Restaurant Cost of Goods Sold (COGS) Made Simple
Ask any restaurateur and they'll tell you. Your cost of goods sold can be the most important metric for running a restaurant.
What is Cost of Goods Sold?
The Cost of Goods Sold (or COGS) is part of inventory management.
It lets you understand the total cost of producing the items on your menu. From appetizers and entrees to desserts and drinks.
COGS is different from ideal food cost. It takes factors like waste, shrinkage, and spoilage into account so that you can understand the actual cost of the goods you sell.
Knowing your COGS is essential to increasing profit margins and revenue for your restaurant.
Understanding restaurant COGS
A restaurant’s COGS takes into account every item that directly goes into producing the goods (food and drinks) you sell in a given period.
COGS is based on your inventory, not just the food cost of a dish but things like garnishes and condiments. It even includes disposables like cleaning supplies and takeout containers.
The Cost of Goods Sold does not, however, take indirect spending into account. Labor cost or the rent, utilities, and other overheads of running a restaurant are not part of the COGS.
Restaurant Cost of Goods Sold calculation
COGS = Beginning Inventory + Purchases - Ending Inventory
You can calculate the Cost of Goods Sold over a single shift, a week, or even a whole year.
Start with the value of the inventory at the beginning of the period. For example, to calculate COGS for January, start by taking inventory in the morning on January 1. Let's say this is $20,000
Add to that the cost of any purchases made during that period. This includes any orders made during January. Let’s say you receive 10 orders in January, totaling $9,000.
Finally, subtract the value of the inventory at the end of the period. In our example, this would mean taking inventory at the end of the day on January 31. Let’s say this is $16,000.
In this example, your COGS is $20,000 + $9,000 = $29,000 - $16,000 = $13,000
So, in January the cost of making your menu items was $13,000. This should be deducted from your gross profit as an expense.
You can do this calculation manually in a spreadsheet, or use a food costing app that works out key metrics like COGS for you.
What should COGS be for a restaurant?
For a typical restaurant, COGS will make up around one-third of total profits, or 30-40%.
Bear in mind though that Cost of Good Sold is not a fixed expense. It can vary over time based on factors like seasonality, inflation, and wastage levels.
It is also important to understand the breakdown of costs by item. A high Cost of Goods Sold isn’t necessarily a sign of a problem - so long as the menu price reflects that.
Equally, a low COGS doesn’t necessarily indicate a profitable item. In fact, a COGS of $0 would mean you haven’t sold anything!
Maintaining a healthy Cost of Goods sold is a balancing act between reducing inventory spend, maintaining quality, and increasing sales.
How to manage cost for restaurant business
Knowing and understanding the Cost of Goods Sold is the first step to reducing costs - and improving profits - in your restaurant.
Once you understand COGS, you can also calculate your COGS ratio. The COGS ratio is The Cost of Goods Sold as a percentage of total sales.
You should monitor COGS at least weekly. Over time, your COGS should be reflected in menu prices so that you are making a good overall profit margin.
How do restaurants reduce COGS?
There are many ways restaurants can work on reducing the total Cost of Goods Sold. They include things like:
Keeping an eye on sell-through
The obvious way to lower COGS is to make sure you’re only buying as much food inventory as you actually need. Keep an eye on inventory and sales reports to ensure that you don’t over-purchase and end up with spoiled inventory.
Wastage is, to some extent, an inevitable part of running a restaurant business. You can reduce wastage though, by monitoring sales, using dynamic menu deals to sell excess inventory before it spoils, and training staff to use the correct storage methods.
Another obvious way to minimize COGS is to save on the inventory you purchase. Whilst maintaining supplier relationships is important, shopping around can open the door to renegotiating with your current suppliers. Compare prices for the best supplier to meet your needs so that you can minimize spending whilst maintaining quality. You can even use different suppliers for different products.
Buying in bulk where possible
Purchasing non-perishable items in bulk can net you some of the best deals around, and give you bargaining power with suppliers. Ensure you have the storage space available to store items bought in bulk. Check the shelf-life of the goods you purchase in bulk to avoid spoilage. Shelf-stable food and cleaning supplies should last a long time in a restaurant.
You can keep inventory costs down by changing your menu with the seasons. Focussing on produce that is fresh and in season gives you the best chance of saving money. Local seasonal ingredients are usually better for the environment too.
Menu engineering is the process of dynamically planning and updating your restaurant menu based on factors like cost, popularity, and pricing. Elements like color and layout can have an impact on the items customers choose to order. You can engineer your menu to encourage sales of your most profitable items.
Taking accurate inventory
Your Cost of Good Sold is based on inventory levels. Making your inventory counts accurate is an essential part of understanding and reducing your COGS. Using inventory management software gives you the best chance of recording accurate inventory levels. You can always understand exactly where you are with restaurant inventory and cut the risk of over-ordering.
Tracking inventory trends
Inventory software can also help you to track - and predict - inventory and ordering trends over time. This can help you to further keep a handle on inventory ordering and reduce spoilage.
Do you know your restaurant's Cost of Goods Sold?
COGS can fluctuate over time - not just seasonally or year-on-year but even weekly, monthly, or by shift. That’s part of the reason it is so important for restaurant owners and managers to closely monitor the Cost of Goods Sold.
The lower your COGS is, the higher the restaurant profit margin you’ll see.
Equally though, you must balance lowing your Cost of Goods Sold with maintaining the quality of food your customers expect.