Running a restaurant may be challenging. To be successful, it takes constant monitoring and numerous procedures, and one of the most important components of the overall operation is analyzing your cost of goods sold (COGS), which is directly relevant to your inventory, menu engineering effort, profit margin, and revenue. In a nutshell, it is the cost of food used in the preparation of your menus.
In this post, we'll go over the significance of COGs, how to calculate them, and how to reduce your COGs.
A restaurant owner may have estimated the Theoretical Cost of the menu items beforehand, but take note that this is just only an ideal expenditure and does not take into account waste, food spoilage, inconsistency, or shrinkage. Calculating a restaurant's cost of goods sold in a constant manner can help you in determining how much is spent on a certain dish in a specific time period.
What is the Cost of Goods Sold for Restaurants?
Cost of goods sold (COGs) is the overall cost of all ingredients used to prepare a menu item, which includes sauces, garnishes, and other condiments.
Calculating COGs basically comes down to calculating the cost of ingredients or restaurant inventory within a certain time period. This calculation enables restaurant owners to keep lean and maintain costs low and allows them to save money on food inventory by observing patterns and trends.
Moreover, your COGs for the same items are likely to fluctuate in a certain period either weekly, monthly, or even in a year since the cost of the product also varies depending on the season. It is critical to keep track of your COGs on a regular basis to ensure sufficient profit.
What is the formula for Good Sold?
The following formula is used to calculate Cost of Goods Sold:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)
Beginning Inventory: This is the monetary value of the inventory left from the previous period (day, week, month, or year).
Purchased Inventory: The monetary value of the inventory purchases you make for the next period.
Ending Inventory: At the end of your time period, you calculate the monetary worth of any leftover inventory.
Understanding the restaurant cost of goods sold
For clarity, let's look at an example below.
For instance, at your last month's inventory taking. There was still $8,200 worth of food costs, beverages, and other stuff in your inventory purchases at the beginning of the month that including everything that goes into making a meal plan or a drink to sell.
When you started the month, you bought $6,400 in additional inventory buy. And by the end of it, you had only $3,000 worth of total stocks.
Calculate cost of goods sold & Cost of Goods Sold Formula
COGs = Beginning Inventory + Purchased Inventory – Ending Inventory
So now, we'll equate these variables to the given formula to calculate cogs.
Beginning Inventory: $8,200
Purchased Inventory: $6,400
Ending Inventory: $3,000
COGs = Beginning Inventory [$8,200] + Purchased Inventory [$6,400] – Ending Inventory [$3,000]
Cost of Goods Sold = $1,200
This means you spent $1,200 to produce your dishes. This number should be considered as a cost and should be subtracted from your gross revenue.
How to Lower Your Restaurant Cost of Goods Sold
A lower food cost figure typically indicates a higher profit margin for your restaurant. Thus, it is a great advantage to look into ways to reduce the cost of goods sold.
This can be done by the following:
- Use software to manage inventory trends in your restaurant
- Buy food and supplies in bulk
- Cost-compare and purchase products at a lower price point
- Monitor inventory regularly
- Use a restaurant COGS calculator to save time
It is important to note that reduced COGs are not necessarily a good thing. If your COGS is $0, for example, that indicates you didn't sell anything. You want to be able to maintain consistent food sales while allocating a lesser portion of that money spent to inventory food costs. The dilemma is determining how to do so without sacrificing the quality of your menu items.
Buy in bulk whenever possible
Some restaurants buy specific products in bulk to take advantage of supplier discounts. Buying in bulk can be an efficient strategy to reduce your food cost and supplies that have a long shelf life or turn over fast in your restaurant.
Keep a close eye on menu items sell-through
That is unless you precisely track the sales of each menu item. Solicit only on quality products that you can sell within a certain upcoming time period. Analyze food sales data to determine supply requirements. Buy adequate food supplies to meet customer demand for each menu item.
Monitor inventory closely
Traditional inventory procedures leave plenty of leeway for error. Using an integrated inventory system with your menu purchase and POS can help you avoid over-ordering, saving you up to 8% on food inventory.
Reduce food waste
Food waste is often a concern in this industry, leading to excessive CoGS. If it's approaching close to the weekend and you have a lot of ingredients that will soon go bad, let your cooks get creative.
A good relationship is everything in a restaurant business. A long-time supplier of your restaurant's fish may have a lower costs rival. If you can, ask your present vendor to match the other supplier's offers in order to reduce costs.
Purchase products at a lower price point
This should be a last resort for most restaurants. Customers will notice if you serve poor-quality meals at a high price.
Finding the best deals on food supplies without affecting quality is possible. Working with multiple suppliers for raw materials is another approach to reducing expenses and low shipping costs.
Consider redesigning your menu
Having a visually appealing menu can influence customer satisfaction. The design of your menu has a significant influence on the menu items that customers order. Everything from the layout to the colors and descriptions will influence which foods people select.
Use specials and seasonal menus to keep inventory lean
Promote specials or items with excess stock to reduce food waste. Stock up on seasonal menu items and seasonal pricing to avoid wasting food. Overall, careful inventory management is the greatest strategy to reduce restaurant COGS to avoid losing money.
The COGS/Sale ratio determines your spending relative to your net profit. A lower COGs ratio is desirable as it indicates that you are spending less to make more money. It is often viewed as a sign of strong financial health.
What does the Cost of Goods (COGS) say about your restaurant?
COGs vary across restaurants depending on factors such as size and concept.
So now that after you calculate your cost of goods sold, what can you do with this number? According to some, the ideal cost of goods sold percentage is around 30-40%. However, there are still many factors to consider in your operation such as how labor-intensive your items are, how much you can charge for them, your location and rent, and other overhead expenses.
In reality, if we compare a fine dining restaurant vs. fast food, fine dining restaurants generally have a higher COGs percentage because it uses higher quality and more expensive ingredients. But these higher cost of goods sold aren't always alarming considering that they charge a premium price to cover these costs.
To ensure a successful restaurant, it is highly recommended that your restaurant's food cost should not exceed 30% of sales gross profit. Keeping COGS consistent and below 30% will ensure that your restaurant's profit margin meets or exceeds the industry average of 2 to 6%.
Example with drinks sold:
If your bar sold 20,000 dollars amount worth of alcohol inventory taking and generated $100,000 in sales over the course of a year, then its cocktail cost percentage is 20% (20,000 / 100,000 = 20%).
That means that 80% of your cocktail revenue is your monetary value.
If your venue has a liquor program, goods sold will be lower due to lower labor costs. The typical cost of goods sold for liquor programs are between 18% and 24 percent.
How to Implement a Recipe Management System
Recipe management is essential for restaurant operators to ensure dish consistency, monitor restaurant food costs, and set successful menu pricing.
Recipe costing tools automates the time-consuming processes associated with cost management. However, they are not all built with the same features. You must ensure that your recipe software is built on an invoice processing system. The invoice processing feature automates the ingestion of your invoice data -not only to meet the demands of your accounting system but also to extract line-item specifics to keep ingredient costs up to date.
With the help of recipe management software, it makes it easier to catalog ingredients and group them into recipes after invoice data has been processed and prices of ingredients are updated. It will help you track ingredients costs changes and how it affects your recipe costs.
Once you've established regular recipe costs, you can compare them to your prices and analyze profitability across entire menus and specific dishes. This comparison enables you to set financial targets and make the required adjustments to meet them, whether that means increasing pricing or finding a method to cut restaurant expenses.
Restaurant Cost Control Guide
Cost controls are an essential part of every restaurant's operation and financial performance monitoring. This process may be identified by forecasting and comparing it to the actual data. Understanding your restaurant's cost control will assist you to increase profitability. It allows you to uncover your costs and which areas require improvement, which not only saves you more money but also the time that you can allocate to other restaurant tasks.
There are five key restaurant costs that must be managed:
- Equipment and supplies
- POS systems
Below are highly effective cost control strategies for your restaurant that you should be employing:
Implement inventory management to ensure cost control
Tracking and controlling your inventory is the first step in cost control. It is crucial to keep track of the daily stock-in and stock-out, as well as the actual consumption throughout the day. Inventory management can assist you in forecasting your exact stock requirements based on your stock consumption patterns. This feature helps you reduce any unnecessary wastage caused by over-ordering. A variance between 3-5% is standard, and anything that implies excessive or even misappropriations may be occurring at your restaurant.
Purchasing Raw Materials On Credit To Cut Costs
Buying on credit is a smart choice since it allows you to run your restaurant, generate income, and then pay off the credit with the money you make. You may keep your costs under control by using limited cash transactions and making all purchases on credit through the restaurant's account. Purchasing in cash is usually in smaller quantities and might be more expensive than when purchased in bulk.
A contract with your food suppliers on an annual basis is also a great option. It would not only help you negotiate a lower price but also help you maintain consistency in the quality of your raw materials.
Yield Management Analysis of Stock Requirements
Yield management also plays an important part in food cost control as it informs you how much raw ingredients will be utilized to create a specific menu. The raw ingredients and other items should be ordered and purchased with the item's yield in mind.
Portion Control as a Means of Reducing Wastage
Overproduction and large servings are indicators of wastage that contribute to the increasing cost of food. To manage your pricing, you need to have the tools to measure the portions and implement strict protocols to regulate the size of the amount. Food plating is also important since over-serving can result in higher food prices and wastage. It is helpful to create a tracking chart based on the following parameters:
- Food Returned by the Customer
- Food Burnt in the Kitchen
- Food Spilled in the Kitchen or Floor
- Extra Portions that get thrown away
Measuring these parameters allows you to take corrective actions based on the results. For instance, if the food is being returned by the customers, you should either enhance the flavor and the quality of the item or you can start lowering the quantity size served.
Keep Direct Labor Costs Under Control by Reducing Employee Turnover
Employee turnover rates in the restaurant industry are among the highest, reaching up to 75 percent in some circumstances. To assist you in decreasing your labor costs and overall costs, you must continue to reduce your employee turnover rate. Hiring restaurant personnel takes a substantial amount of time and resources, beginning with recruiting and suitable training. Regardless of your efforts, if an employee leaves your company within the first month, all of the resources you committed to hiring them will be lost. As a result, when recruiting new employees for your company, it is critical that your primary focus be on quality hiring and providing them with perfect workplace circumstances so that they stay for a longer period of time.
Automating The Manual Processes
The requirement for a workforce is reduced by a smart restaurant management system that automates the whole ordering and payment procedure.
Having a restaurant management system that includes a kitchen display system will also significantly reduce your reliance on human labor, cutting your direct labor costs. When an order is placed into the POS, for example, it is immediately displayed in real-time on the kitchen screen.
Evaluating Your Employees' Performance to Improve Efficiency
Monitoring and evaluating your restaurant staff's performance is crucial for finding areas where they excel and others where they may improve. Determine the key performance indicators (KPIs) for your restaurant personnel and analyze them on a regular basis to ensure that they are doing their duties as intended.
Controlling Internal Thefts And Pilferage
Internal thefts at restaurants can happen in a number of ways, and restaurant managers are sometimes unable to identify the source of the thefts. Employees who are dishonest, for example, may modify the number of sales that happened on a specific day and pocket the invoice amount for themselves, or they may keep certain inventory items for themselves. To keep this under control, providing roles and permissions for each action and keeping a strict check on the daily reports is one successful technique.
Daily and Weekly Reporting To Keep Track Of Restaurant Costs
Keeping a daily log of your overall reports is one of the most important processes to follow. Another important piece of advice is to keep a regular record of your entire restaurant operation. In this case, real-time reporting is really beneficial. You will be able to retain tight control over your business and spot areas of income loss while also monitoring sales-purchase data if you keep track of the statistics and report on a regular basis.
How to go beyond COGS for more in-depth insights
The first thing on going beyond the cost of goods sold is to track individual food ingredients' direct cost changes.
For example, you can check beef prices to notice if vendors raise prices. Product price rises affect your overall restaurant's COGS and the profitability of each menu item that includes the goods.
Finding out how to cost a plate of food from your menu is another good approach to examining the impact of price changes.
Without the right tools, achieving this level of detail is tough and time-consuming, which is why many restaurants never take the time to dig down.
COGS is a delicate balancing act
Finding the right balance between food quality and COGS is critical to long-term profitability for whatever type of restaurant you manage.
The good news is that lowering your total cost of products sold isn't random. Choose a cheaper price shop, buy in bulk to save money, or even increase menu prices to enhance gross earnings on each dish sold.
The bottom line on tracking COGS
Running a restaurant business is associated with a lot of hidden costs. Getting accurate COGs calculations is a goal you have to consider. As your business grows, having a clear picture of how your operations, sales, and profitability all work together is critical for your business's bottom-line success. The cost of goods sold is one of the key metrics to help you acquire a comprehensive view of your financials and business decision-making.