Calculating food costs is a fundamental best practice for any restaurant. Knowing your food costs can inform your decisions when it comes to pricing your menu items and budgeting for ingredients and vendors — which when done right, will lead to higher profits.
That’s why it’s important that you get food costs calculations right.
In this post, you’ll learn the ins and outs of calculating your food costs. We’ll shed light on the different components that you should measure, the formulas for calculating your costs, and how to put your data to good use.
Let’s get started.
Food cost is the ratio between the cost of your raw materials/ingredients and the revenue that you generate when you sell your menu items.
There are a number of ways to calculate food costs in a restaurant. Some choose to itemize the cost of each ingredient in a dish to determine their food cost per serving.
Others calculate it using their Cost of Goods Sold (COGS), which takes into account the value of your inventory at a given time, and shows the cost of food in a specific time period. This method allows you to figure out your food cost percentage, so you can have a clearer picture of how much it costs you to make your dishes.
Let’s look at these two food cost calculations more closely below.
One way to calculate your actual food cost is by itemizing and measuring the ingredients you use per dish. So, if you’re a pizzeria and you’re calculating how much it costs to make one pizza, your food cost per serving calculation can look like this:
Dough = $0.45
Cheese = $1.99
Sauce = $0.44
Mushrooms = $0.40
Olives = $0.15
Pepperoni = $1.00
Total = $4.43
With this method, it shows that ingredient costs are $4.43 to make one pizza dish. From there you can calculate your margins and figure out how much to price your products to be profitable.
Another method is to use the food cost percentage formula, which gives you the ratio of food costs to revenue, expressed as a percentage. The food cost formula for that is:
(Beginning Inventory + Purchases – Ending Inventory) ÷ Total Food Sales
So let’s say that in a given month, your restaurant’s inventory was valued at $10,000. You made an additional $2,000 in purchases, and by the end of the month, your inventory was worth $8,000.
In that same time period, you made $12,000 in food sales.
Your food cost calculation would like this:
Your food cost percentage based on the values above is 33%, which means for every dollar you make, you’re spending 33 cents in food.
According to Restaurant Report, profitable restaurants usually have a food cost percentage of 28% to 35%, so if your food cost percentage is above that range, it could mean that you’re spending too much on ingredients, your prices are too low, or that you're not generating enough sales.
In the example above, we see that the restaurant has a 33% food cost ratio, so they’re right in the average range.
It’s important to note that this formula only represents your food costs, and doesn’t factor in other business expenses. When you include labor, Restaurant Report estimates that your expenses will consume 50% to 75% of sales. And when you add in things like overhead expenses, utilities, and rent, you’ll find that your restaurant costs will eat up a sizable chunk of your revenue.
Industry data shows that the average restaurant profit margins sit at between 3% and 9%. Full-service restaurants have their average margins between 3% and 5%, while food trucks and fast food establishments have profit margins between 6% and 9%. Meanwhile, caterers see margins between 7% and 8%.
Now that you know the basics of food costing, let’s look at the benefits of tracking this metric closely.
For starters, your food cost percentage can serve as a handy benchmarking tool. As discussed above, restaurants, on average, have a food cost percentage of 28% to 35%. Depending on how your numbers are tracking, you can get a solid idea of how your business is performing compared to others.
Knowing your food cost percentage can also give you ideas on how to improve your restaurant business. If your food costs are higher than average, then you could look into your budget and spending, then find ways to lower costs. You could, for example, switch to a different vendor, re-negotiate your terms or look at your portion size.
If your food budget isn’t the problem, then it may be a case of driving sales, in which case you can cook up ways to increase foot traffic or average order values. In some cases, it’s an issue of pricing, and your menu prices are undervalued. (More on this below.)
The bottom line is, the only way to surface these issues — and ultimately solve them — is to know your numbers.
You can’t properly calculate your menu pricing without knowing your food costs. Generally speaking, restaurants calculate their menu items using the formula
Cost per serving ÷ Ideal food cost percentage
In the examples above, the pizzeria has a cost per serving of 4.43 and a ideal food cost percentage of 33%. This translates to:
4.43 / 0.33 = $13.42
So, the actual food cost per serving of 4.43 and a target food cost percentage of 33%, the restaurant chooses to price this menu item $13.42 (or they could round up to $13.50.)
As you can see, food cost percentage is an important component of menu pricing, which is why it’s essential to get an accurate view of how much your food costs are.
Every restaurant is different, so the decision on when and how often to calculate your food costs depends on your operations. That said, Restaurant Report recommends calculating it during a specific accounting period of at least two weeks or every 28 days.
Already calculating your food costs? Here’s a quick rundown of the common mistakes restaurants make and how to avoid them.
Food cost calculation isn’t a “one a done” activity. This is a metric that needs to be tracked on a continuous basis. After all, the F&B industry doesn’t stay stagnant; it’s constantly going through menu price changes, new regulations, and trends so your menu price needs to reflect the market.
Make it a point to calculate food costs regularly (at least once a month) and then track your data over time. This will allow you to spot trends and see whether your metrics are improving (or not) in the short- and long-term.
Data in and of itself isn’t very useful. The real value lies in the insights and action you take based on the information you’ve gathered.
As such, measuring your food costs percentage isn’t enough. See to it that you’re actually doing something with that data.
For instance, if your food costs are trending up, then you may need to re-examine your budget, reduce recipe costs, or update your menu price. If your food cost ratio is going down, then you could find ways to further optimize it or consider reinvesting in other areas of the business.
Whatever the case, strive to take action on your data when necessary. Knowing your numbers is all well and good, but you won’t improve your business by just passively monitoring your data.
Another big mistake is sticking to manual processes. If you’re still counting and itemizing ingredients and costs by hand, you’re not only wasting time, you’re also more prone to human errors and discrepancies.
Address all that by arming your business with tools to automate and streamline how you track and record your costs. Consider investing in solutions like:
Restaurant POS system. A POS system enables you to ring up sales at your restaurant. These sales and transactions are recorded, so you can effectively track your revenues. In many cases, the POS solution is tightly integrated with the business’ inventory and overall restaurant management platform, so sales and inventory levels are tracked and adjusted from one system.
Inventory counting app. Physically counting your food items and ingredients is important in ensuring that the numbers you have in your system reflect what you have in the kitchen. As such, you’ll want to arm yourself with a robust stock counting app that lets you count and record food quantities and costs with ease. For best results, use a solution that works on your mobile device, so you can eliminate the need for manual tools like pen and paper.
Restaurant analytics. Why crunch the numbers by hand when you can have a trusty analytics app to do it for you? Most solutions can automatically track everything from inventory costs, COGS, sales, profits, and more, so you can focus less on running the numbers and devote more energy to strategizing and taking action.
Food costs calculator. If your restaurant management system doesn’t have a built in food cost calculator, there are a number of free ones online. With these tools, you can simply enter your inventory and sales data, and the calculators will do the rest.
Food costs is — and will always be — a critical metric in restaurant management. You should keep a close eye on it for as long as your business is running. Doing so will help you stay competitive and be more profitable.