Cost of goods sold is one of the most important performance metrics a restaurateur should track.
Why? Cost of goods sold, or "COGS," ties directly into your menu engineering efforts, profit margin, revenue, and inventory. Without a strong understanding of cost of goods sold, you're blind to the true performance of your business.
In this blog post, we'll be defining cost of goods sold, explaining the cost of goods sold formula, giving tips to lower COGS, and helping you understand why it's so imperative to running a restaurant.
Ready to skip right to the point? Download our free restaurant cost of goods sold calculator and let us do the work for you.
According to Investopedia, cost of goods sold "is the direct cost attributable to the production of the goods sold in a company."
Therefore, in a restaurant, cost of goods sold refers to the cost of all the ingredients used in a given time period. Your restaurant's COGS change over time and you will see a completely different number when comparing your COGS for one shift to your COGS for one year.
Your cost of goods sold is subtracted from your gross revenue in your restaurant profit and loss statement, as this is money that you either owe or have already paid. In other words, money from COGS is subtracted from your profit.
The cost of goods sold formula is as follows:
Let's look at an example. Say you want to know your inventory for last month. You had $3,000 of leftover inventory at the start of the month, including food, drinks, spices, baking materials – anything it takes to get a meal on a plate and a drink in a glass.
Throughout the month, you ordered $8,000 of additional food inventory and ended the month with $2,000 worth of inventory.
Let's define those variables from the equation.
Plugging those numbers into the restaurant cost of goods sold equation, we get this:
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, totals $9,000.
You can play around with the numbers a bit in this interactive restaurant cost of goods sold calculator.
This calculator asks you to sum up all of your COGS. If you want to break down your food and drink items more specifically, download our restaurant cost of goods sold calculator.
A smaller COGS number means a larger profit margin for your restaurant. Therefore, it's in your best interest to investigate lowering your cost of goods sold.
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 maintaining the same amount of sales with a smaller portion of that money going to food purchases. The challenge is figuring out how to do this without lowering the quality of your food.
Here are some common ways restaurants try to lower their COGS. Remember that raising menu prices has no direct effect on your cost of goods sold – how much you sell your food for is independent of how much you pay your suppliers for it.
To take advantage of supplier deals, some restaurants try to buy food supplies in bulk. For food that has a long shelf life or turns over fast in your restaurant, buying in bulk can be an effective way to lower COGS.
For example, if a deal with your supplier to buy in bulk saves you 50 cents per pound of chicken, and each chicken entree contains eight ounces, you've saved yourself 25 cents in COGS per chicken entrée.
However, common concerns over buying in bulk include the freshness of the food, which could be compromised if it is kept too long or frozen. You also have to consider how much room the bulk-bought food will take up in your back of house. Your kitchen crew may have to navigate the walk-ins and back rooms like a labyrinth if there are stacks of boxes crowding their way.
Most would agree that this is a last resort option to lower COGS. If the taste deteriorates dramatically from one visit to another, yet prices stay the same, your customers will notice. This puts the quality of your meals and the integrity of your business in jeopardy.
One way to purchase cheaper products without settling for lower-grade food is to price shop. Speak to other food suppliers to see who has the best overall prices that best fit your restaurant. For 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 the supplier who charges more on steak because you retain more profit from your more popular item.
Finally, don't be afraid to reach out to your supplier and re-negotiate your deals. If you're struggling to maintain a reasonable COGS, chances are your supplier would rather lose a bit of money than your entire contract.
If you look closely at the cost of goods sold equation, you actually won't see the term "sold" in the entire line. This is because COGS can exist independent of sales, funnily enough.
How? Through poor inventory management. Restaurants that don't have closely-monitored back-of-house guidelines can lose money every single 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. Otherwise, your COGS will be much lower than it needs to be, and your wallet will be emptier than you'd want it to be.
All things considered, this is probably the best way to lower your restaurant cost of goods sold. This method lets you keep the quality of your food high, simplify your kitchen, and plug the money drains in your back of house.
Math isn't everyone's strong suit, and you should be more focused on what your guests are crunching on instead of crunching numbers. But if you can effectively manage your cost of goods sold alongside other finance metrics like labor cost percentage and restaurant payroll, your daily profits should be in a good place.
Download our restaurant cost of goods sold calculator and let the numbers speak for themselves.