How To Calculate Food Cost Percentages (With Formulas & Examples)
- August 3, 2023
-
Jean-Philippe Serhal
Jean-Philippe Serhal
Your restaurant’s profitability depends on how you set the prices for your various menu items. Price a dish too high, and customers won’t order it. Price a dish too low, and you won’t generate enough revenue to cover your costs. This is why finding the balance between the cost of ingredients in your recipes and the price you are selling your menu items at is key. Ultimately, keeping track of your food costs will strengthen your ability to set menu prices intelligently, and maximize revenues.
In this article, we’ll explain what the food cost percentage is and how to calculate it. We’ll talk about how Anthony’s Shawarma Joint calculated theirs, and we’ll address the common misconceptions that come with figuring out what a good food cost percentage is (spoiler alert ! The answer is : it depends 😀)
Here’s what’s on the menu :
- What’s the food cost percentage ?
- How to calculate the theoretical food cost ?
- How to calculate The Theoretical Food Cost Percentage
- How To Calculate Your Actual Food Cost Percentage
- How Does Food Cost Variance Impact Gross Profits ?
- Is Your Actual Food Cost Percentage Ideal ?
- Where Does Food Cost Varianc Come From ?
- How Can You Reduce Food Cost If Variance Is Not An Issue ?
- Conclusion
- About Supy
1. What’s The Food Cost Percentage?
In simple terms, the food cost percentage of a restaurant is the ratio of the cost of the ingredients bought to the revenue generated by the menu items sold, over a period of time.
For a single menu item, the theoretical food cost percentage would look like this :
The calculate the theoretical food cost percentage of several menu items sold over a period of time, the formula would look like this :
The food cost percentage is a number that every restaurant owner needs to know in order to make decisions about menu item prices, menu item profitability, overall menu profitability, overall costs, and portion sizing.
But… the formulas mentioned above are just theoretical values. The theoretical food cost percentage works in an ideal world where every ingredient is perfectly portioned, which doesn’t happen often.
This is where the actual food cost percentage comes in, where the value is calculated by looking into the global (vs singular) consumption of ingredients, over the revenue generated by the menu items sold.
2. How to Calculate The Theoretical Food Cost
First, let’s find the total cost of the ingredients per serving.
Anthony’s Shawarma Joint is known for its chicken shawarma, which is comprised of 100 grams of chicken thighs, 10 grams of pickles, 5 grams of tahini, 5 grams of tomatoes, and 1 piece of arabic pitta bread of flour.
Anthony spends $10 for 1 kilogram chicken thigh when purchasing his ingredients from his food distributor. He figures that 100 grams (or 0.1 kg) of chicken thigh for his chicken shawarma costs his restaurant $1. The cost per serving of the remaining ingredients of the shawarma is calculated similarly by Anthony:
The sum of all the ingredients used in Anthony’s famous chicken shawarma recipe amounts to $2.00.
That’s his theoretical food cost per serving.
3. How to Calculate The Theoretical Food Cost Percentage
We divide the theoretical cost of his ingredients ($2.00) to the selling price of his chicken shawarma, which in this case is $8.00.
$2.00 / $8.00 = 0.25, or 25%
The theoretical food cost percentage of Anthony’s chicken shawarma (given the perfect portioning of ingredients) is 25%.
Now, time for a reality check !
4. How To Calculate Your Actual Food Cost Percentage
The actual food cost percentage comes into play when the calculation involves a large quantity of items sold, and the calculation is often done over a certain period of time (weekly, monthly…). So why don’t you do it per item ? Well, simply because it would take a long, long time to do so. You’d have to measure each ingredient used every time you’d create an recipe, and that’s just not realistic !
The actual food cost percentage formula is the actual food cost divided by the revenue generated during a specific period (i.e. first day of the month, to last day of the month).
It is necessary to first have the follow values to calculate the actual food cost percentage :
- Opening Inventory : value of the physical inventory on hand at the beginning of the month
- Purchases : value of all the purchases you have done during the month, regardless of consumption or ingredients used.
- Closing Inventory : value of all the ingredients remaining in your inventory, or stock room at the end of the month
- Revenue : this is the amount you made in sales for the month, as seen in your sales reports extracted from your POS through Supy’s integration.
This is what the actual food cost percentage formula looks like :
Let’s now assume that Anthony’s Shawarma Joint sells 100 chicken shawarmas, and assume the below:
- Opening Inventory: $200
- Purchases: $220
- Closing Inventory: $160
- Revenue: $8 x 100 (quantity sold) = $800
Actual Food cost percentage = ($200 + $220 – $160) / $800
Actual Food cost percentage = ($260 / $800)
Actual Food cost percentage = 0.325 or 32.5%
Anthony’s Shawarma Joint has an actual food cost percentage of 32.5% for the month, which means that 32.5% of its revenue was used to pay for the actual quantities of ingredients used to make the 100 shawarmas that were sold during the month.
That’s higher than his ideal or theoretical food cost percentage of 25% that was set by Anthony while creating the recipe.
The difference between actual and theoretical food cost percentage, which in this case is 7.5%, is known as your food cost variance.
The closer the variance is to zero, the better. The comparison between the actual and theoretical food cost percentage gives you an understanding of whether or not your food cost is under control.
5. How Does Food Cost Variance Impact Gross Profits?
- It helps you properly price your goods. When was the last time you gave your store room or inventory a close inspection? You must carefully consider the ingredients you’re buying and their respective costs in order to get your food cost percentage. In order to keep your food profitable, you can find out that a particular component costs more than you had anticipated.
- It helps you reevaluate the ingredients you’re utilizing. Namely, if after performing your food cost percentage analysis or running a menu engineering exercise you discover that particular products would require excessively high prices in order to remain profitable. Data-driven recipe testing is made possible by having a clear understanding of your food costs. Testing various ingredients is a wonderful approach to find the correct mix to match your ideal food cost percentage. Perhaps there are other ingredients you can use to reduce menu prices or even to just make a certain dish more profitable.
- It helps you make adjustments to your menu, which is crucial to your restaurant’s success. Supplier prices rise, and consumer preferences and habits change with time. You’ll be better able to make profitable changes to your menu by routinely calculating your food cost percentages. Having real time visibility on your menu profitability is essential. Setting food cost percentage alerts when a certain recipe exceeds the desired food cost percentage is also key.
- It helps you understand the performance of your menu. Do you frequently run out of ingredients used in the recipe of your Menu’s best selling item? Are you often over-stocked on ingredients used on Menu items that are not selling (leading to wastage and increased uncontrolled costs)? Do you know which of your products are contributing most to your profits? When analyzing your menu, having access to this data can significantly alter your results. There may be menu items that cost less to produce yet bring in more revenue for you.
- It helps you understand and compare the food cost percentage of each separate location; as your food costs may differ by branch. You should be able to evaluate the profitability and popularity of the menu items in each location once you have the food cost percentage for all of your locations.
6. Is Your Actual Food Cost Percentage Ideal?
Restaurant food costs can vary between 20% and 35%, depending on the restaurant’s segment (Fine Dining, QSR, Casual Dining, Cloud Kitchen), menu size, and target customer. It’s a popular misperception that restaurants should strive for a specific, ideal food cost percentage. A healthy percentage might actually differ significantly based on the goods you offer, how you manage food costs, and the market you service.
In the example below, this restaurant increased its net profit margin by 10% by reducing his food cost from 35% to 25%:
7. Where Does Food Cost Variance Come From?
If the actual food cost in your restaurant is higher than the theoretical food cost, one or more of the following reasons can be to blame:
- Chefs are over portioning
- Overstocking of ingredients, that eventually go to waste
- Poor controls in the kitchen when receiving suppliers invoices
- Staff forgetting to punch orders in the POS
- Theft
Using technology, and a smart inventory system can help you pin down where your operation is leaking, and cure any of the issues mentioned above, in turn ensuring your profits are maximised.
8. How Can You Reduce Food Cost If Variance Is Not An Issue?
Let’s assume Anthony’s variance was close to zero, meaning his actual food cost percentage is 25%. When comparing his numbers with his peers, he realizes that his cost of food is drastically higher than industry standards. He now wants to capitalize on this opportunity to further increase his gross profits, by exploring the one of the several options below :
- Look for less expensive suppliers
- Cut back on portion sizes
- Increase menu prices
- Find ingredients with lower yield
- Find ingredients with less prep wastage
- Investing in Advanced Inventory Management software that provides strong controls
In either of the options above, it’s critical to exercise caution and keep an eye on how your tweaks affect sales. When food costing is done properly, sales will pay your continuing restaurant expenses and provide you with extra cash to put in the bank and pay out dividends.
9. Conclusion
Although it may seem like a burden, maintaining strict control over your restaurant’s food cost percentages ensures that you can cover your expenses and make a profit on every sale. Every dollar counts in a sector where profit margins are notoriously thin.
In summary, here’s how to be in control of your food cost for your restaurant:
- For every menu item, determine the food cost for the recipe
- Once you price a Menu item, note down the food cost percentage for this menu item
- Track the difference between your actual food cost and theoretical food cost, also know as variance
- To achieve your optimal Food Cost Percentage, tweak your menu, recipes, and create controls around all your operating procedures
- Observe how the tweaks affect your revenue
- Investigate other ways to lower food costs
- Invest in technology to allow you to visualize all the above in real time and take actionable decisions that will maximize your profits
10.About Supy
Supy is a data-driven inventory management platform built to cut costs. We empower restaurant owners with a suite of 6 modules covering all operations in the back-of-house, including inventory management. Our suite of built-in, real-time dashboards help restaurant owners reduce their food cost percentage by setting up alerts around food cost percentage at a Menu Item Level, understanding food cost percentage on all menu items, and monitoring Menu Profitability in real time.
