Whether you're putting together a menu for your newly opened restaurant, trying to budget for weekly expenditures, or thinking about implementing menu engineering practices, calculating food cost is one of the most essential pieces of information you can possess as a restaurant owner/operator. It forms the basis of proper restaurant accounting.
What is Food Cost?
Food Cost is a percentage that restaurant operators use to determine how much money they make back on the sale of each dish compared to how much it costs to produce said dish. Food cost takes everything into consideration from the fixed overheads like labor and electricity to each individual ingredient that goes into the dish.
Food cost helps restaurant operators better understand the profitability of their menu items, and make decisions based on that knowledge.
Step-by-Step Guide: Calculating Food Cost
Read on to learn how to calculate food cost at your restaurant.
- Break up each dish into its ingredients. Everything from seasoning to how much cooking oil is added.
- Calculate the cost of each dish. Combine the cost of each ingredient to come up with the total cost per dish.
- Figure out your fixed cost per meal served. To arrive at this number, add up all the fixed costs that go into producing the dish such as salaries and utilities. Assume your daily fixed costs are $1500 and on average you serve 150 customers per day, this means that your fixed cost per meal served is $10.
- Calculate what percentage of your menu price comes from food. Found by dividing food cost by menu price. Assume that an order of Caesar Salad costs you $3 to produce and you sell it at $7 that means your food cost is 43%.
- Determine target food-cost. If you are selling a dish at $10 and you find that your fixed cost per meal is $7, your dishes can cost you no more than $3 for you to make a profit.
- If you run an established restaurant, make sure to check each dish to determine whether or not the price covers the food cost and fixed price per dish. From here it is a lot easier to get a bigger picture of your restaurants daily operation and whether or not it is possible to break even or even turn over a profit.
Food Cost Calculation for Burger Priced at $9
|Cost of Ingredients:|
|Cost of Beef Patty||$1.03|
|Cost of Hamburger Buns||$0.20|
|Cost of Lettuce||$0.10|
|Cost of Tomatoes||$0.07|
|Cost of Ketchup||$0.02|
|Cost of Pickles||$0.10|
|Cost of Oil for Grilling||$0.05|
|Overhead Costs Per Hamburger (Labor, Electricity, Gas)||$0.50|
|Food Cost Percentage||23%|
Tip: It is important to understand whether or not different items require different food cost percentages. If you are running a fine dining restaurant where prices are higher, you can get away with a higher food cost, but if you run a small neighborhood eatery with more affordable prices, you'll want to lower your food cost to take advantage of the smaller profit margins.
The Importance of Calculating Food Cost
As a restaurant owner/operator, profitability should be your number one priority to ensure your restaurant’s success. In the restaurant industry, the main method for restaurant owners to make money is by selling food. Hence, without knowing the food cost of each individual menu item, there is no way of knowing which dishes are actually generating profit (if any).
Food costing takes into consideration everything that goes into preparing a dish. Everything from the ingredients themselves to the rent and labor cost involved is accounted for.
Often times though, food cost isn’t taken seriously. This could be because restaurateurs think it takes too long to calculate, or maybe because food cost isn’t a tangible cost like rent or staff salaries. Either way, assigning value to food cost is one of the quickest methods of beginning to maximize profits.
Food costing isn’t something only small restaurants have to do. It is industry standard and even the biggest restaurant chains do it. Let’s take Burger King as an example; Burger King sells around 16.7 million burgers per day. If Burger King doesn’t optimize their food costs down to one cent, they are losing $167,000 per day, or $61 million a year.
Obviously the same applies for smaller restaurants too. If you run a moderately successful independent restaurant that seats about 100 customers per day you are looking at losing $30,000-$50,000 per year when your food costs aren’t optimized.
Advantages of Knowing Your Food Cost Percentage
There are a number of reasons why you need to calculate food cost at your restaurant, but it should only take a few to convince you to start.
- It allows you to know which menu items are profitable and which aren’t, preventing you from missing out on any opportunities to make more money.
- When you know which items are more profitable, you can design your menu and pricing around your food cost (this is actually a strategy most restaurants use).
- Understand how each ingredient affects your profit margins. If there is a sudden spike in the cost of beef, you will be prepared to adjust prices accordingly to protect your profit.
- Most importantly, it allows you to set a standard food cost percentage across the board, and eliminate any menu item that costs too much (or find a way to bring the food cost down).
How Can You Optimize Food Cost?
Sometimes your food cost is too high and sometimes you have a dish that is surprisingly cheap to put together, find below a few strategies that’ll help you optimize your food cost. Properly optimizing food cost involves on your menu involves compiling detailed ingredient costing and working out your food cost formula to predict profitable menu items.
- Increase the number of carbs on your menu. Carb heavy dishes tend to be a lot cheaper than protein based plates.
- Design your menu to highlight the most profitable menu items.
- Play around with portion sizes until you get the food cost percentage you are looking for.
- Increase menu prices slightly to compensate for higher food cost dishes.
Download a Food Cost Calculator For Excel
To make things easier for you, we have put together a free food cost calculator excel sheet that can streamline the entire process. The excel sheet not only allows you to calculate the food cost per item, but to also add important details such as pictures, notes, and allergy information about each dish.