Restaurants typically have razor-thin profit margins, and not having a handle on your costs of food can eat into this already slim percentage.
It is easy to create dishes and price them to allow for a particular profit margin. However, it is also easy for waste, theft, spillage, and other forms of loss to quickly render these calculations inaccurate.
To better control the amount spent on ingredients, restaurants should calculate how much they spend on food compared to sales—a figure known as the food cost percentage—and then compare this to their ideal food costs.
This is where a food cost calculator, like the one developed here, will be invaluable.
We’ve built this simple tool to help you instantly work out how much you are overspending on food. Once you have a handle on these figures you’ll be able to start making savings and increasing your margins…..check it out, you’ll be surprised how much you can save!
You are 18,32% over budget, which equals $110!
of all sales
more than planned
Once you have a good handle on these calculations, you can take steps to reduce costs and increase your restaurant’s profitability.
How to Calculate Your Food Cost Percentage
First, let’s look at how to calculate your food cost percentage.
The equation is simple—you just have to total your sales over a defined period, and then divide this by the cost of ingredients required to make these sales.
This means you need to know:
- The value of your inventory at the start of the period.
- The value of ingredients added to inventory during the period.
- The value of your inventory at the end of the period.
- Total sales during the period.
Then enter this information into the following formula:
Food Cost Percentage = (A + B – C) / D
Food Cost Formula Example
Here is how a pizza delivery restaurant would calculate its food cost percentage over a week.
- The owner would first perform a stock take to discover the value of ingredients in the restaurant. For our example, this number comes to $7,000.
- The restaurant then needs to go about business as usual for the week, while noting the value of any stock added. Let’s say that the owner adds $2,000 worth of stock.
- At the end of the week, the restaurant should perform another stock take. The value of ingredients in the restaurant at the end of the period is $6,700.
- The owner looks at their POS to see they have made $5,500 in sales during the week.
Putting these figures into the above formula, we can see that the restaurant’s food cost percentage is:
Food Cost Percentage = ($7,000 + $2,000 – $6,700) / $5,500
Food Cost Percentage = 42%
This means the owner spends 42 cents on food for every dollar the restaurant brings in. The question, now, is what can the restaurant owner do with this figure? How can they bring it down?
What is Your Ideal Food Cost Percentage and Cost Per Serving?
The above calculation considers all the ingredients that come into and leave your restaurant. As well as the food you sell, this also includes waste, theft, over portioning, and anything else that can result in food going missing.
To get the most use out of this figure, you need to compare it to your actual ideal food cost percentage—a number that only considers the cost of ingredients in the dishes you sell. This will show if you are wasting more than you are comfortable with.
To work out your ideal food cost percentage, you need to know your food cost per dish; and to discover this, you only have to add up the price of all the ingredients used to create one. Do the same for all menu items.
Cost Per Dish = (Sum Total of All Ingredients Used in Dish)
Once you know the cost, per dish, of all items on your menu, you can find out your ideal food cost percentage—calculate the cost of the food that goes into all your sales over a defined period, and then divide this by total sales.
Ideal Food Cost Percentage = Cost of Ingredients / Total Value of Sales
Example of Ideal Food Costs:
Let’s go back to the example of a pizza restaurant to see how they can work out their ideal food cost percentage.
- The owner needs to know how many sales they made in the defined period. From the above calculation, we know the pizza restaurant made $5,500 in sales the previous week.
- The owner then needs to calculate the actual cost of the ingredients in these sales using the cost per serving and multiplying this by the number of servings sold. The owner would need to do this for each dish. For our example, let’s say this comes to $1,900.
The owner then needs to divide the actual food costs (B) by the total sales (A).
Ideal Food Cost Percentage = Actual Food Costs / Sales
Ideal Food Cost Percentage = $1,900 / $5,500
Ideal Food Cost Percentage = 34%
This means that in an ideal situation, the pizza restaurant owner would only spend 34 cents on food per dollar earned—quite a lot less than the 42 cents per dollar earned they are actually spending.
By bringing the actual costs of food down—and without doing anything that will affect their ability to make sales—the restaurant will automatically increase profitability.
Optimizing Your Food Cost Percentage
There are plenty of steps you can take to bring your actual food cost percentage closer to your ideal food cost percentage.
First, you have to identify where food is going missing.
If your problem is that your ingredients are going bad before you can use them, you’ll need a different solution than if you’re over-portioning your dishes without realizing.
Here are some things you can do to optimize your food cost percentage:
- Buy perishable items in small batches, so you are more likely to sell them all before they go bad.
- Introduce a more effective preparation process to ensure the correct amount of each ingredient goes into each dish.
- Design better storage processes to reduce waste.
- Use the first-in-first-out system, so you always use older ingredients before newer ones.
- Reconsider whether it is worth having items on your menu that don’t easily sell and frequently result in waste.
- Use the same ingredients across a wider range of dishes, so you are more likely to use them all.
- Promote items that use up ingredients close to going to waste.
- If you give away a lot of freebies and samples, either take these into account when calculating food costs and pricing or reduce the amount you give away.
- If people are frequently returning dishes, look into why and make changes.
- If you think you have a problem with theft, take steps to counter this.
Shopping around for new suppliers or cheaper ingredients is another possible step you can take to increase your profit per dish.
However, before implementing a change, consider how it will affect your business. Some of these steps may result in fewer sales or less happy customers.
For example, consolidating your menu may upset the few customers who enjoy the items you remove. Likewise, giving away tasters and freebies can improve the customer experience, which may result in people returning to your restaurant and more overall sales.
Only you can decide if the extra costs are worth the savings.
Getting Your Pricing Right
When pricing your menu, you must consider your food cost percentage and also how the price will affect sales of the item and your menu as a whole.
Here are some examples of when you might be okay with a high food cost percentage on individual items or your entire menu:
You Sell Food at a High Price
Fine dining restaurant owners may accept higher food costs as quality ingredients are an essential part of the experience. These businesses earn a lot of money on each dish sold.
For comparison, food costs of 40% on an $80 lobster dish will leave $48 to cover other expenses and profit, while food costs of 28% on a $20 spaghetti dish will only leave $14.40.
Sell Popular Dishes at Low Profit
Many restaurants sell popular items at a lower profit, or even at a loss, as they know this will bring people into the restaurant. They can also then upsell on other items to bump up overall profit.
Combine Items into Sets or Meal Deals
Similar to the above point is creating meal deals or sets. For example, a burger restaurant might not make much money when it sells a burger on its own, but when it combines it with fries and a drink—two items that typically have low food cost percentages—they will bring the overall food cost percentage up.
Your Restaurant’s Competition
You also need to consider your competition. If you are in an area with other restaurants selling a similar product, it may be impossible to raise your prices enough to get the food cost percentage you want.
Benefits of Knowing Your Food Cost Percentage
It is essential to have a good understanding of all your restaurant’s costs, and food cost percentage is no different.
The Potential for Large Profit Increases
The two most significant expenses for most restaurants are labor and food. Any way you can reduce the amount you are spending on these two things is going to help you stay profitable.
Even taking your actual food costs just a couple of percentage points closer to your ideal food costs can result in huge savings over the long term—in our pizza shop example, the difference between actual food costs and ideal food costs was $400 per week.
If the restaurant can get actual costs to the same level as ideal costs, they will save around $1,600 per month and $20,800 in a year. Even if they can only get halfway to ideal costs, they will still save over $10,000 annually.
Better Menu Pricing
If you don’t know how much you are spending on food, you are just estimating a price that may be profitable. Discovering your costs lets you price your menus more strategically, thereby maximizing profit.
You can remove items that aren’t making you much money or create deals whereby you pair less profitable high-selling items with more profitable, but less popular, ones.
Keep on Top of Price Changes
By continually calculating your food cost percentage, you will stay on top of how changing ingredient prices are affecting your bottom line. This will allow you to adjust your dishes or menu prices accordingly.
As a restaurant owner, throwing out food is throwing out money. The less you waste, the more money you will save. Plus, reducing waste also has a positive environmental impact.
Knowing how your actual food costs and ideal food costs vary is a crucial part of building a successful restaurant. It can help you price your menu more effectively, and it shows if you have any problems in your process that you should address. Use the food cost calculator and formula above to get an accurate view of how much you are spending.
Looking for a way to grow your restaurant? Check out our Restaurant Marketing Ideas post. Want to build an app without coding that allows customers to order directly from their phones? Check out our online food ordering system.