Food Cost Formula Explained
By: rkapur
Read in 5 minutes

Managing Your Food Cost to Stay in Business

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Restaurant entrepreneurs know that product stocking is the highest cost. Monitoring and controlling your food 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 in 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 costs and ensure that they remain within reasonable limits? 

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

Food Cost Formula Explained

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%.

Of course, when you are using the food cost 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.

You can download an easy-to-use food cost formula template here.

Follow These Rules

Now that you have your food cost percentage, how can you use it to track 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.

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.

Wastage and theft could be an issue.
It is advisable to develop standard systems and procedures to monitor this.

Using The Food Cost Formula

The food cost formula works best when it is 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 cost in 5 steps.

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