Cost of goods sold is one of the most important performance metrics you can track. This is especially true now, as restaurants adapt their operations due to COVID-19 and begin to reopen over the coming months. You'll need to keep a closer eye than ever on your business's financial health and performance.
Cost of goods sold (COGS) ties directly into your menu engineering efforts, profit margin, revenue, and inventory. Without a strong understanding of cost of goods sold, you might find it hard to get a clear view of your business's true performance.
Keep reading, and you'll learn just how important COGS is to helping you keep your business running efficiently: what exactly cost of goods sold is, how to calculate it, and tips on lowering your COGS.
What is Cost of Goods Sold?
According to a definition from Investopedia, cost of goods sold is "the direct cost attributable to the production of the goods sold in a company."
But let's break that down more simply: Cost of goods sold refers to the cost of all the ingredients a restaurant uses in a given time period. Your restaurant's COGS number changes over time, and you'll see a completely different number when comparing your COGS for one shift to your COGS for an entire year.
When building out your restaurant profit and loss statement, your cost of goods sold is subtracted from your gross revenue, since this is money that you either owe or have already paid. In other words, money attributed to COGS is subtracted from your profit.
How to Calculate Cost of Goods Sold for Your Restaurant
The cost of goods sold formula is as follows:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)
Let's break this down with an example. Say you want to get a better idea of your inventory from last month. You had $3,000 of leftover inventory at the start of the month, including food, drinks, spices, and other materials — basically anything and everything it takes to get a meal on a plate and a drink in a glass.
Throughout the month, you ordered $8,000 of additional inventory and ended the month with $2,000 worth of inventory.
Now let's tie these number into the variables from the equation:
- Beginning Inventory: $3,000
- Purchased Inventory: $8,000
- Ending Inventory: $2,000
Then, plugging those numbers into the restaurant cost of goods sold equation, we get this:
Cost of Goods Sold = Beginning Inventory + Purchased Inventory – Ending Inventory
Cost of Goods Sold = $3,000 + $8,000 – $2,000
Cost of Goods Sold = $9,000
In this example, your restaurant's cost of goods sold — or the amount of money spent on food and drink served in your establishment during the month — reaches a total of $9,000.
You can play around with the numbers a bit using this interactive restaurant cost of goods sold calculator. The calculator asks you to sum up all of your COGS and will help you break down your food and drink items with greater specificity.
Read this next
See the seven most important restaurant metrics owners need to track and how to calculate them correctly.
How to Lower Your Cost of Goods Sold Number
A smaller COGS number usually means a larger profit margin for your restaurant. That's why it's in your best interest to investigate how you can bring your cost of goods sold down.
Keep in mind, a lower COGS is not always a good thing. If you have a COGS of $0, for instance, that means you didn't sell anything. What you want to achieve is your ability to maintain a steady sales number while allotting a smaller portion of that money to food and inventory purchases. The challenge is figuring out how to do this without lowering the quality of your menu items.
Here are some common tactics restaurants use to try to lower their cost of goods sold. Remember that raising menu prices has no direct effect on your COGS — how much you sell your food and menu items for is independent of how much you pay your suppliers for it.
1. Buy in bulk
To take advantage of supplier deals, some restaurants buy certain supplies in bulk. For ingredients and supplies that have a long shelf life or turn over quickly in your restaurant, buying in bulk can be an effective way to lower COGS.
Here's an example: If a deal with your supplier to buy in bulk saves you 50 cents per pound on chicken, and each chicken entrée contains eight ounces of chicken, you've saved yourself 25 cents in COGS per chicken entrée.
But there are common concerns over buying in bulk. One thing is freshness, which could be compromised if it's kept or left frozen too long. Another thing to consider is how much room you have in your back-of-house to store bulk supplies. Your kitchen crew may have to navigate the walk-ins, pantries, and back rooms like labyrinths if there are stacks of boxes crowding their way.
2. Purchase products at a lower price point
Most would agree that this is a last resort option to lower your COGS. If you went to or ordered from a restaurant, and you noticed that the taste and quality started to dip, but the price point was the same, you'd likely notice. And your customers would, too. That's why purchasing products at a lower price point as a way to bring down COGS isn't the best idea — you don't want to put your meals and integrity at risk.
One way to purchase cheaper products without settling for lower-grade items is to price shop. Talk to different food suppliers to see who has the best overall prices that are a good fit your restaurant.
Here's another example: One supplier may have better deals on steak than chicken, but if you sell drastically more chicken than steak, the price difference may mean you're better off going with another supplier who charges more for steak because you'll retain more profit from your more popular menu items that feature chicken.
Also, don't be afraid to reach out to your supplier and re-negotiate any standing deals. If you're struggling to maintain a reasonable COGS, chances are your supplier would rather lose a bit of money than all of your business.
3. Monitor inventory closely
If you take another look at the cost of goods sold equation above, you actually won't see the term "sold." This is because, surprisingly enough, your COGS can exist independent of your sales.
This usually happens because of poor inventory management. If your restaurant doesn't have clear back-of-house guidelines or procedures in place, you could be losing money every shift due to inventory spillage. Improper portioning, over-ordering, waste, and theft can take a big chunk out of your restaurant's COGS without adding a penny to your bottom line.
Make sure you have a reliable restaurant inventory management system in place to closely monitor the ins and outs of your restaurant inventory. If you aren't too careful, your COGS number will be much lower than it needs to be, and your wallet will be emptier than you'll want it to be.
All things considered, detailed inventory management is probably the best way to lower your restaurant cost of goods sold. Through portioning, food waste procedures, and detailed inventory tracking, you can keep the quality of your food high, save money, and keep your kitchen running efficiently.
Use This Calculator to Determine Cost of Goods Sold for Your Restaurant
By managing your cost of goods sold alongside other financial metrics like labor cost percentage and restaurant payroll, you'll have a greater sense of your restaurant's profits. Download this restaurant cost of goods sold calculator to get calculating.