To maximize profits, food service businesses need to closely monitor their restaurant ingredient usage and costs. Calculating the food cost percentage will help restaurant owners determine how to properly price their menus so that it generates enough revenue to offset expenses and to make sure they stay within the inventory budget.
Therefore, having full insight into food costs gives restaurants the ability to thoroughly understand their financial health.
How to Calculate the Food Cost Percentage
The food cost percentage refers to the ratio of ingredient expenses and the generated revenue from sales. This figure is primarily used to examine if the business or individual menu item is profitable.
The average food cost percentage for full and quick-service eateries is 28% to 32%. To calculate weekly food cost percentages for a business, management can follow these steps-
1. List All Ingredients Received at the Start of the Week
POS software with inventory management features can streamline this process by allowing users to track stock quickly and easily on an Internet-connected device or tablet.
2. Add the Price of Each Item in Inventory
Accumulating the dollar value of all ingredients is necessary when calculating the food cost formula.
3. Monitor New Purchase Orders
If new inventory purchases are made during the week, the prices should be accumulated as well.
4. Conduct Inventory Again at the Start of the Next Week
This will give insight into how much inventory was used during the week before and how much is left over.
5. Combine Total Food Sales
The latest POS systems provide reporting and analytics related to sales and transactions during a given period. Management can utilize this feature to determine how much money they generated during the week.
6. Plug these Values into the Food Cost Percentage Formula
The food cost percentage formula is-
(Beginning Inventory + Purchases During the Week - Ending Inventory) / Food Sales = Food Cost Percentage
For example, a full service restaurant started Week 1 with inventory that cost $17,000 and later purchased $4,000 more in ingredients during the week. At the start of Week 2, management took inventory and it totaled to $16,000 and their overall food sales were $15,000.
In this case, the calculations would be-
(17,000 + 4,000 - 16,000) / 15,000
0.33 or 33%
Therefore, the weekly food cost percentage for this restaurant is 33%.
How to Calculate the Ideal Food Cost Percentage
Once a restaurant calculates their actual food cost percentage, they should compare it to their ideal food cost to assess their profitability. The 3 steps to finding the ideal food cost percentage are-
1. Calculate Food Cost Per Dish
Find the total food cost per restaurant menu item with the formula-
Food Cost of Ingredients x Weekly Amount Sold = Food Cost Per Dish
For example, if it costs the same restaurant $10 to make a chicken meal and they sell 250 plates of it weekly, the total food cost per dish would be $2,500.
2. Calculate Total Sales Per Dish
The total sales per dish should be calculated with the formula-
Sales Price x Weekly Amount Sold = Total Sales Per Dish
Following the same example, if the sales price is $40 for the chicken meal and 250 dishes are sold weekly, the total sales per dish will be $10,000.
3. Use the Ideal Food Cost Formula
After calculating the total food costs and sales per menu item, restaurants can determine their ideal food cost percentage by using the formula-
Total Cost Per Dish / Total Sales Per Dish = Ideal Food Cost Percentage
The calculations for the chicken meal would be-
2,500 / 10,000
0.25 or 25%
With this value, restaurants can compare and examine whether their ideal and actual food costs match. If their actual food cost is higher, they can reassess their operations and identify any inefficiencies that need to be addressed.
For instance, in these examples, the restaurant's actual food cost percentage for a menu item was 33% but their ideal cost is 25%. This means they are spending an extra 8% on inventory. Management can investigate to see if the expenses are attributed to waste, overstocking, or theft.
Importance of Food Cost Percentage
Food cost percentage provides valuable insights that restaurants can use to make improvements and optimize their business. Other benefits of understanding food cost percentage include-
Food cost percentage can reveal which products are most and least profitable. Restaurateurs can use this information to make updates to their menus, such as removing costly items and adjusting prices.
Informed Pricing Decisions
By knowing the costs of producing a menu item, restaurant owners can create prices that will generate enough revenue to cover food expenses and increase profit margins.
Improved Understanding of Food Supply
By consistently tracking food costs, owners can better understand their food supplies and identify any changes in pricing from their suppliers.
It is also important to monitor trade negotiations and farming trends because the availability of food supplies can greatly impact an ingredient's price. Doing so will enable restaurants to be prepared to quickly restock their inventory or decide on new ingredient substitutions.
Restaurants can experiment with new menu items for a time period and calculate their food costs to see if it aligns with their budget. If not, adjustments can be made to the recipe and its ingredients to reduce expenses.
Effectively calculating a restaurant's food cost percentage gives owners the ability to make informed decisions on how to improve their operations and boost profitability.