Understanding Food Cost for Maximizing Restaurant Profitability

True restaurant food cost is not what the customer pays for the meal on their plate.  The true food cost is the percentage generated by a restaurant’s food inventory management. It may sound complicated, but at its most fundamental, it is actually quite simple.  Unfortunately many restaurant managers do not calculate food cost the way it is supposed to be done.  Even if they do calculate it correctly, many are not aware of everything that goes into it.

What is Food Cost?

Food cost can be determined as the percentage of the total of your restaurant sales that are spent on food product.  This percentage should stay somewhere around 28-30% in order for the restaurant to show profitability.  When food cost is combined with labor costs, it usually consumes between 50-75% of a restaurant’s total sales.  If your food costs are higher than 35%, it may be time to take a serious look at the way you do business.

These figures are greatly affected by the cost of your other overheads. The figure of 28-30% is used in the United States of America, where labour costs are relatively high. In a country such as South Africa with much lower labour costs, a food cost between 35-37% is acceptable whereas a food cost of around 31% is exceptional.

There are some quick service restaurants with very low labour and rental costs, that can run profitably with a food cost in the 45-50% range.

How to Calculate Food Cost:

The ratio for theoretical is actually quite simple:  Theoretical Food Cost = Cost of Food Sales / Food Sales. E.g. if you sell $100.00 worth of food, and the food costs you $29.00 your food cost is 29%.

To obtain an accurate food cost, you will have to include the change in your inventory (stock) levels. If the value of the stock grew over the month, the value it grew by must be subtracted from the Cost of Food Sales. If it shrunk, that value must be added to cost of food Sales.

To get an accurate assessment, you will first need to look at a specific time period in your restaurant’s operating life.  The typical Food Cost assessment is done Monthly.

You can follow the steps below to determine your restaurant’s Food Cost:

Step #1:  Establish your time frame for evaluation.  This is not just a one-time deal; your time frame needs to be set up for regular food cost assessment.  You will need to work with your accountant as well as your managers in order to have all the information you need regarding sales, purchases and inventories available to you when the calculation is done.

Step #2:  Total all of your customer checks (or reports received from point-of-sale cash registers).  You only need to include the sales that are generated specifically from food sources and should fit within the time frame that you are looking at.

Step #3:  Determine your Cost of Food Sales.  These are the costs that are related to your food sales and include purchases as well as well as adjustments for inventory level. It is very important not to just include purchase in this part, but also to include the difference in your inventory (from the last time you calculated your inventory, until this time).

Step #4:  Once you have your cost of food sales (including inventory adjustments) you can determine your Food Cost Percentage.  This is determined by taking the total that you came up with in determining your Cost of Food Sales (Step 3) and dividing it by your actual food sales (step 2), the number that you come up with is your FOOD COST.

So:  Food Cost = Cost of Food Sales / Food Sales

Once you have determined your food cost percentage, you need to take a good hard look at the numbers themselves.  While most restaurants that operate successfully consistently generate Food Costs between 28% -30%, the kind of restaurant you are running will have an impact on your overall percentage. For example, whereas Italian restaurants run fairly low (about 28%) a steak house can have Food Cost of up to 40% and still be successful.

By determining your Food Cost on a regular basis, you can develop a powerful analytical tool for comparing months as well as identifying trends in customer purchasing or in product fluctuations that you can counter by being prepared to deal with.  All in all, it is a valuable tool that you will come to appreciate.

Additional Considerations:

In general, beverage cost of sale will be lower than food cost of sale, depending on your target market normally 5-10% better.
It is very important to know what each product you sell costs you, so that you can determine that you are selling it at the correct price. Once you have that knowledge, you can set the selling price based on your targeted food cost, what your competition are charging and what the market can bear.

For more info on Ideal Software’s stock control system for monitoring your Food cost http://www.idealsoftware.co.za/ideal-stock-control

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