This helps operators make better decisions, streamline operations, and enhance profitability.
Creating craveable dishes and providing high-quality service are crucial parts of running a successful restaurant, but so is having a comprehensive understanding of your restaurant's financials. One of the most important parts is accurately calculating food costs. This helps operators make better decisions, streamline operations, and enhance profitability.
What is Food Cost?
The first step is defining what food cost is—the total expense needed to purchase ingredients for menu items. This is inclusive of all the edible components of a dish, including spices, produce, meats, and condiments.
Determining the Cost of Ingredients
To calculate food costs, you need to establish the cost of ingredients. This means keeping records of all purchases and invoices. Consider these steps:
- Inventory Management: Maintain a list of all your ingredients, including quantities, unit costs, and suppliers. Regularly update this list to ensure accuracy.
- Supplier Selection: Collaborate with reliable suppliers who offer competitive prices without compromising on quality. Establishing strong relationships with suppliers can lead to better deals and cost savings.
- Invoice Organization: Keep track of all invoices and receipts related to ingredient purchases. Ensure that each invoice corresponds to the respective ingredients on your inventory list.
Calculating Food Cost Percentage
Once you've determined the cost of ingredients, you can calculate the food cost percentage for each menu item. This helps evaluate the profitability of a dish. Follow these steps:
- Determine Recipe Costs: Analyze the recipe of each menu item and identify the ingredients used, along with their quantities. Multiply the cost per unit for each ingredient by its quantity to calculate the ingredient cost for the recipe.
- Determine Total Cost: Add up the ingredient costs for each menu item to obtain the total cost of producing that dish.
- Calculate Food Cost Percentage: Divide the total cost of the dish by its selling price, then multiply the result by 100 to obtain the food cost percentage. For example, if the total cost is $5 and the selling price is $15, the food cost percentage would be (5/15) x 100 = 33.33 percent. The ideal range for restaurants is between 28 and 35 percent.
Tracking Variations in Food Cost
Food costs can fluctuate due to factors such as seasonal price changes, supplier issues, or market volatility. Several chains, big and small, have been dealing with this issue throughout the pandemic. For example, Darden's food costs rose from $811.4 million to $855.3 million during its fiscal fourth quarter. At Brinker International, parent of Chili's and Maggiano's, food and beverage costs rose from $270.3 million to $287.3 million year-over-year in its most recent financial quarter.
It's vital to monitor these variations and adjust calculations accordingly. Here are a few strategies to help:
a. Regular Price Comparison: Periodically compare prices offered by suppliers to ensure you are getting the best possible deal.
b. Analyze Usage and Waste: Keep a close eye on ingredient usage and minimize waste. Proper portion control and efficient inventory management can significantly impact food costs.
c. Menu Engineering: Analyze your menu and identify the high-profit and low-profit items. Adjust portion sizes, pricing, or ingredients to optimize profitability.
Gross Profit Margin
A restaurant in good standing has a gross profit margin of around 70 percent, according to Lightspeed. This means that for every $100 a customer spends, the gross profit is $70.
Here's how to calculate gross profit margin:
Gross Profit Margin = (Total Sales - Food Cost) / Total Sales
Lightspeed uses the example of a burger concept that earns $1.25 million in sales between July and September, with food costs of $400,000.
($1,250,000 - $400,000) / $1,250,000 = 0.68, or 68 percent gross profit margin.
Conclusion
Ultimately, understanding how to calculate food costs empowers restaurant owners and managers to take control of their financial operations. By implementing these techniques and continuously monitoring and adjusting food costs, you can not only increase profitability but also improve the sustainability of your restaurant.
