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Four Things You Should Know About Food Cost Percentage

If you run a restaurant, you need to be able to balance minimizing costs with delighting your customers and keeping revenues as high as possible.

Restaurant food expenses play a key role when it comes to your overall operating costs, meaning your food cost percentage is a key metric that you simply need to monitor at your restaurant. 

When you consider the rising-cost, volatile landscape that we’re operating in at the moment, this can be a lot easier said than done. 

However, this does not mean you can simply operate without understanding this metric. You need to understand your food cost, and you can use technology to assist you with this. This will enable you to keep on top of your food cost percentage so that you can optimize your finances as much as possible.

With that being said, below, we are going to take a look at four of the most important things you need to know with regard to food cost percentage.

1. Learn how food cost percentage is calculated

The first thing you need to know is how to calculate food cost percentage. You calculate this by starting with the cost of the goods you sell and then dividing it by the sales or revenue you generate from the finished dish. 

The cost of the goods sold is the amount of money you have spent on ingredients and the inventory within a given period. If this sounds a bit overwhelming, don’t worry, as we are going to take you through each step.

So, firstly, you need to look at your weekly inventory. List all of the food supplies you have received at the beginning of the week. A lot of inventory management systems work on handled devices or tablets, meaning you can simply walk around the back of the house and check items off your list like you would if you had a clipboard. 

Now, you should add together the dollar value for every item. For example, how much did you pay for every box of pasta in your back of the house?

You also need to track your purchases to determine if there were any other purchases made within the week, for instance, after you started inventory.

At the beginning of the following week, take inventory again. Follow the same process. A shelf-to-sheet system is recommended by many, where your inventory tracking system is set up just like your back of the house is.

For every shift, add together the total food sales. A lot of the PoS systems on the market today come with restaurant analytics, which will automatically provide you with this information.

Use the following formula to calculate the actual food cost for the week:

  1. Add together your purchases and beginning inventory
  2. Subtract your ending inventory
  3. Divide by your food sales

This will give you your food cost percentage.

In formula format, this is as follows:

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

Let’s illustrate this with an example.

  • Beginning Inventory = $20,000
  • Purchases = $5,000
  • Ending Inventory = $16,500
  • Food Sales = $12,000

Food Cost Percentage = (20,000 + 5,000 – 16,500) / 12,000

Food Cost Percentage = 8,500 / 12,000

Food Cost Percentage = 0.70 or 70%

Is this a good food cost percentage? No! Why? It’s way too high! We’ll explain more about this below. 

2. Understand what is a good food cost percentage

In the example we just provided, the restaurant had a food cost percentage of 70%, which is way too high. 

So, it is important to understand what is a good food cost percentage and what isn’t. A good food cost percentage is somewhere between 38 and 32 percent in a lot of quick-service and full-service restaurants.

However, it is important to stress that this is just a ballpark figure and there is no exact “good” percentage. It differs based on the type of food you serve, and also the operating costs of your restaurant. 

To determine what percentage is ideal for your restaurant, you need to first calculate your ideal food cost percentage.

Here is the formula you need to use for this:

Complete Cost Per Dish / Complete Sales Per Dish = Ideal Food Cost Percentage

For this percentage to be beneficial, you will need to have something to compare it to. This will help you to make sure your restaurant is on track. A good approach is to compare your ideal food cost with your actual food cost.

In an ideal scenario, you would have no theft or food waste at your restaurant. 

Calculating your ideal food cost percentage will not take into account your inventories at the beginning or end. Instead, it will account for the total sales and costs linked with every dish on your menu. 

You can also compare your costs with the costs of other restaurants in your area too.

Firstly, you will need to enter the kind of concept you run and the area you are based with. After this, share the five most popular items on similar restaurant menus in your location.

Once you have done this, you can dive into these menu items and determine the food cost of every item, as well as the cost per pound of every ingredient. 

3. Understand why food cost percentage is so important

Now we have taken you through some of the different calculations and why they are so important, it makes sense to delve into the ‘why.’ Why does this even matter?

Well, there are some key benefits associated with calculating and understanding your food cost percentage. Firstly, it means you can spend and earn smarter. By pricing all of the items on your menu based on food cost percentage, you can ensure that everything you sell fits in with your food cost margins.

From this point, you will know the items on your menu that generate the most profit, and therefore, which items you should be promoting the most.

You can also experiment intelligently with new recipes. You can make a new recipe and do calculations to determine whether or not it matches up with your ideal food cost percentage. If it doesn’t, you can make tweaks until it does.

Aside from this, the food cost percentage enables you to get a better understanding of how food supplies impact your expenses and profitability. Plus, you can engineer your menu efficiently as well. You can make updates to menu items that are no longer profitable, ensuring that they no longer hold your business back and eat into your profits.

4. Optimize your food cost percentage

All restaurants and food businesses should make a continual effort to optimize their food cost percentage. There are a number of different ways you can do this. So, let’s take a look at some suggestions:

  • Adjust the items on your menu based on the season. This can help you to save money on food costs while lowering waste. If ingredients are in season, they are going to be cheaper to produce. 
  • Do not give away too many freebies, like butter or bread, if your ideal and actual food costs are far apart. This is something you can do once you have bridged the gap.
  • Monitor portion sizes. Do you find that the majority of your dishes are coming back half-eaten? If so, this could be a clear indication that you are putting too much food on the plate. 
  • Shop around to find different sellers of wholesale food so that you can make your money go as far as possible
  • Get creative with the design of your restaurant menu so that you can strategically promote and suggest items that are more profitable to your customers. 
  • Use a lot of carbs on your menu. The reason for this is quite simple; the likes of pasta and potatoes tend to be much cheaper to purchase in bulk.
  • Try menu engineering so you can determine which items on your menu are bringing in the greatest profit and you can adjust your menu accordingly. 
  • You also need to be smart about menu pricing. Consider increasing your menu prices by a small amount and then factor this into the overall business plan for your restaurant.

Final words on food cost percentage

So there you have it: everything you need to know about food cost percentage. We hope that the information and advice that we have provided you with in this post have helped you to get a better understanding of what food cost percentage is and why it is so important.

Ultimately, if you run a restaurant, understanding this metric and using it properly will be the key to financial success. Without it, it is impossible to optimize your expenditure and menu items appropriately.

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