Food costs are one of a restaurant's most significant operating expenses. It accounts for 28% to 35% of the turnover rate in the restaurant industry. The reduction of food costs is crucial. Because of perishable ingredients and unexpected sales, controlling food expenses at restaurants can be challenging.
According to a study conducted by Tostivint et al., (2016), food waste in the restaurant industry is quickly becoming a major problem given its recent contribution to overall food waste of approximately 12%. All of this waste might have a negative impact on the restaurant's profitability.
Fortunately, there are ways to reduce food costs and minimize wastage. Setting goals and implementing minor adjustments like monitoring inventory, changing food orders, and effectively optimizing your food may have a huge impact on your profit margin. This article discusses reducing food costs, reengineering menus, and tracking the ideal cost of goods sold.
How to reduce food costs in your restaurant
Most restaurant operators are unable to manage their finances and experience losses as a result of their inability to control their restaurant expenditures. Failure to keep costs under control might result in significant losses and the eventual closure of a restaurant. Restaurant cost control is significant because it helps you to pinpoint the source of your spending and take corrective and preventative steps to maintain a good expense-to-finance ratio.
How to control the cost of food
When it comes to carefully price your menu, food costs are crucial. Understanding and controlling food prices is essential for your restaurant's success. Though perceived value and market demand are important factors, actual food costs are what dictate where a menu item's pricing should be placed to generate a profit. To establish menu prices, plate costs and the restaurant's food cost percentage target must be considered.
Tracking and monitoring the food that comes into your restaurant is the first step in lowering food costs and wastage.
Manage your inventory closely and conduct daily and weekly reports of food inventory
While calculating restaurant food costs might be time-consuming, sticking to on budget and keeping track of your spending can help you save time, money, and food in the long run. Inventory, cost of goods sold (COGS), and food cost percentage are all factors to consider when calculating food costs. These variables may assist you in staying on track with your budget and profit and loss statement.
It's imperative to keep track of daily stock-in and stock-out as well as real usage. Monitoring the difference between the Ideal Stock and actual physical stock can help you determine if your restaurant is wasting too much food.
A smart Stock and Inventory Management System is useful since it allows you to track Variance, generate real-time data, and define re-order levels for particular stock items. In this way, you avoid over-buying or under-ordering by only ordering the products when they reach a particular re-order threshold.
Use inventory tracking to reduce waste and purchase inventory at the right level
Avoid impulse buying on things you don't need, this is one of the simplest methods to reduce food costs. Managers can improve their purchased inventory management by minimizing order waste with data-driven suggestive ordering.
Use historic and projected sales and inventory data to make better purchasing decisions.
What’s the difference between food cost and prime cost?
Food cost is not the same as prime cost. Food cost is simply the cost of food incurred by your restaurant after all external and hidden costs have been taken into account. It is used to calculate prime costs, so they must be accurate.
Prime cost, on the other hand, is the restaurant's COGS plus labor over a period. Food, wine, and other drinks, packaging, and other costs related to producing, serving your menu items, and packaging for take-out and delivery are all included in your restaurant's COGS. Additionally, the labor costs include salaries, hourly wages, taxes, and benefits.
Calculate your cost of food
Here's the formula to calculate the cost of food:
Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales)
Follow these steps to calculate your cost of food.
Determine Inventory Usage
First, calculate your inventory usage to determine your food cost. This is the total amount of product consumed by your restaurant or bar during a given time period. Use the formula below to calculate your Inventory usage.
Inventory Usage = Beginning Inventory + Purchases - Ending Inventory
What you have on-hand before opening on the 1st of the month is your beginning inventory. The remaining inventory at the end of the month is your ending inventory. You must also include any purchased inventory during the month.
For instance, in your fine dining restaurant, you used $1,200 in inventory this month.
Find Total Sales
The point of sale system at your restaurant or bar can track sales automatically. If you don't have a POS system, you can manually calculate sales by-products.
Multiply the total number of products sold in a month by the sales price. For an $8 salmon plate, for example:
30 sold plates x $8 sales price = $240 (Total Sales for Salmon)
Do this for every good sold, then add them all together to determine the total sales for your restaurant or bar. Now, let's say your total monthly sales were $3,000.
Use the Food Cost Formula
Finally, using the food cost formula and the two values you obtained in the previous steps, you can compute your actual food costs figure. Consider the following scenario:
$1,200 (Inventory Usage) ÷ $3,000 (Food Sales) x 100 = 40% (Food Cost)
The cost of food is 36%. This means that a dish costs your business on average 36% of the selling price to make.
What is your restaurant food cost percentage?
You should not be one of the restaurant owners who ignore the food cost %. Maintaining the lowest possible food cost percentage (without losing menu quality) results in more gross profit to cover other expenditures and have gross revenue left over.
Food cost percentage is the sales-to-cost-of-products-sold ratio that can help you determine whether you're charging your customers the best price.
The food cost % formula is:
Food Cost % = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales
It is common for food and beverage vendors and operators to keep food costs between 28% and 35% of the cost of goods sold percentage. There's not a magic number for a restaurant's food cost percentage; it varies based on the menu, overhead and operating costs, and many other factors.
How to reduce food and beverage costs
One technique to control restaurant expenses is to compare ideal and actual food costs to discover food waste issues. Here are five more things you can do to make more money and enhance your bottom line.
Implement restaurant food cost controls
There are several strategies to cut restaurant costs. Now that you know how to calculate restaurant food costs and determine if your food cost percentage is on track for for-profit goals, you can implement controls to get — or keep — that percentage where you want it.
Eliminate bottlenecks with automation
Introducing automation into your restaurant operation is one of the most important parts of running a streamlined and well-organized restaurant business. Customized forecasting based on previous data can help you reduce food cost and enhance restaurant operations over time. Food cost restrictions might be better controlled by automating key operations such as tracking and data collection for forecasting.
Forecast sales all year round
Every restaurant must forecast yearly sales. Using configurable restaurant management software, you may forecast sales by location and timeframe. By comparing daily sales trends from this year to the previous period year, automated forecasting drives the "smart stuff" in operations. Previous sales data influence smart inventory decisions, and sales forecasts drive smart prep, resulting in little waste during meal preparation.
Consider the distinction between a Friday happy hour and a Sunday brunch. You may monitor how sales change throughout the day by evaluating historical sales for each time period, allowing you to labor-intensive your items where it is most required. This would necessitate obtaining historical average sales amount data every time period, which without restaurant operational reporting software may be exceedingly time-consuming and difficult.
Set goals and track progress
Setting thresholds and optimal cost variations for your restaurant business is one strategy to manage restaurant costs.
You may discover operational flaws, leftover inventory, identify loss and theft, and rising commodity costs by tracking the differences between your ideal and actual food cost. Don't ignore the cost of spoilage; reducing waste is an important part of lowering the cost of products sold.
Strive for your ideal food cost and track what works and what doesn't in order to get your restaurant's cost closer to your target.
Train your staff to keep food costs in mind
Are your cashiers trained to address queries from customers and to use the POS's beginning inventory process to avoid mistakes? Orders that are poorly prepared result in a lot of waste.
Train your cooks and line employees on portion size control, and emphasize the need of following recipes.
What is the best way to measure sauce, cheese, or meat? Is it necessary for employees to use a ladle, a scale, or another specialized measurement device? It's one thing to insist on a method for combining menu items, but it's quite another to hold to it.
Provide clear standards for employee meals
Most restaurants have a policy for free or discounted employee meals. Some restaurant owners give all employees with a free basic staff meal, while others allow employees to pick their meals and pay a discounted menu price.
While cutting staff meals may sound to be a simple method to save money on food, it will inevitably affect employee morale. Your staff works long hours in a fast-paced environment, so providing free or discounted meals daily is an essential part of team building.
Set free meal and discount thresholds, and make sure your employees are aware. Meals should be delicious, balanced, and not extravagant. filet mignon should only be served on special occasions.
Work with your food suppliers
Prices are always changing and profitability can be hampered by convenience. Ordering the same products from the same vendor over and over again is an easy trap to fall into. So, make sure to stay vigilant. Your connection with your supplier will have a significant beneficial impact on your expenses.
You can reduce costs if you know how much food your restaurant needs. If at all possible, compare pricing. For quality products, ask your current supplier for a discount or price match on a dollar amount.
Another option is to buy in bulk but split up the shipment. Ordering in bulk can save money, and be cost-effective but spoilage can offset savings. Freshness and long shelf life are ensured via staged deliveries, which reduce wastage resulting in saving money.
Monitor vendor price changes
Your suppliers' pricing fluctuates a lot depending on the season and demand for certain things. These changes may appear minor from week to week, but they can add up to a significant amount of money over time.
Tracking pricing fluctuations can also help you determine if your plate costs need to be recalculated, which, as you may know, may make or break whether you meet your food cost percentage target.
Automated invoice processing simplifies price tracking. Digitizing invoice data helps you spot inconsistent vendors and negotiate net pricing.
Reengineer your menu
Many restaurants analyze their menu items carefully and use the fundamentals of menu engineering to eliminate expensive and unpopular menu items. You can instantly analyze menu item popularity vs profitability by gathering sales mix polls from your connected POS and integrating it with recipe costs in your restaurant management software.
You may make cost decisions about adjusting recipes or components by looking at whether products are underpriced or overpriced. If you're selling a significant number of low-margin items, for example, and your food cost percentage is increasing, you may either increase menu prices or change portion sizes. Menu engineering also allows you to take advantage of menu possibilities, such as advertising a menu item with a high-profit margin but low sales volume. Understanding the relationship between menu item popularity and profit allows for data-driven decisions that reduce food expenses.
Lockdown your restaurant inventory management processes
Taking inventory is time-consuming and may distract you from creating tasty plates and a welcoming atmosphere. In general, restaurant inventory management affects your overall food costs.
Food waste and higher COGS percentage might result from poor inventory monitoring, thus it's critical to do it correctly. You can closely monitor food prices by doubling down on inventory control. This is especially true if you discover that using Excel to manage your restaurant inventory is no longer an option.
Master your restaurant's inventory taking with these tips:
- Verify all incoming orders against invoices to ensure they are correct. Note discrepancies to get vendor credit.
- Take inventory frequently to avoid over-ordering and better understand the restaurant's cost of goods sold.
- First-in, first-out (FIFO) means using the oldest ingredients first. It reduces spoilage.
- Financially challenged? Use ending inventory and vendor agreements to run a tighter ship.
Write it in the rulebook
Don't allow the rest of your team to undermine your attempts to save money on meals! Make cutting food costs a restaurant policy, and make sure your employees know what it means and how they can assist. You can even decide to reward staff who assist you meet your food cost goals.
Watch portion sizes
Control food costs and waste by limiting portion sizes. If many plates are cleared with food still on them, you may be serving too much (or the food may be subpar, which we won't discuss today).
You can also survey regulars or ask trusted regulars about portion sizes during the entire process. The temptation is to keep serving larger portions so customers can take leftovers home, but remember that to-go containers are also expensive.
Be consistent when calculating inventory
When calculating inventory, do so at a consistent time of day. For example, it's best to figure inventory at the beginning or end of each day. This helps you maintain consistency when calculating inventory and food cost percentages.
Checking your inventory regularly can tell you how fast your food is being used or wasted. If your wasabi goes unused and spoiling, reduce your food order to reduce food waste. If you run out of mozzarella cheese before dinner service, you need to increase your food order to have a higher cost of goods sold percentage.
Controlling restaurant food expenses is pivotal to the survival of your restaurant business. Although there are several strategies that can be employed, the methods listed above will assist you in lowering food costs and enhancing your restaurant's bottom line.
Consider a complete, restaurant-specific inventory management system that's part of an all-in-one restaurant accounting and operations platform if you want to conveniently track your food expenditures and enhance your bottom line.