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How to Boost Your Restaurant's Profitability Using COGS: What Should Food Cost Be in a Restaurant?

12 Minutes Read

What Should Food Costs Be in a Restaurant? Here's How to Calculate Food Cost Percentage to Boost Profitability Using COGs

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Beyond rent and staff salaries, the restaurant industry battles hidden costs—especially food waste. The New Mexico Restaurant Association highlights this as a major pitfall.

But what if you could reclaim lost profits hidden in your COGS (Cost of Goods Sold)? In this article, learn how to optimize it, slash waste, and boost your profitability. From menu pricing to portion control, discover the secrets to maximizing success and knowing the food cost percentage.

What should a restaurant's food cost be?

What Is A Good Food Cost Percentage?

Determining the ideal food cost percentage is beneficial for maintaining profitability in your restaurant business. Restaurant food cost should be between 25% and 35% of total food sales. This range can vary based on several factors:

What Type of Restaurant Do You Run?

Fine dining restaurants often have higher food costs because they use premium ingredients and offer more elaborate menu items. In contrast, fast food restaurants have lower food costs due to simpler menus and bulk purchasing.

How Does Location Affect Food Costs?

The geographic location of your restaurant can impact food costs. Urban areas may have higher costs due to increased rent and labor costs, while rural areas might benefit from lower overhead but face higher transportation costs for ingredients.

How Do Market Conditions Impact Your Food Costs?

Seasonal changes, economic conditions, and supply chain disruptions can affect the cost of ingredients. Staying adaptable and updating your menu to reflect these changes can help manage costs effectively.

How Does Cuisine Type Influence Food Costs?

Certain types of food may naturally have higher food costs due to the ingredients required. For instance, seafood restaurants might experience higher costs compared to a pizzeria.

What Factors Influence Restaurant Food Costs?

How Does Ingredient Quality and Sourcing Impact Food Costs?

  • Establish Relationships with Suppliers: Strong relationships can lead to better prices and more reliable delivery schedules.
  • Source Locally: Local sourcing can reduce transportation costs and provide fresher ingredients.
  • Seasonal Menus: Using seasonal ingredients can lower costs and add variety to your menu.

How Does Menu Pricing Affect Food Costs?

  • Cost Analysis: Regularly analyze the cost of each menu item and adjust prices to maintain margins.
  • Perceived Value: Ensure that your menu prices reflect the quality and experience provided. Higher prices can be justified with exceptional service and ambiance.
  • Competitive Pricing: Stay aware of your competitors' pricing to remain competitive while covering your costs.

How Can Portion Control Help Manage Food Costs?

  • Standardize Recipes: Create and follow standardized recipes to ensure consistency in portion sizes.
  • Training: Train staff to measure and serve consistent portions.
  • Monitoring: Regularly monitor portion sizes and adjust as necessary to avoid over-serving.

How Can Waste Management Reduce Food Costs?

  • Inventory Management: Implement a robust inventory management system to track stock levels and reduce spoilage.
  • FIFO System: Use the First-In, First-Out (FIFO) system to ensure older stock is used before newer stock.
  • Creative Use of Leftovers: Utilize leftovers creatively in daily specials or staff meals to minimize waste.
  • Staff Training: Educate staff on proper storage techniques and waste reduction practices.

How to Boost Your Restaurant's Profitability Using COGS

How Does COGS Affect a Restaurant's Profitability?

Understanding the Cost of Goods Sold (COGS) is beneficial for a restaurant's profitability. COGS includes the cost of the ingredients and the overall food cost of each item on your menu. By calculating the food cost percentage using the food cost percentage formula (COGS / Sales x 100), you can better manage your expenses.

What is a Sample Calculation for Food Cost Percentage?

For example, a burger costs $2.50 in ingredients and sells for $10. Using the food cost percentage formula: ($2.50 / $10) x 100 = 25%. This means 25% of your sales price goes to the cost of food.

How Can You Boost Profitability?

  • Highlight Profitable Ingredients: Make high-cost ingredients the centerpiece of your menu items. This strategy subtly steers customers towards more profitable choices, enhancing your restaurant's point of sale.
  • Discount Check: Before offering discounts, use COGS to ensure they won't hurt profits. Discounts should still help you set menu prices that increase overall sales while maintaining profitability.
  • Waste Reduction Games: Make saving food fun for staff with contests. Reducing waste translates to more profit for you and helps reduce your food cost percentage.
  • Reward Strategically: Offer loyal customers deals on lower-cost menu items. This boosts sales without sacrificing profit on more expensive dishes, balancing popularity and profitability.
  • Menu Description Power: Use strong words to describe high-profit ingredients. This makes them more attractive to customers, thereby increasing menu item popularity and your restaurant's overall profitability.

What Should Food Costs Be in a Restaurant: Steps to Reduce Costs

How Can Food Inventory Management Help?

Regularly check your food inventory to avoid over-purchasing and reduce food waste. Effective restaurant inventory management helps every restaurant keep track of what comes into your restaurant and what goes out, ensuring you can calculate your food cost percentage accurately. This practice is integral to managing the total cost of running your restaurant.

Further reading: Important Tips For Managing a Restaurant Balance Sheet

How Can You Monitor Indirect Costs?

Monitor indirect costs such as utilities and labor to see where you can cut expenses. These costs differ based on the type of restaurant you run, but keeping an eye on them can significantly lower restaurant expenses. Managing these costs effectively will improve your restaurant profit margin.

How Can You Control Ingredient Costs?

Aim for a food cost percentage that balances quality and affordability. Use a food cost formula to calculate your food cost percentage and ensure you are not overspending. Look for ways to save money on food by negotiating with suppliers or buying in bulk. This approach helps you keep track of the money spent on food and reduces your restaurant operation costs.

How Can Menu Management Reduce Costs?

Remove low-selling items from your menu to reduce costs and focus on popular, high-margin items. This strategy helps optimize your restaurant to make a profit by ensuring you only offer dishes that sell well and contribute to your restaurant profit margin.

How Can Restaurant Accounting Practices Help?

Implement robust restaurant accounting practices to keep track of all restaurant costs and identify areas to reduce costs. Every restaurant needs to stand on a strong financial foundation, and good accounting helps you calculate their food cost percentage, monitor expenses, and optimize your total cost management. FAQs about food cost and effective accounting can help you better understand and manage your restaurant's finances.

How Can You Negotiate with Suppliers?

Build strong relationships with your suppliers. This can lead to better prices, bulk purchasing discounts, and more reliable deliveries. Regularly review and renegotiate terms to stay competitive and lower your food costs. This approach is vital for restaurant owners aiming for a low food cost percentage.

How Can Menu Engineering Improve Profitability?

Analyze the profitability and popularity of menu items. Adjust your menu to focus on high-margin items and remove or modify low-performing ones. Use historical data to make informed decisions. Menu engineering is essential for effective food cost control and achieving a good food cost percentage. Understanding your food cost helps in optimizing menu item pricing.

How Can Employee Training Help Reduce Food Costs?

Train your staff on portion control, proper food handling, and waste reduction techniques. Consistent training ensures everyone follows the same standards, leading to significant cost savings and better food cost percentages. Effective training can help reduce portion sizes and food waste, contributing to overall cost reductions.

How to Manage Food Costs in Bookkeeping

How Should You Record Food Purchases?

Track all food purchases meticulously. Record invoices and receipts in your accounting software under "Cost of Goods Sold (COGS)." This provides an accurate picture of your expenses and helps in understanding your food cost. Many restaurants use POS systems to track these expenses effectively.

How Should You Manage Inventory?

Perform regular inventory counts and adjust your records to reflect current stock levels. This accuracy is significant for calculating actual food cost and managing your inventory effectively. Accurate inventory management helps restaurant owners maintain control over their operating expenses. Restaurant management software can simplify this process.

How Do You Calculate COGS?

Calculate your COGS using the formula:

COGS = Beginning Inventory + Purchases − Ending Inventory

This calculation helps in understanding your gross profit margin and overall profitability. Using a food cost calculator can simplify this process and ensure precision. Restaurant’s food cost percentages are a key metric in determining financial health.

How Do Financial Statements Help Manage Costs?

List COGS directly under sales revenue on your Profit and Loss Statement (P&L). This helps determine your gross profit. Accurate COGS calculation is essential for assessing profitability and making informed financial decisions. Understanding your food cost through accurate financial reporting helps in setting benchmarks and managing total food costs.

Further reading: What Does a Bookkeeper Do?

Key Takeaways

  1. Optimize Purchasing: Buy in bulk to save on costs.
  2. Portion Control: Standardize portions to cut waste.
  3. Menu Engineering: Focus on high-margin items.
  4. Regular Audits: Conduct frequent inventory checks.
  5. Supplier Negotiation: Negotiate better rates to reduce food cost percentage.

How can Taxfyle help?

Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.

At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you.

Legal Disclaimer

Tickmark, Inc. and its affiliates do not provide legal, tax or accounting advice. The information provided on this website does not, and is not intended to, constitute legal, tax or accounting advice or recommendations. All information prepared on this site is for informational purposes only, and should not be relied on for legal, tax or accounting advice. You should consult your own legal, tax or accounting advisors before engaging in any transaction. The content on this website is provided “as is;” no representations are made that the content is error-free.

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published

June 5, 2024

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Kristal Sepulveda, CPA

Kristal Sepulveda, CPA

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