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A Simple Guide To Calculate Food Cost Percentage For Restaurant

Published Mar 25, 2022
A Simple Guide To Calculate Food Cost Percentage For Restaurant
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Understanding the science of pricing is vital for keeping your restaurant business financially healthy. The two basic elements of cost analysis are the food cost and the labor cost. The food cost percentage measures how efficient a restaurant is at controlling its food costs.

Moreover, the food cost percentage is the ratio of food costs out of total sales revenue. It is a good indicator to measure the competency of your restaurant manager, as it gives a clear picture of where you are losing money and how much. This article will show you how to calculate the food cost percentage for restaurants in different situations!

What does restaurant food cost?

Restaurant food cost is the amount of money that a restaurant spends to buy all the ingredients for the meals that they sell. Restaurant food cost does not include anything else like labor, rent, utilities, or other restaurants' expenses. It is also important to note that this number will change depending on how much you purchase at one time. The larger your order, the cheaper it will be per dollar. The smaller your order, the more expensive it will be per dollar.

If you are looking to earn profit from selling meals, you must have a low food cost percentage. The higher your restaurant's food cost percentage, the more money you lose on each meal sold. You can reduce your food cost percentage by purchasing ingredients in bulk and shopping at wholesale stores.

What to do before you start food costing?

Let us begin with this section now!

1. Track all of your numbers.

Numbers include sales, profit, and overhead. POS is the best way to get a good handle on your numbers; however, you can do it manually. If you don't know your numbers, you can't know if you make money. 

2. Define your accounting period

When you define your accounting period, you need to decide if it is a daily, weekly, or monthly accounting period. 

3. Set budget targets

Setting targets for each cost category is a good idea to ensure you’re in line with your budget. This will allow you to be more efficient and help reduce waste. 

4. Focus on a weekly operational budget

You should start with a clear understanding of how much it costs to run your restaurant each week and ensure that your weekly sales cover this figure. This will allow you to calculate the gross profit margin percentage for each menu item and ensure that your kitchen has enough money to cover its costs.

Food cost per serving explained

The total food cost is derived from the ingredient list, converted into a cost per serving figure. We then round up this figure to the nearest whole dollar, so some of the totals don't match their cost per serving figures. For example, we've included 3.5 kg of carrots and 2 kg of onions in the cheapest meal plan, but because they are sold in units of 1kg, we had to round up the figure to 4kg. This is why it costs $6.33 for a serving, instead of $1.65 per serving. 

Therefore, total food cost is based on what you would actually pay at the supermarket and not a hypothetical price based on a pack size or recipe yield. It also includes fresh produce, which may be cheaper if you grow your fruit and veg.

Food cost percentage explained

This section would explain the details of the food cost percentage. Food cost percentage is one of the most important things to consider when opening a restaurant.

1. What is the food cost percentage?

Food cost percentage is the most common metric used to measure food cost. It's simply the total cost of all ingredients and packaging divided by the total sales value of your restaurant's food sales. The goal is to keep this number as low as possible, ideally around 30%.

2. What is a good food cost percentage? 

A good food cost percentage is an important measure of profitability for a restaurant. The higher the food cost percentage, the less money a restaurant makes. A low food cost percentage indicates that a restaurant is buying its ingredients at lower prices and preparing them more efficiently. Generally speaking, restaurants are looking for a good food cost percentage in the range of 25% to 35%.

3. How to calculate food cost percentage?

Food cost percentage is the most important measurement of profitability in any restaurant. The more a restaurant knows about its food costs, the better it can manage and control them. In addition, by knowing your food costs, you can also calculate markup percentages to ensure that your profit margins are in line with industry standards.

4. Food cost percentage formula

You must be wondering now what the formula for food costs is? The food cost percentage formula is as follows:

Food Cost = (Beginning Inventory + Purchases - Ending Inventory) / Food Sales

5. How to calculate the ideal food cost percentage?

Ideal food cost percentage is calculated by dividing the total food cost by the total sales. The formula is as follows: 

Ideal food cost percentage = Total Food Cost / Total Sales

How to set menu prices?

Before deciding on a price for your menu, it is important to understand the concept of cost-plus pricing. This means that you will set a price based on what it costs you to produce each item and then add on a percentage to cover the cost of running your business.

A great way to decide how much you should charge for each item is by looking at what other similar restaurants are charging for their food. Consider location, popularity, and food quality when looking at competitors' prices.

You should also be aware that menu prices will vary depending on what type of restaurant you are running. A high-end restaurant is likely to charge more for its food than a local cafe. The price of each item should reflect the level of service, quality, and experience that your customers can expect from your business.

How to track menu pricing's effect on sales?

Pricing is the key to success for any business. It's not a mystery to increase sales with menu pricing; it's all about knowing your customers' preferences. With advanced analytics tools, you can track which of your customers are visiting your restaurant more often than others and what they order most frequently. If a certain group of customers spends more money on certain items, you can tweak the menu pricing to increase their average check amount. This can have a significant impact on your overall sales.

Take, for example, the Big Boy Restaurant chain in California. 

Adjusting the menu pricing and increasing the prices of some high-profit items by as little as $0.10 each, they saw an increase of 7% in sales. This small change resulted in an average check amount increase of $1.70 per customer, which equated to an additional $8,000 per week!

Related Blog: Benefits of setting up the right QR Code POS System for your Restaurant

Best ways to lower restaurant food costs

1. Find cheaper vendors

This is the best way to lower your food costs. The secret to finding cheaper vendors is to ask around and get recommendations from people who have worked in restaurants before. Everyone knows everyone in this industry, so it's very easy to determine who the best vendors are for your restaurant and their prices. If you're starting a new restaurant, get as many referrals as possible from people who work in the same industry. There are some great resources online that you can use to find cheap food vendors. 

2. Reducing portion sizes

Restaurants should consider reducing portion sizes and charging accordingly. This will ensure that customers do not get too much food for their money.

3. Use cheaper ingredients

Inexpensive cuts of meat, cheaper fish like tilapia, frozen vegetables, and canned beans are all good places to start.

4. Invest in technology

When food costs are rising, one of the best ways to lower them is by investing in technology. Many restaurants still use the same old cash registers they purchased ten years ago. Investing in new technology will help your restaurant streamline operations and save money on everything from ordering to delivery. For example, some restaurants now purchase digital kitchen scales that cost a few hundred dollars, but they pay for themselves in less than a year.

Takeaways for managing food cost percentage

Your food cost percentage is an important metric to track because it can help you make decisions about the profitability of your menu items. If your overall food cost percentage is too high, you may need to adjust the prices on some of your menu items. Alternatively, if your food cost percentage is too low, you may want to reconsider some of the ingredients used in your dishes.

You can also use a lower food cost percentage to determine whether new menu items will be profitable. If you add a new item to your menu and the food cost percentage goes up, you may consider removing that item from your menu.

Related Blog: How to Reduce Waiting Time in Restaurants?

Maximize your profits with technology

It is a good idea to install some technological equipment in your restaurant. You can get its benefits by using a food cost calculator for restaurants. 

Technology helps you to reduce the food cost and increases your profits. If you purchase any technology, it is good to get it checked by an expert. It will help you to get the right deal for your business.

Conclusion

Through this blog we have presented you with a simple method to calculate your food cost percentage. If you own a restaurant or plan to start one you must consider a personal consultation. Call OVVI on (800)-767-9585 or write to us at [email protected] to discuss business with our product expert.