Food cost formula: How to calculate it and improve costs

Camino Financial26 Feb 2024
Food cost formula: How to calculate it and improve costs
The best way to control what you spend on food is the food cost formula. Every restaurant owner knows that hat product stocking is the highest cost. Monitoring and controlling your costs is key to running a successful restaurant. If you buy expensive high-quality ingredients, you will have to raise the prices of the dishes on your menu. Consequently, you may price yourself out of the market, and your sales may drop. If you do the opposite and keep prices unchanged, your profits will fall. But how do you calculate the cost of the food? How can you manage it and ensure it remains within reasonable limits? With the food cost formula! In this article, we'll explain to you in detail what exactly the food cost formula is and how it can help your business.
Table of contents
1. What Is Restaurant Food Cost?
2. Why Is Food Cost Percentage So Important?
3. What to Do Before You Start Food Costing?
4. How to Calculate Food Costs in a Restaurant
5. How to Find Food Cost Percentages in Your Restaurant? An Example
6. How to Control Food Costs in a Restaurant
7. It's Time to Increase Your Restaurant's Profits

What Is A Restaurant's Food Cost?

In the food service industry, the food cost percentage is a calculation of food purchased for resale or food sold minus the food cost. In simple terms, it's how much money you spend on ingredients to make your menu compared with how much money you make from it. It's not just what's on the menu, either. Restaurant food costs include alcoholic beverages, bread, desserts, etc. Restaurant owners need to buy ingredients for everything that goes into their restaurant. Food cost is the amount of money it takes to purchase the ingredients for a particular meal. You can calculate these costs if you add the price of all the dish ingredients. Or, you can determine them by how much money you spend on food per guest, per day. If a restaurant's food cost is lower than that, they might have a lot of leftover inventory and wasted time/money that could serve more customers. On the other hand, if the restaurant food cost is higher than that, the restaurant might not be making enough money to stay in business.

Why Is Food Cost Percentage So Important?

Using a food cost formula is important because it is one of the leading indicators of a restaurant's profitability. It generally ensures that a restaurant maintains an ideal food cost percentage to be profitable. There are several reasons why the food cost percentage is so significant. First, food costs are one of the largest expenses for most restaurants. Second, food cost percentages can impact menu prices and profit margins. And finally, high food costs can negatively affect a restaurant's bottom line. Many restaurant owners don't realize that they don't just have to worry about average restaurant food cost percentages and markup. Restaurant owners need to consider their restaurant food cost percentage and markup with their target market. In turn, it can help with budgeting and forecasting. By knowing how much each dish costs to make, restaurants can better understand the profit they are likely to make on each item and see if it is worth adding a particular dish to the menu.

What to Do Before You Start Food Costing?

Before applying a food cost formula for your restaurant, there are some things you need to know before or some steps required for this:
  • Start with your menu analysis. Make a study of your menu prices, and identify what items are your most profitable menu items.
  • Calculate your daily food cost percentage. You'll need to determine how much food costs every day, then divide it by that day's sales (also known as food sales).
  • Add up the total cost of all the ingredients you used throughout a specific period considering the food supplies. You can do this by multiplying the price of each item by the number of times customers ordered it during that same period.
  • Compare your food cost percentage to others in the industry.

How to Calculate Food Costs in a Restaurant

The food cost formula is a simple and efficient way to calculate food costs in a restaurant, keep an eye on your food expenses, and prevent them from escalating.
Think of it as a food cost calculator.
The result of applying the formula is a percentage, meaning that a particular portion of your total restaurant expenses will go toward food purchases.

Food Cost Formula

Food Cost Formula = ( beginning inventory + food purchases – ending inventory) / food sales
  • The beginning inventory is the food you have in your kitchen at the start of the day or week. You can find this number by taking what you bought on Monday and subtracting it from what was leftover on Friday.
  • Purchases are the items you bought throughout the day or week from your food supplier. You can find these numbers from your cash register or POS system.
  • Ending inventory is the amount of food left in your kitchen at the end of a specific time (week/day). To do this, take what you have leftover on Friday and subtract it from what you used on Monday.
*To calculate the Actual Food Cost Percentage, multiply the result by 100.

What is a good food cost percentage?

While this could differ for every restaurant, it would usually be in the region of 28% to 32% of your total food sales. The percentage could be even lower for certain types of restaurants.

How to Find Food Cost Percentages in Your Restaurant? An Example

This example would clarify the calculation of the food cost percentage formula. Imagine your restaurant reflects the following data:
  • Value of inventory at the beginning of the week: $7,000
  • Purchases during the week: $3,000
  • Inventory seven days later: $6,000
  • Food sales in the week: $16,000
Now, let’s use the formula: Food Cost Formula = ( beginning inventory + food purchases – ending inventory) ÷ food sales Food Cost Formula = ($7,000 + $3,000 – $6,000) / $16,000 Food Cost Formula = ($4,000) / $16,000 Food Cost Formula = 0.25 Food Cost Formula = 0.25 x 100 = 25% Your food cost percentage is 25%. Of course, when you are using the food cost formula, it is crucial to ensure that you value your opening stock, closing stock, and purchases as possible. Additionally, carry out the exercise of valuing your opening and closing stock at precisely the same time every week so that your results are consistent.
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How to Control Food Costs in a Restaurant

Now that you know calculate food cost percentage, how can you track costs? How can you put the food cost formula into practice to see an actual decrease in your costs? You can start a food cost control weekly. Results will help you to see if costs are rising or falling. This will help you know when to pay closer attention to your purchase practices and the prices you are paying. This said the first thing you should do is manage your food inventory. As a restaurant manager, you can control restaurant food costs through various measures, including menu engineering, location research, inventory management, tray liner design, portion pricing, etc. Combining these techniques will allow you to maintain restaurant food cost control.

How to improve food costs in a restaurant

Once you calculate the food cost formula in your restaurant, you can improve your results and try to be more efficient. Here are some specific steps that you can take:

Use at least two suppliers for each item that you buy.

There are a few reasons you might want to use at least two suppliers for each item you buy. This will allow you to keep track of market prices. You can also reduce your actual food costs by buying more from the lower-cost supplier. Another reason to use multiple vendors is that it can help ensure you always have a backup supply of the items you need. What happens if one of your providers closes? Or what happens if their prices go up? If you have another provider to go to, you will not lack the products you need.

Ensure that your receiving controls are in place

When the suppliers deliver the stock, you must verify the quantity. It is also essential to check if they are the grade you have ordered. Devise a checklist that the person receiving the delivery can use. You can do this by creating a physical or digital inventory spreadsheet or using a warehouse management system. It would help if you created receiving checklists and standard operating procedures for verifying the quantity and quality of goods received. You should also have systems to handle damaged goods and returned products.

Negotiate with your suppliers

The best way to negotiate with your suppliers is to understand what you want and need from them. Make sure that you can articulate your needs clearly and concisely, and be prepared to listen to what they have to say. Work together to find a solution that meets the needs of both parties. Remember that it's essential to maintain a positive relationship with your suppliers, so be courteous and respectful at all times. Thank them for their time, and let them know that you look forward to working together in the future. Learn here some valuable techniques to negotiate with your suppliers. A great idea is to sign long-term contracts to reduce the prices or team up with another restaurant in your area to buy ingredients in bulk and then divide them.

Produce part of your ingredients yourself

If you have enough space in your restaurant to have a small orchard or winter house, consider growing some of your products to save some of the money you allocate to buy fresh produce. Some vegetables, especially herbs, don't require a lot of care or a green thumb. Also, this is an excellent marketing technique. Customers enjoy that the cilantro in the dishes grows in the house or that the tortillas are fresh and homemade.

Wastage and theft could be an issue

Food waste can happen for various reasons, such as overcooked or undercooked items, wrong products, or customers not finishing their meals. Theft can occur when employees or customers steal food from the kitchen or dining area. It is advisable to develop standard systems and procedures to monitor this. There are a few things you can do to avoid this in your restaurant:
  • Train your employees on proper food handling and cooking techniques to minimize spoilage.
  • Ensure all refrigerators and freezers are correctly calibrated and kept at the correct temperature to help keep food fresh.
  • Place cameras in the kitchen and dining area to deter theft.

Reduce your menu

It's a fact: customers prefer a reduced but well-organized and balanced menu rather than an overwhelming number of choices. By reducing the number of dishes on your menu, you can better use your ingredients and reduce the waste of those ingredients you never use. You can learn here how to reduce or improve your menu, or in other words, how to do a menu audit.

Price accordingly your menu costing calculation

If you have a trendy dish, consider increasing the price, and if one of your dishes is not selling, reduce the cost. Keeping a close eye on which dishes are selling or not selling can help you cut some ingredients from your shopping list, reducing your food cost. This takes us to the following point:

Buy the same ingredient in larger quantities

In your menu, you can offer the same ingredient with different elaborations. That will allow you to buy that ingredient in larger quantities for a reduced price and eliminate other components from your shopping list.

It's Time to Increase Your Restaurant's Profits

The food cost formula in conjunction with the above ideas works best when you use it regularly. Remember that you should not just calculate your food cost percentage and leave it at that. Use the information to identify the items leading to an increase in costs. You can then try and locate other lower-cost suppliers for these purchases. Every amount you save will increase your profits and thus help your business grow. We hope this article helps you better grip your food costs. To receive more valuable tips to manage your restaurant better, subscribe to our Newsletter. It's completely free, and every week you'll receive in your mailbox the latest trends in small business and tools and resources to grow your restaurants.

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