Know your food costBefore digging into the details, let’s first nibble on some basics. You’re probably familiar with the term food cost percentage, but what is it and how is it calculated? Food cost percentage is simply the ratio between your ingredient cost and the revenue generated per dish. Do you know your food cost percentage? While food costing may sound time consuming and complex, simple math will give you the information you need to understand the profitability of your menu items. Let’s break the process down into two easy steps:
- Step 1: Determine your cost of goods sold (COGS) – Take the value of your inventory at the beginning of the month ($25,000), add the purchases you made that month ($3,000), subtract your ending inventory for the month ($24,000). This gives you a $4,000 COGS. $25,000 + $3,000 – $24,000 = $4,000 COGS
- Step 2: Find your food cost percentage – Divide your COGS ($4,000) by the sales made that month ($12,000). This gives you a food cost percentage of 33.3%. $4000/$12,000 = .333 food cost percentage
What you should know about your food cost percentageWhile a .333 percentage falls within the profitability guidelines of between 28% – 35% food cost, there are other factors that you need to take into consideration. What type of restaurant do you run and who are the clientele that you serve? Let’s take examples from opposite ends of the spectrum. If you’re a casual restaurant, where pasta dishes fly out your kitchen’s door, you’re food cost percentage should be around 28%. As one of the most economical dishes to make, not to mention the savings when buying in bulk, you can have a lower cost of food percentage and remain profitable. What if you’re a fine dining establishment and people flock to your door for your mouth-watering surf and turf? Given the higher cost of ingredients to create these dishes, your food cost should be around 35%. Now that you know your food cost percentage, let’s take a look at how inventory and menu pricing comes into the picture.
The impact inventory has on your profitabilityNot only do your dishes delight your customers’ palettes, they are also nutritious and healthy. With that being the case, why should your inventory processes be on life support? Without exact inventory counts, it’s nearly impossible to get a clear view of your food cost percentage. If you’re still manually counting inventory, it doesn’t have to be that way. You can recoup time spent by implementing technology that gives you control. In fact, a recent Tenzo blog recommended MarketMan’s Inventory solution as having benefits that go beyond efficient stock-takers. An inventory management system automates and simplifies the process, giving you the accurate figures you need. With the right system, you’ll have total control over your inventory. You’ll gain a real-time view of your inventory quantity and value, as well as potential waste and theft. And that’s not all, you’ll be able to optimize your ordering process, and identify your most and least profitable menu items.
Price each dish to perfectionNow that you have a precise food cost percentage, it’s time to take a look at your menu. Are your dishes priced for profitability? If not, it’s time to dust off your menu and make pricing adjustments. Ingredient prices rise and fall, and you need to keep tabs on which ingredients are the most profitable and which ones are taking a bite out of your profitability. For instance, when an ingredient you use to create a few of your dishes begins to get pricey, what are your options? If possible, you can swap the ingredient for a more cost effective one, tweak the recipe to use less of the ingredient, or increase the price of the dishes that contain the ingredient. Ensuring your menu is priced for profitability doesn’t stop there. Take a look at your competition. Let’s go back to our previous example between a casual restaurant and a fine dining establishment. If your casual restaurant serves more cost-effective comfort food than your closest competitors, you’ll want to price your dishes a bit lower. Alternatively, when your upscale restaurant draws diners from near and far, you’ll want your menu prices to reflect the quality and experience you deliver. Finally, you need to promote your high-margin dishes. When it comes to menu placement, there are a few options at your disposal. Graphics, color and borders will draw your diners’ eyes to your most profitable menu items. Another trick is to use “The Golden Triangle”. This menu design psychology ensures your most profitable menu items are in the center, top right and top left of your menu. This placement is where your diners’ eyes tend to gravitate when first looking at the menu. Promotion doesn’t end with menu design. Make your most cost-effective dishes the special of the day and continually rotate these dishes to keep them fresh and appealing. Make sure your waite staff promotes not only the specials of the day, but also your other high-profit dishes. Advertise your revenue-generating dishes with flyers, groupon and locally distributed advertisement booklets – to name a few. Regardless of the type of restaurant you manage, knowing your food cost percentage is the first step to ensuring profitability over the long run.
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