Running a restaurant, like any other business, boils down to the efficiency of your inputs and your outputs. You buy ingredients, labor, and space, and you sell meals, service, and experiences. Arguably, the most important input to any restaurant is the food – it’s the whole point of the game. Calculating your restaurant’s food cost, then, is one of the most important things you can do for your business.
1. Understanding Food Cost
What is food cost?
Food cost, to put it simply, is the price your restaurant pays for food. It can be divided up in three significant ways: by recipe, per month, and per restaurant (total).
Food cost by recipe calculates the cost to produce an individual menu item.
Food cost per month extrapolates the cost of each meal over the course of a month.
Food cost by restaurant calculates the total percentage of food costs for a whole menu, without respect to time.
Note: food cost is always calculated as a percentage of the value of the meal. We can’t do much with the food cost number itself.
Why should you calculate food cost?
Food cost provides visibility and control over your spend on each individual menu item. It's one of the most significant, volatile, and important operation costs of your restaurant.
You can also compare your percentages to industry standards to help you understand which meals need price or recipe adjustments. If your food cost percentage is too high, either the price has to go up or the cost has to come down. If your food cost is too low, you probably need to make the opposite adjustment.
In other words, calculating your food cost is a great way to trim some fat off your menu.
The Economics of a Recipe
As much as we’d love to cook our hearts into a dish that uses only the finest ingredients from the highest quality sources, we know it’s not always practical. Food costs, especially when compared with sales data, can help us identify where we can improve recipes to make them more profitable, or less wasteful.
Let’s assume we have a restaurant, called Steve’s Sandwich Shop. We’ve calculated the food costs of our three most popular menu items, listed below:
- Heartstopper Special – Price $14, Food Cost 25%
- The Russian Roulette – Price $15, Food Cost 40%
- BLT Supreme – Price $10, Food Cost 15%
As we can see, item one has a food cost of 25%, meaning 75% of the menu price is profit. Item two has a food cost of 40%, so only 60% of the menu price is earned, and so on. At face value, we might opt to raise the price of item two to account for its high cost. But, by pairing food cost with the sales data, we may find it’s a different story. Maybe the price point is fine, but the recipe itself needs some adjustments.
Food cost allows us to calculate the contribution of individual recipe items to the total cost, to identify what and where we might optimize or reduce expenses. Let’s say we decide that 40% isn’t cutting it for The Russian Roulette.
We calculate the cost of the recipe, and find a breakdown that looks something like this:
- Ciabatta bread: $1.50
- Chicken cutlet: $0.75
- Russian dressing: $0.50
- Lettuce: $0.25
- Bacon: $1.00
- Tomato: $0.50
- Avocado: $1.50
If we dive in further, we’d find that the avocado slices on our Russian Roulette sandwich accounts for 25% of the total cost. Rather than raising the price of the whole sandwich, maybe we should seek out a better deal on avocados instead by negotiating with our suppliers – or maybe we should replace them with something else altogether. Whatever the choice is, we can keep the price – and the sandwich – as is, while optimizing in a different way.
Food cost, thus, is an important way to make purchasing decisions for your restaurant. Since we’ve finally got the basics covered, let’s figure out how to get started.
2. How to Calculate Food Cost
Now that we’ve established the utility of food costs in our decision-making toolkit, it’s time to learn how to calculate it. There are some nuances to the process, so in this section, we’ll cover the three most common ways to calculate food cost, as well as some other important details, like calculating ideal costs.
Before we dig in, it’s important to note that just like calculating your break-even point, it takes a lot of data to do this right. The more accurate your data reporting is, the more valuable your food cost calculations will be. If you don’t have a good handle on how much money you spend on ingredients, or how much money in sales each menu item is making, it might be wise to invest in a sophisticated inventory management software to do the dirty work for you.
For the purposes of this guide, we’ll assume you’ve got this data handy.
Calculating food cost per recipe
The easiest way to calculate food cost is on a per recipe basis. By that we mean, how much it costs us to produce a particular dish. It does not include labor costs, just the cost of food.
Here’s the base formula:
Food Cost Per Recipe = Cost to Prepare/Menu Price x 100
To ascertain the cost to prepare, calculate the cost of each ingredient for the recipe. If the recipe for your Russian Roulette sandwich calls for 1oz of lettuce and 4oz of russian dressing, you need to find the price of each of those ingredients.
Going back to our previous example, let’s assume this is our ingredients list again:
- Ciabatta bread: $1.50
- Chicken cutlet: $0.75
- Russian dressing: $0.50
- Lettuce: $0.25
- Bacon: $1.00
- Tomato: $0.50
- Avocado: $1.50
The total cost to prepare would be $6.00. At a menu price of $15, our food cost is 40%. Ta-da.
Calculating Average Food Cost Per Month
As we know, restaurants aren’t run in a vacuum. Some ingredients keep longer than others, and some ingredients are priced differently from month to month. For those of us who run seasonal menus, this gets even trickier – but makes food cost calculations even more relevant.
Calculating your average monthly food cost uses the same logic as the per recipe formula (by that we mean it’s super easy on paper,) but takes a lot of data to pull it off.
For this one, you need to have a complete understanding of your monthly inventory (as in the beginning and the end), purchasing expenses, and total sales. Since this is a monthly calculation, this gives you an overview of your month-to-month spending.
Here’s the equation:
[(Monthly Inventory Value₁ + Monthly Purchases) -Monthly Inventory Value₂]/Monthly Sales x 100
WhereMonthly Inventory Value₁= Inventory value at the beginning of the month and Monthly Inventory Value₂= inventory value at the end of the month.
Let’s assume that Steve’s Sandwich Shop had these numbers for the month of November:
MV₁ = 25,000
MV₂ = 29,000
MP = 9,000
MS = 15,000
Our average monthly food cost would be 33%. Considering industry averages see average food costs hovering between 28 and 32%, we might find this extra percentage point alarming. Maybe we’re wasting too much lettuce, or we’re letting too many of our avocados rot. Maybe we can source a different brand of russian dressing to save some money.
But how can we make an informed decision on cost reduction?
The monthly food cost, especially when calculated as a run-rate (extrapolating it for a whole year for the non-accounting folks), we might find that 1-2% cost fluctuations over the course of a year are normal.
One way to account for this is to calculate the food cost for our whole restaurant. It can be a tedious endeavor, but is well worth the price of admission.
Calculating Restaurant Food Cost
We can break down calculating the food cost percentage of our restaurant into three not-so-easy steps. These steps take both direct and indirect costs into consideration.
First, we need to calculate how much we spend on ingredients. Much like we calculated the total cost of an individual recipe, calculating the food cost of Steve’s Sandwich Shop means we need to do that for the entire menu. That will yield us the total food cost. Remember, this number means very little to us on its own.
Pro-tip: calculate your food costs in batches, rather than individual items. If a head of lettuce gets you five sandwiches, divide the cost of that lettuce by five to get the individual cost.
Get a grip on total expenses
Remember how we said food cost doesn’t consider labor? Think again! This time around, labor matters – but not in the way you might think. For this step, we need to consider all of the costs built into a recipe, including time spent on production, and the money we spend on that time.
Get an idea of how long it takes to produce a menu item and multiply that by the hourly wage of the employee to ascertain the labor cost of a meal.
Next, we need to calculate our overhead. That means rent, utilities, marketing, barstools, those silly fake candles we use as centerpieces, etc. To put some rigor around this, isolate the menu food cost from the indirect costs by bucketing each of them separately. So when you get the total ingredient cost of your menu, you can add that whole number to the labor cost of the hours needed to produce each item, as well as all the other incidental costs.
Divide it all by sales
Just like the recipe cost percentage, when you calculate your total food cost, divide it by the total sales for the year (or by the total menu price, depending on your goal,) and multiply that by 100. Let’s put that into a formula:
Total Food Costs/Total Menu Price x 100
If your total food cost percentage seems off, like substantially higher or lower than you expected, consider revising your input numbers. Again, having an advanced POS system can save you countless hours here. But if you’re going by hand, be sure to check your work. You should calculate your food costs at least once a quarter.
A note on ideal costs
An important piece of the puzzle that we’ve only briefly alluded to here is the concept of ideal costs: how much a meal ideally costs assuming there’s no waste, spoilage, or theft. Ideal costs are calculated by using accounting costs and menu prices.
For example, if our recipe says to use only 1oz of lettuce for a Russian Roulette sandwich, we calculate our ideal cost based on that. If every other sandwich is made with 2oz of lettuce, or maybe half of the whole head of lettuce was dropped onto the floor and had to be thrown out, we’d factor that waste into our real cost.
You might be thinking, why would I ever care about the ideal cost? And you’d be right to think so: very rarely do we hit the ideal mark. However, the ideal cost, especially when compared to real costs, can let us know of any major discrepancies in our production, so we can adjust accordingly.
If we’re wasting tons of food, either by letting it rot or not reusing scraps, we can save ourselves some headaches and pocket change by taking action on it. Ideal costs are also particularly useful for calculating price variance, which we’ll talk about in the next section.
The precognitive power of price variance
One way to put newly found formulas to the test is to calculate price variance – the difference between your expected and actual costs. You can calculate expected costs using historical or ideal cost data.
Price variance can help you understand the true impact of waste, spoilage, or inefficiencies on your bottom line. If your price variance is beyond 10% of the expected mean, you may want to reevaluate your ordering strategies, your menu, or your recipes.
Price variance can be calculated using this formula:
(Actual Price x Actual Quantity Sold) – (Expected Price x Expected Quantity Sold) x 100
Understanding price variance can help you adjust course and avert the iceberg (no pun intended). If you notice your monthly variance increasing, you can tweak your recipes, ordering, or inventory to account for the changes before they get out of hand.
3. Operationalizing Your Data
It’s great to have all this data on hand, so it’s time to start putting your money where your mouth is. There are two major ways to get started: evaluating and updating your restaurant inventory, and reducing food waste.
Optimizing your inventory
1. Order based on historical trends
Assuming your restaurant’s been around long enough, you should order based on historical demand. If you know the winter months tend to bring in fewer customers, your inventory should reflect the decreased demand.
Leverage sales forecasting to get ahead of weather, holidays, national trends, and the economy at large, so you’re not ordering too much or too little.
2. Adapt your menu prices
When you keep track of your food costs, you can see when the price of ingredients start to rise. Adjust your menu prices as needed to account for these changes, so you’re not caught flatfooted when the global artichoke shortage doubles the price of your famous artichoke dip.
3. Bargain for bulk order discounts
When you consistently order bulk ingredients from suppliers, it’s possible to negotiate a bulk order discount, within reason. Don’t overestimate your hand though – you’ve got to be willing to give something to get something here. You might have to order larger quantities, or commit to a certain number of orders. Remember, don’t order more than you can use or store just for the sake of a deal.
4. Save some dough; make your own bread
You don’t have to order cauliflower rice and deboned chicken when you can rice a head of cauliflower and butcher a chicken yourself. Consider which ingredients in your inventory can have their costs cut with prep work. Don’t forget that prep work takes time and effort, so if you have to hire extra help that costs more than the prepared ingredients, factor that into your opportunity costs.
5. Create daily specials to utilize your inventory
Create a daily or weekly special menu item to make use of what’s soon to go bad. Not only will you get it out before it’s wasted, you’ll attract some extra attention with a limited time offer. Put your waitstaff to work and have them market your specials before your patrons order to maximize the effect.
Managing food waste to cut down food costs
Not all food costs are associated with expensive inputs and inefficient recipes. In fact, it’s often related to food waste, which we mentioned above. Food waste affects nearly every restaurant: It’s no surprise that US restaurants generate an estimated 22 to 33 billion pounds of food waste each year.
There are several ways to manage your restaurant’s food waste:
1. Reduce spoilage
Keep tabs on your inventory and a watchful eye on the condition of your food. Take actionable steps to reduce food storage by improving storage operations (like sealing bags, refrigerating perishable goods, and controlling temperature/moisture in your pantry), ordering the proper quantities of food, and employing a first-in, first-out strategy for ingredient utilization. Use the oldest stuff first, and rotate newer stuff to the back of your shelves.
2. Prep smarter to save more
Minimize as much waste as you can during food prep with common sense techniques and upcycling methods. For example, if you’re cubing potatoes, save the scraps for a soup stock or mashed potatoes. Train your staff on the importance of efficient prep so they can be as mindful of your food waste as you are.
3. Control your portion sizes
If you notice guests generally aren’t cleaning their plates, don’t bank on them taking it home in a doggy bag: adjust your portion sizes to be more cost efficient with your resources. Don’t go overboard and shrink your meals relative to the menu price, but be mindful of how often your meals go unfinished. Consider asking your service staff to make a chart to track the frequency of uncleared plates, and experiment accordingly.
4. Get creative with your leftovers
It’s rare that a recipe is 100% efficient with its ingredients, and rarer that your food stocks are totally used up by the end of the day. Get creative with your leftovers to reduce the sunk costs of unused food. Make stocks, soups, and daily specials out of your leftovers to maximize your efficiency while sprucing up your menu with more homemade ingredients.
To learn more, check out 10 Undisputed Ways to Reduce Restaurant Food Waste
Consider a food cost calculator
It’s a small investment that can go a long way. Food cost calculators can come as standalone apps, or as a part of your PoS system. There’s a lot of good reasons to get one, but the main reason is efficiency: calculating your food costs by hand and tracking each and every input, including your food waste, is a tedious and imperfect science.
A proper food cost calculator can pull in all of your recorded inputs and do the math for you, and can even factor in the quality of ingredients relative to the mission of your restaurant. For example, if you’re running a steakhouse your spend on high quality meats should be understandably higher than if you’re running a neighborhood burger joint.
All in all, a food calculator or a robust PoS system can save you hours of mental math and inventory clicking while making your operations more efficient.
Setting goals and getting started
All in all, calculating food costs is a simple way to understand how efficiently your restaurant is producing its menu. Digging further into the numbers can reveal a host of issues before they get out of hand. Consider working your food costs into a dashboard, or investing in a restaurant management software that can do it for you.
Whatever path you choose, leverage food costs to set goals, prices, and adjust your ordering as needed. Believe it or not, the more effort you put into tracking your costs, the more time you’ll have to focus on the fun stuff: running the show!