Why Does Restaurant Food Cost Percentage Matter?
The average food costs are the highest expense and one of the most important aspects of a restaurant business. Food cost is the ratio of your food inventory (cost of ingredients) and the revenue that those ingredients produce when each restaurant meal is sold (food sales). The average food cost is usually expressed as food cost percentage. For instance, if you have an average restaurant food cost of 75 percent, you're making 25 percent profit on all sales. The smallest cutback on restaurant food cost percentage can have a huge impact on the profit margin. To ensure your business stays afloat, calculate your food costs
Calculating the average food cost per month ensures that you stay within your budget. It also helps in determining menu pricing and optimizes the prime cost. Understanding prime cost is paramount. It takes into account the two major line items total Cost of Goods Sold (COGS) and the total labor cost in a restaurant's accounting budget. A restaurant's COGS includes food, alcohol and other beverages, packaging, and other costs associated with preparing and serving the menu items. Knowing how to calculate prime cost helps in better efficiency of operations.
Restaurants are a great way to socialize, share a meal, and have fun with friends and family. Besides flavorful food, running a restaurant business means that you are obligated that your customers have a joyful time without being burdened by a hefty bill after their meal. At the same time, it is necessary to ensure that your business is good, that you are making profit on every meal you serve.
How Can Restaurant Food Cost Percentage Impact A Business?
The average food cost percentage of a restaurant is one of the key indicators of its profitability. If a restaurant lets its food cost be extremely high with respect to its menu prices, the profit margins become tighter and the business may be at the risk of failing. Calculating the average food cost per month or per week makes sure that you have a budget to stick to. That your calculations are solid and your business has a robust financial planning and strong inventory management. Food cost percentage helps in determining the menu pricing for a restaurant per dish basis and optimizes the prime cost as well.
The average restaurant food cost is equal to the total menu price divided by the number of items sold. The lower the percentage of food cost, the more profitable a restaurant business is going to be.
Other determinants for calculation of profit for a restaurant business include the location, type of restaurant, and time of year. For example, the rent or the cost of maintenance of a property in a few locations are more than others, or some menu items ought to be more expensive than others because they include more ingredients or ingredients scarcely available or require more labor involvement. But if you are smartly managing the budgeting of your restaurant, these things shouldn't affect your business.
The bottomline, however, is that if you're an entrepreneur looking to open a restaurant or already running a restaurant, it's important to calculate food costs, take into consideration the profit margin and the gross profit you make after all the expenses included. With many restaurants, the cost of food accounts for up to 30 percent of the total revenue. Hence, an accurate estimate of the average food cost percentage is critical to your restaurant business. You need to take a lot of things into consideration, like food cost per serving, the overall menu pricing, cost of goods used, etc.
The food cost percentage is one of the most important aspects of a restaurant’s financial success.
Understanding the cost of food is crucial to running your restaurant.
Pros Of Restaurant Food Cost Percentage
After labor cost and rent, if anything matters the most in a restaurant business, it is food cost. Food cost is one of the highest expenses in a restaurant business. Moderating the food cost percentage with tact and proper calculation can have a big impact on profit. Here are some of the benefits that calculating food cost percentage brings to a restaurant business-
- Creates an awareness among the employees that food costs will be analyzed closely.
- Restaurant employees realize the importance of cost control.
- Besides bolstering a culture of cost control, when experimenting with new menu items, one is able to calculate the ideal food price by utilizing the percentage formula for food cost.
- As a business, one monitors each recipe closely and sees the profit per dish is generating with changes in ingredients.
- Food cost percentage puts the restaurateur in control of the profit generated on total food sales.
- When you follow a food cost percentage formula, it is easier to replicate the same model when expanding further in different regions.
Cons of Restaurant Food Cost Percentage
In theory, the food cost percentage sounds very simple- the ratio between the actual food cost of the raw materials used to make a dish and the revenue generated from the total sales. But the process of food costing can be a daunting exercise.
Food cost percentage isn't disadvantageous really, but it requires a team effort. The involvement of all the teams beginning from the kitchen staff who implement cost control methods per serving, to the people involved with inventory management to ensure that procurement of raw material is at ideal costs. Following a food cost percentage formula means that you need a lot of due diligence, organization, and gathering data from your restaurant POS system (point of sale system).
Despite all these challenges, food costing should be done to remain profitable in business.
Who Needs To Calculate Restaurant Food Cost Percentage And Why?
Food cost percentage is of prime importance for any restaurateur big or small. When a restaurant business knows the value of its inventory and the food cost percentage, it not just helps in creating an optimized menu pricing, but ideal food cost percentage also helps in deciding portion sizes, create menu pricing accordingly and navigate challenges that occur due to rising prices of raw materials. Food cost percentage is important to any and every restaurant business. It is a guiding force for many critical business decisions.
For instance, if you are aware of the average food cost percentage and still struggling with your profit margin, one way to tackle this problem is to balance high-cost menu items with low-cost ones. It isn't easy or instant. But keenly observing and keeping a track of the average food cost percentage or any changes in the food cost can make it a smooth process. To determine that the food cost is under control-
- Food Cost should be updated regularly.
- You should be aware of the menu pricing per dish.
- Implement a point of sale system to generate accurate product mix reports.
- Understand the principles of menu psychology and menu engineering to increase profit margin.
- The price of each menu item and continually updating the menu with changing prices of ingredients helps control the average food cost percentage.
The restaurant food cost percentage is one of the most important aspects of a restaurant’s financial success.
If you want to be successful, you need to know your food cost percentage.
How To Calculate Restaurant Food Cost Percentage
Calculating the average restaurant food cost percentage isn't difficult, but it requires a commitment approach, regular analysis of expenses, and use of data to increase sales and profit. The three things that one needs to take into consideration while calculating the restaurant food cost percentage is-
- The inventory cost the value of the inventory at the beginning of the week/month and at the value at the end of the week/month.
- Additional purchases made during the week.
- Sales figure during that period.
To calculate the average food cost, add the value of the initial investment in the inventory and the cost of additional purchases of the period. Subtract that total cost of the inventory at the end of the considered period. It gives you the average food cost. Divide this cost with the total food sales. This is the percentage of your total revenue. The lower this percentage, the better the business.
In simplified terms, food cost percentage formula = (Beginning Inventory + Purchases Ending Inventory) Food Sales
Conclusion to Restaurant Food Cost Percentage
If your restaurant's actual food cost percentage is much greater than your ideal food cost percentage, keen observation can help you deal with the challenge. If you are regularly updating and observing the food cost percentage of your restaurant, there are multiple ways. For instance, you canraise the menu prices, rejig the menu, focus on items that cost less and sell more. Restaurant food cost percentage also helps in optimizing the usage of ingredients per dish basis.
By understanding the average food costs for your restaurant, surviving in the cut-throat restaurant industry becomes much easier. It helps in engineering menus that are simpler and fair, for the business as well as the customers. Food Cost percentage streamlines a restaurant business for a greater profit margin.
Restaurant owners need to know what their food cost percentage is.
It’s a crucial number for your restaurant, but it can be hard to calculate and understand.