Hand using calculator and fresh vegetables to illustrate food cost
By: rkapur
Read in 8 minutes

Food Cost Formula to Stay in Business

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Restaurant entrepreneurs know that product stocking is the highest cost. Monitoring and controlling your food cost 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 you keep prices unchanged, your profits will fall. You may even start incurring losses. How can you manage your food cost and ensure that they remain within reasonable limits? 

The best way to track your food cost in the restaurant business in the so-called food cost formula. In this article, we’ll explain to you in detail what exactly that formula is and how it can help your business.

Food Cost Formula

What is the Food Cost Formula?

The food cost formula is a simple and efficient way to keep an eye on your food expenses and prevent them from escalating. A certain percentage of your total restaurant expenses will go towards food purchases. 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.

The formula to calculate the food cost percentage goes like this:

FOOD COST PERCENTAGE = beginning inventory 
+ food purchases
– ending inventory
÷ by food sales

This example would clarify the calculation:

Value of inventory at the beginning of the week: $7,000
Purchases during the week: $3,000
Inventory exactly seven days later: $6,000
Food sales in the week: $16,000

Food cost percentage =$7,000 + $3,000 – $6,000 = $4,000
Now divide $4,000 by $16,000 to get 0.25, or 25%. 

Your food cost percentage is 25%.

READ: 10 Ways to Grow Your Restaurant Business

Of course, when you are using this formula, it is important to ensure that you value your opening stock, closing stock, and purchases, as accurately as possible.

Additionally, carry out the exercise of valuing your opening and closing stock at exactly the same time every week, so that your results are consistent.

Fresh vegetables to illustrate "food cost"

How to Use the Food Cost Formula

Now that you have your food cost percentage, how can you use it to track costs? In other words, how can you put this formula into practice, so you see a real decrease in your costs?

Monitoring the results of your weekly exercise will help you to see if costs are rising or falling. You will know when it is time to pay closer attention to your purchase practices and the prices that you are paying. This said the first thing you should do is managing your food inventory.

Here are some specific steps that you can take:

  • Use at least two suppliers for each item that you buy. This will allow you to keep a track of market prices. You can also reduce costs by buying more from the lower-cost supplier.
  • Ensure that your receiving controls are in place. When stocks are delivered, they should be checked for quantity. It is also important to see if they are of the grade that you have ordered. Devise a checklist that the person receiving the delivery can use.
  • Negotiate with your suppliers. You can sign long-term contracts for a reduction in the prices, or you can team up with another restaurant in your area to buy ingredients in bulk and then divide them. Learn here some useful techniques to negotiate with your suppliers.
  • 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, and especially herbs, don’t require a lot of care or a green thumb. Also, this is an excellent marketing technique: customers enjoy the fact that the cilantro in the dishes grows in the house, or that the tortillas are fresh and home-made.
  • Wastage and theft could be an issue. It is advisable to develop standard systems and procedures to monitor this (for example, you can install security cameras in your storage area).
  • Reduce your menu. It’s a fact: customers prefer a reduced but well-organized and balance menu rather than an overwhelming amount of choices. By reducing the number of dishes in your menu you can make a better use of 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 restaurant menu. If you have a very popular dish, consider increasing the price, and if one of your dishes is not selling, reduce the rice. Keeping a close eye on which dishes are selling or not selling can help you eliminate 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 ingredients from your shopping list.

These practices, along with the food cost formula, work best when they are used on a regular basis. Remember that you should not just calculate the food cost percentage and leave it at that.

Use the information to identify the items that are leading to an increase in costs. You can then try and locate other lower-cost suppliers for these purchases. Every amount that you save will go towards increasing your profits and thus help your business grow.

It’s always inspiring to listen to other restaurant owners share their own experience. In this video, chef James Clary explains how you should properly calculate your food costs in 5 steps.

We hope this article helps you have a better grip on your food costs, but you may need a deeper assessment to identify those areas you can improve in your business. In that case, we recommend you to complete this Growth Evaluation. It’s a free quiz and completing it will take you just a few minutes. In 72 hours you will receive a complete report highlighting the areas you can transform in your business to make it grow.

 

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