Most restaurants operate on a profit margin of just 3% to 5%, which doesn't leave room for wasteful spending. That’s why food cost control should be a key objective for any restaurant. Keeping food costs manageable is a great way to ensure expenses don’t eat into that already razor thin profit margin.
Improving food cost control for restaurants
There are a number of changes you can implement at your restaurant today to ensure you’re only spending what’s necessary on food, therefore maximizing your profit potential for every dish you sell. Here’s what you need to know.
What is food cost control?
Cost control is the ongoing practice of taking measures to reduce business expenses as a way to increase profits. Food cost control specifically, is identifying and reducing the cost of food and beverages at your restaurant.
Put simply, the objective of food cost control is to find a way to maximize your gains by minimizing your costs. The process of managing costs is ongoing—it’s not a one time exercise that you complete and put a bow on, it’s more of a state of mind that you bring to your day to day. Food costs change, as does your menu, your sales, your guests and so many other factors affecting food cost control.
There many variables that impact food cost control, including (but not limited to):
- Kitchen organization
- Employee training
- Standardized recipes and procedures
- Menu costing
- Portion control
- Production forecasting
- Overproduction
- Improper cooking
- Ordering
- Inventory
- Theft
- Waste
- Purchasing analysis
- Sales
- Service
Understanding overall food cost percentage
Before we dive into calculations, here’s an important takeaway when it comes to food cost percentage: it only measures your profit from your food inventory. This is different from your gross profit margin. Gross profit margin takes into account things like:
- Labor costs
- Overhead from capital investments (equipment, etc.)
- Marketing
- Maintenance
- Food costs
Keep in mind that your food costs are one part of calculating your overall profit margin.
Understanding your food cost percentage helps you navigate reducing your food costs in order to increase your profit margin. It’s a very important component.
The key to running a successful restaurant business is math. Read more about hacking your menu for growth.
How to calculate your overall food cost percentage
Let’s start at the highest level. Understanding the big picture of food cost control is a key first step.
If you run a full service restaurant, expect your food cost percentage to land somewhere around 35%. For a quick service restaurant, you’re looking at closer to 25%. To calculate this percentage for your particular restaurant, you’ll need to dig into your weekly inventory and run some numbers.
Here’s a simple formula:
The step-by-step process to calculate overall food cost percentage:
Step 1: Calculate your start of week inventory (e.g. $30,000)
Step 2: Track your weekly purchases (e.g. $5000)
Step 3: Determine end of week inventory (e.g. $15,000)
Step 4: Add up all food sales (e.g. $6000)
Step 5: Sum final amount to determine total food cost for the week (e.g. $20,000)
Once you’ve gotten this number down (your food cost percentage), you can determine if it’s too high or too low based on your individual goals and the industry average.
How to calculate ideal food cost percentage
Once you’ve calculated your overall food cost, how will you know you’re succeeding? You’ll need to calculate ideal food cost percentage in order to do that. This is important because, rather than comparing yourself to other restaurants, you’re setting a standard to meet (or fall below, for more profits). Some restaurateurs call this their “maximum allowable food cost.”
Call it what you like, it’s the number you don’t want to exceed in your food cost control calculations.
Calculate ideal food cost percentage by dividing total cost per item by total sales per item.
To get to this formula though, you’ll need to calculate your total cost per item (also known as recipe food cost) and your total sales per item.
Calculate total cost per item by multiplying food cost of ingredients by weekly amounts sold.
Calculate total sales per item by multiplying sale price by weekly amount sold.
Armed with these two numbers, you can determine your ideal food cost. Here’s a real-world example:
Now if you recall our example of food cost percentage above, the actual food cost worked out to be 30%.
If the ideal food cost is calculated to be 25%, this means you’re leaving 5% of profits on the table. You should find ways to reduce your overall food costs to get closer to your ideal of 25%.
How to Set Menu Prices Based on Food Cost Percentage
One of the most important parts of this process is using food cost percentage to determine the prices on your menu.
Calculate selling price by dividing portion cost by food cost percentage.
Here’s an example using a gourmet cheeseburger with a portion cost of $6:
Once you’ve determined the ideal selling price, you can determine if that specific markup makes sense given your understanding of your guests, the market, other prices on your menu, and any other relevant variables.
You can (and should) also dig into the underlying costs that make that gourmet cheeseburger cost as much as it does. You may find avenues to reduce the portion cost through better ingredients, improved cooking procedures, reduced waste, or other means.
With that kind of menu-focused food cost control, you can narrow in on your cost drivers down to the item as you strive to maintain your ideal food cost percentage.
Understanding average cost per guest as a part of food cost control
There are a few different ways this can be done. A good starting point would be to determine your average cost per guest, as well as your average cost per menu item (which we discussed above).
To determine the average cost per guest, add up all of your food costs, including ingredients, delivery, interest on purchases, spoilage, theft and waste for the month. Divide that figure by the average number of diners you serve.
If your overhead cost per guest is $15, but guests in your area want to spend less than $10 for a meal, your food costs may be too high and you need to take steps to bring them down.
Look for menu items that are considered loss leaders - loss leaders are menu items with lower profit margins or potentially lose money at their current price points, yet they are a popular item. Find a way to reduce your costs on those items specifically.
Also look for menu items that have a high cost, but don’t perform well. Remove these from your menu.
Tips for improving food cost control
Now that you know the importance of food cost control, you’re probably wondering about ways to cut food costs in your restaurant. Here are a few:
Track and manage your supply inventory
You should already be doing this (and if you’re not, start now). It’s a tedious task, we get it, but it’s necessary if you want to have a solid handle on your food costs and keep them as low as possible. Some things you can start doing now (if you’re not already):
- Stay aware of pricing in the market with multiple vendors
- Do regular inventory checks, as much as once per week
- Centralize your ordering workflow to gain visibility into what you ordered and received from all of your suppliers
- Report any shorts or errors promptly to avoid waste
- Ensure that you’re ordering the right amount of product at the right times so it’s being used in a timely manner without being wasted
Reduce food cost control losses
This is the next step to keeping your food costs low. This includes loss from food waste and theft. Careful inventory tracking should go a long way towards helping to minimize losses, but there are still further steps you can take. These include:
1. Keep ingredient amounts and food quality consistent
Example: Standardize ingredient sizes and prep techniques in the kitchen using automation and technology (e.g. pre-packed slices of cheese for specific meals rather than slicing anew each time the meal is prepared)
2. Serve reasonable portion sizes
But also, not two meals for the price of one. Example: Benchmark your portion sizes against competing restaurants using Instagram or Yelp
3. Repurpose scraps for homemade stocks or sauces
Example: Unused portions of ingredients are great to use for new soup broths that you can add to the menu to shake things up
4. Implement an employee meal and snack program
Example: Offer complimentary meals to staff on extended shifts (or as part of your benefits) to reduce and control this type of loss (or add it into your operating expenses)
5. Educate and enlist your staff in controlling food costs
Here’s an example from a sous chef we spoke to: Something I used to always get my staff to do was to put any food waste in a separate garbage (e.g. fries that we left over, burnt buns, overcooked items and items that ‘died’ waiting in the pass. Then we would weigh it at the end of the night to prove a point and make everyone aware of the cost associated with the over portioning and other mistakes!
6. Look into food supply purchasing groups
Join a purchasing group or other platforms that allow you to take advantages of the price benefits of a buying group. When restaurants join forces with one another in a purchasing group, they have a lot more purchasing power, which gives them a lot more leverage to negotiate deals with suppliers and vendors. It’s a great way for smaller, independent restaurants to compete with the large national chains that already have so much purchasing power.
Track food prices - always
As a restaurateur, you should always be tracking food prices and know whether prices for different ingredients (especially staples that you use in a lot of dishes) are predicted to rise or fall in the coming months. The USDA releases a yearly Food Price Outlook that offers predictions about the prices for common ingredients in the coming year.
Knowing what ingredients are going to become more expensive or more affordable can help you plan your menu to minimize your food costs. Definitely consult this Food Price Outlook before creating and ordering ingredients for new dishes as a method of food cost control - this page is updated regularly to reflect the current state of the economy.
Keep it seasonal
Similarly, it’s a good practice to keep your menu seasonal. This allows you to take advantage of ingredients that are in season and thus more marketable to your guests. On the flip side, having menu items that require kiwis or pineapple year-round can be costly, since the prices of those ingredients will vary based on the season.
Understanding food cost control and keeping food costs low takes some dedication, but it’s doable. Identifying all the variables that go into your food costs and learning how to calculate your ideal food cost percentage are critical first steps that lead you to better pricing your menu.
Once you get the right formula down, your bottom line will thank you.
Learn more about the math that will make your restaurant business skyrocket.
Save time and money with accounts payable automation
Reducing food costs is just one important part of improving your restaurant's finances. Automating accounts payable and invoices can drastically reduce time and money spent on accounting, freeing up more time for you to focus on growing your business in other areas. Check out our Complete Restaurant Accounting and Inventory Guide for more tips.
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