In the article, I’m going to cover everything you need to know about food costs: benefits of a food cost calculator, why it’s important, common pitfalls, formulas, key strategies, and how to calculate costs at scale. To quickly calculate your food costs, here is a calculator to help you out.
How Do You Calculate Food Cost Percentage?
Food cost percentage is the ratio between your ingredient cost and the revenue generated per dish, which indicates what menu items are most profitable and the most wasteful. Here’s how to calculate it:
Step 1: Determine your cost of goods sold (COGS), which is the dollar value of the items you have on-hand during a specified period. At the MarketMan Bistro, we calculate inventory on a monthly basis.
- Take the value of everything you have on-hand in your inventory at the beginning of the month ($25,000)
- Add the purchases of every ingredient, equipment, or tool you’ve made this month ($3,000)
- Subtract your ending inventory value for the month ($24,000)
Beginning inventory $25,000 + Purchases $3,000 – Ending Inventory $24,000 = $4,000 COGS
- Divide your COGS ($4,000) by the sales made that month ($12,000)
- Multiply by 100 and this gives you a food cost percentage of 33.33%.
Pro tip: What is a healthy food cost percentage?
The average food cost percentage is around 30% for full-service and quick-service restaurants.
Video: How to Calculate and Minimize Food Costs
Restaurant Profit Margins vs Food Cost Percentage
Profit margins calculate how much your restaurant is generating or losing based on your operational costs. Your food cost percentage indicates how much your dish’s ingredients cost as a percentage of your revenue. Since the price of your ingredients and menu items dynamically change week over week, calculating each dish’s individual profit margin is not a valuable use of time.
Gross profit is the difference between the price you sell the dish and the cost of goods sold.
Gross Profit = Total Sales – Cost of Goods Sold (COGS)
Net profit is calculated when you deduct operating expenses such as salaries, utilities, rent, and equipment from your gross profit, which is a more realistic value of how much your restaurant is generating.
Net Profit Margin = ( Revenue – Cost ) / Revenue
Why Industry Averages Are Not Effective
The average food cost percentages will differ depending on the clientele you serve and the way you operate. For example, pizzerias that cook in bulk with a handful of the same ingredients can see food cost percentages of upwards of 40-50%. On the other side of the spectrum, a fine dining establishment with diverse menu offerings can see an average food cost percentage of 10%. At the end of the day, you need to define what success looks like for your own restaurant depending on your location, concept, and staff.
7 Reasons Why Calculating Food Costs Manually Will Hurt Your Restaurant
1. Humans Make ErrorsWhile your hands are full managing your employees, cleaning up spills, and handling orders, there’s a high chance that you’ll enter a number or two incorrectly, which can negatively influence a key business decision like removing a menu item. Technology can help make judgment calls on accurate data rather than gut feeling.
2. Inventory is a Separate Step (But Doesn’t Have to Be)Manually calculating food cost happens entirely outside of the inventory process (which you may also be doing manually). But today’s inventory management software lets you do it all in one place.
3. Costs Change Quickly and Seasonal Fluctuations are Difficult to PredictYour suppliers are changing your ingredient prices daily, and it’s nearly impossible to keep track of every price change. Certain ingredients are significantly more expensive when they’re not in season or if there’s a rare national shortage. When prices do change, it’s integral to quickly find a similar and comparably priced replacement ingredient or charge more for it.
4. You Don’t Get Real-Time Cost Alerts
If you don’t happen to notice that a supplier is now charging you 5% more for an ingredient, you won’t know to update your food cost. Instead of being reactive, you can be proactive with a recipe costing software like MarketMan. Our software will alert you when your ingredient prices change and will automatically recalculate the cost of the dish dynamically so you have access to the most accurate data available.
5. It’s Time ConsumingThe time you spend calculating food costs manually is the time you’re not spending on other aspects of running your restaurant. And the more you struggle with the math, the more time it will take. With so many responsibilities in running a restaurant, there’s no reason why you should be wasting time on food cost calculations when there’s software to make your life easier.
6. Menu Profitability Calculations are DifficultBeyond calculating the cost for each dish on your menu, you also need to be aware of which items on your menu are dogs, or unprofitable and unpopular.
Digging manually into past sales can be a time-sucking nightmare. The right tools can help you identify the stars on your menu, or items that are popular and profitable.
MarketMan’s menu profitability report can identify your food costs, menu profitability, and your most sold items.
7. Cutting Corners Can Be Costly
You might be tempted to skip on insignificant ingredients like a sprinkle of salt or a dash of oil when inputting your calculations. While it may seem trivial, the sum of the costs can prove to be significant. The less you trust your own data, the less useful the whole exercise will be.
Benefits to Calculating Food Costs Regularly
It Keeps You Accountable
While it’s easy to calculate the price of ground beef and eggs that go into your famous hamburger recipe, the seasoning, the sauce, and the extra toppings can chip away at your food costs over time. While they may seem insignificant at first, an accurate food costing tool can show you how much each dish actually costs, to the tee.
It Helps You Build Better Menu Items for Your Restaurant Concept
If you run a steakhouse, your food costs for top-quality meat will be understandably higher than if you run a taco shop. Knowing the quality of food (and price point) that your customers expect can be helpful when assessing new potential menu items. Then using a food cost calculator to assess what the menu item would cost can help you determine whether it’s a good fit for your menu lineup or not.
You’ll Make Smarter Data-Driven Decisions Confidently
A food costing tool provides a birds-eye-view of your restaurant’s profit potential. You can trim the fat on menu items that don’t make sense and conversely keep items that bring in more foot traffic (even if they’re not as profitable). Whatever the scenario may be, accurate data can help you make smarter business decisions at ease.
Now that you have a firm understanding of how to calculate your food costs, here are a few ways to optimize your menu.
Pro Tips & Strategies:
What to do when your ingredient costs rise:
- Call and negotiate prices with your food supplier
- Use less of the said ingredient
- Find an alternative, cheaper ingredient
- Increase the menu price
Promote your most profitable dishes:
Designing an optimized menu is integral to selling more of your profitable dishes. Use “the golden triangle” methodology to place your most profitable menu items 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. Knowing this, promote your most cost-effective dishes as the chef’s special of the day and continually rotate these dishes to keep them fresh and appealing. Ensure your wait staff promotes not only the specials of the day but are also well-versed in selling your other high-profit dishes.