take into account your beginning and ending inventories. Instead, it accounts for the total costs and sales associated with each dish or menu item.
First, we have you enter the type of concept you run and in what area. Then, it shares the five most popular items (and their price breakdown) on similar restaurant menus in your area. Then, you’ll be able to dive into these menu items to calculate each item’s food cost, the cost per pound and/or cost per cup for each ingredient.
You can also use the tool to create custom menu items and determine the ideal price for them. So play around with it and start brainstorming on how you can improve your food cost percentage.
The Guide to Restaurant Sales
In this Guide to Restaurant Sales, you’ll learn the metrics you need to measure to understand the financial health of your restaurant. Plus, you’ll get tons of great ideas that’ll help you learn how to improve sales in your restaurant.
How to calculate food cost per serving (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
Now that you’ve calculated 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%
The ideal food cost percentage comes out to 25% and the actual food cost percentage comes out to 30%, in the examples shared above. Now we know there’s an extra 5%, either due to waste, theft, or additional purchasing. Ultimately, you want your actual food cost to match or even be below your ideal food cost.
How can you optimize food cost percentage?
There are many ways to optimize your food cost percentage. Here are a few:
Be smart about your menu pricing. Try raising prices on your menu by a small amount and factoring this into you overall restaurant business plan.
Try menu engineering to identify which menu items are bringing in the most profit and update your menu accordingly.
Use plenty of carbs on your menu. Why? Because items like potatoes and pasta are generally cheaper to buy in bulk.
Get creative with your restaurant menu design to strategically suggest and promote more profitable items to guests.
Shop around at different wholesale food sellers like US Foods so you can find the best prices for your restaurant.
Keep an eye on portion sizes. Are many of your dishes coming back half-eaten? You may want to consider reducing your portion sizes.
Don’t give away too many freebies, such as bread and butter, if your actual and ideal food costs are way off.
Adapting your menu along with seasons can help you save on food costs. Food items and produce that are in season will be cheaper, and seasonal items that are trending with customers will help with popularity and profitability.
How do you 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. Here's a formula you can use:
Divide this 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. Keep menu prices simple and round up or down.
When you’re pricing your menu, you should also consider your local market. If demand is high for a particular menu item in your area, you may want to sell it for more or less, depending on what the market can bear.
You’ll also want to consider labor costs, rent, overhead costs, and more when pricing your menu.
How xtraCHEF by Toast can help you stop getting cooked by costs
COGS is a great high-level, actionable measure for your food costs — it's half the equation for calculating prime costs—but restaurants need a more precise, detailed overview of their spending.
This is more true now than ever with soaring food costs, inflation, ongoing supply chain disruptions, and continued labor struggles.
Even with our formulas and synopsis above, manually tracking restaurant food costs has typically been time-consuming and error prone.
Food cost control comes down to tracking supplier price fluctuations, which means capturing product prices, units of measure, and other critical details from all your invoices — that's where xtraCHEF by Toast comes into the picture.
xtraCHEF's automation can help take the tedious work of invoice processing off your plate. With automated invoice processing, you can simply snap, scan, and upload your invoices. The platform extracts all the critical line-item details, passing along important information into your accounting system while diving into individual ingredient costs within xtraCHEF.
You can use this clean, consistent data on product prices to start making more informed decisions.
For example, you can get accurate recipe costs or plate costs. Simply drag and drop items from your product catalog and set the quantity. xtraCHEF will pull in invoice product prices, factoring in quantities so that you know exactly how much each ingredient costs per recipe.
With precise recipe costs that update with each new vendor order, you can ensure your food costs and menu prices work together to achieve your target profitability.
Schedule a demo to speak with a product specialist today about the potential benefits of Toast and xtraCHEF for your operation.