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Restaurant cost of goods sold (COGS) is a critical metric that spans operational and financial performance.
Operators track COGS to determine the general profitability of the business as well as granular profitability for different services and menus, specific menu items, and days of the week.
Tracking COGS has never been more important in the face of today's high-cost, volatile environment — with ongoing supply chain woes, product price fluctuations, and labor struggles eating into restaurant margins. The ability to track COGS is a step toward truly taking control of restaurant costs and making data-driven decisions. Of course, it's easier said than done.
Read on to learn how COGS can help you keep your business running efficiently. See how to calculate it manually and with automated systems, and explore tips for lowering your restaurant's COGS.
What is Cost of Goods Sold for Restaurants?
Cost of goods sold refers to the cost of all the ingredients a restaurant uses in a given time period. It's a critical metric used for monitoring and controlling restaurant costs.
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.
Calculating COGS comes down to finding the cost of ingredients or restaurant inventory for a given amount of time. Doing this calculation helps restaurants stay lean and keep costs low, and allows restaurant operators to save money on food inventory by identifying patterns and trends.
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.
What does COGS say about your restaurant?
COGS tells you how much you are spending to make what you’re selling across your restaurant operation — individual locations, shared concepts, or an entire portfolio.
The COGS/Sales ratio quantifies your spend relative to revenue. A lower ratio is preferred as it suggests you’re spending less to make more money. It’s generally a sign of good financial health.
COGS typically varies between restaurants depending on factors like size and concept.
Consider a fine dining restaurant vs. a fast food one. Fine dining generally has higher COGS because they use better quality, more expensive ingredients. This higher COGS isn’t necessarily alarming because they then charge a premium to more than cover these costs.
That being said, a good average COGS number to aim for is usually around 31%.
You can track COGS and COGS ratio over time to identify trends and determine if you’re in control of your costs.
For example, if COGS consistently rise for three months while turnover remains constant, you may have a problem. Maybe suppliers have increased their prices, and you haven’t adjusted yours. Perhaps food waste in the kitchen is higher than usual due to several new hires.
COGS is most definitely a critical restaurant accounting KPI, but it needs to be a starting off point and not your only metric — much like restaurant inventory turnover ratios, restaurants need more precise insights to accompany COGS measures.
How to Calculate Cost of Goods Sold for Your Restaurant
What is the Cost of Goods Sold Formula?
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.
What should COGS be for a restaurant?
The Food Service Warehouse recommends your restaurant cost of goods sold (COGS) shouldn’t be more than 31% of your sales. While fine dining restaurant COGS may be a bit higher due to more expensive food costs, pizza shops should aim for the low to mid 20% range for COGS, having lower operating costs.
Recipe management is a must-have capability for operators to achieve dish consistency, monitor and control costs, and successfully set menu prices.
COGS ratio, also known as COGS to Sales Ratio, refers to the ratio of your cost of goods sold compared to the money generated through sales in a certain period. The lower the ratio the better, as it means you'll have spent less money to make more.
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.
Use software to track food inventory trends in your restaurant
Buy food and supplies in bulk
Cost-compare and purchase products at a lower price point
Monitor inventory regularly
Use a restaurant COGS calculator to save time
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.
4. Use specials and seasonal menus to keep inventory lean
By leveraging smart menu creation, your restaurant can minimize food waste, promoting specials or items with extra stock. Use featured menu items and seasonal pricing to adjust your inventory planning for certain seasons and avoid excess food items sitting on shelves.
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.
How to go beyond COGS for more in depth insights
The first step in going beyond COGS is diving into more granular numbers to monitor individual ingredient cost fluctuations.
For example, you can monitor chicken thigh prices over time to see supplier price increases. Product price increases do roll up to impact your overall COGS, but they’re also directly impacting the profitability of each menu item that product is in.
Learning how to cost a plate of food from your menu is another great way to zoom in on COGS and see the direct impact of price fluctuations.
With this information, you can decide to increase menu prices, shop around for cheaper vendors, remove menu items entirely, or pivot to less expensive product alternatives.
Achieving this sort of granularity is difficult and time-consuming without the right tools, which is why many restaurants never take the time to drill down.
Tracking COGS, plate costs, & more begins with your invoice details
You need to accurately track product price fluctuations and monitor the insights that come from them — that starts with ingesting item-level details via invoices processing automation.
Digitizing invoices and the critical data they contain provides you with a strong restaurant costing foundation. Many operators never take full advantage of this truth because they still rely on manual data entry to record invoice data, whether through QuickBooks accounts or ongoing spreadsheets.
This is an unsustainable process due to time constraints, human error, and the burden of managing, storing, and even paying for postage and shipping paper invoices.
xtraCHEF by Toast helps you easily ingest invoices — automatically pulling and routing general ledger data to your accounting system and line-item details to your xtraCHEF account for further analysis. And after scanning, your paper invoices are irrelevant. Everything is in our system.
The bottom line on tracking COGS
Achieving an accurate COGS measure is a goal within itself, but it’s just the beginning of folding more actionable insights into your business decision making.
xtraCHEF by Toast starts with invoices, unlocks COGS, and then enables you to drill down into ingredient-level insights.
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.