Food cost percentage is one of the key metrics for any restaurant. It plays a critical role in deciding how you should price your dishes and is an excellent indicator of general profitability.
It is essential for the long-term viability of your restaurant that you understand food cost percentage - or the restaurant food cost formula - how to use it and, if necessary, how you can bring it down. Therefore, it is extremely important to implement food costing systems in your venue.
Our guide has everything you need to know about food cost percentages in your venue and how you can use them to perform better than ever.
Food cost is the ratio of the cost of ingredients and the revenue generated by selling the same ingredients as a menu item. This cost is frequently expressed as a percentage.
The term "food cost percentage" can be used to refer to the cost percentage of individual dishes and to the overall cost percentage of your restaurant as a whole. It is a good idea to calculate both of these metrics to get the clearest understanding of your venue's finances.
Food cost percentage is similar to, but distinct from cost of goods sold (COGS). Typically, COGS includes everything that a customer receives when they buy a menu item, including serviettes or packaging. Food cost refers solely to the cost of the raw ingredients.
Understanding your food cost percentage is crucial for any hospitality venue. Restaurant food costs are a major expense. Therefore, it is extremely important you know exactly how much money you are spending relative to the revenue generated by a dish.
Food cost percentage is also significant when it comes to pricing your dishes. By calculating exactly how much you are spending on your food costs, you know how much you need to charge for that dish to earn a healthy profit. Understanding your actual food cost percentage helps to set a target food cost percentage and change your prices accordingly.
Once you have established the food cost percentage of various dishes on your menu, you'll quickly find out which dishes are highly profitable and which are costing money. It is an exceptionally useful metric that immediately paints a crystal-clear picture of how profitable your menu is across the board.
As with any key performance indicator in restaurants, there is no singular food cost percentage figure all venues should aim for. A commonly cited range for ideal food cost percentage is 28-35%.
Different types of venues should approach food cost percentages differently. A fast food venue should aim for a lower food cost percentage to maximise profits, while more upscale full-service restaurants may have to tolerate a higher food cost percentage.
The formula for calculating food cost percentage for a single dish is simple. All you need to do is divide the total food cost by the total food sales.
The total food cost is the cost of the ingredients used to make an individual dish, while the total food sales is the revenue generated by selling the dish. To turn the result into a percentage, simply multiply it by 100.
Take the following example: If your restaurant sells a simple dish consisting of chicken ($2), vegetables ($1) and sauces ($0.50), the total food cost for that dish is $3.50. If that dish is sold for $10, then the food cost percentage is 35%
Another enlightening metric you can use in your restaurant is the food cost percentage of your venue as a whole. This provides a holistic picture of the overall profitability of your venue relative to food and beverage costs.
The food cost formula for your entire venue involves taking your beginning inventory, adding purchases made over a given period, and then subtracting your remaining inventory. Then, take the resulting figure and divide it by the total revenue of food sales during the same time period.
Let's apply this method to a hypothetical restaurant based on the following figures:
Applying the formula laid out above gives the following calculation:
($5,000 + $15,000 -$4,000) ÷ $50,000 = 0.32
0.32 × 1000 = 32
Therefore, this restaurant's total food cost percentage is 32%.
In order to price your menu properly, you must decide on your ideal food cost percentage. This requires a comparison, which you can perform when you calculate actual food cost percentage. For example, the actual food cost percentage for the chicken and vegetable dish listed above is 35%.
If you conclude that this percentage is too high for your venue, you may decide that your ideal food cost percentage is 28%. This number is closer to the lower end of the industry standard.
In order to determine your menu prices, you can apply the following formula:
You now know that in order to achieve your desired food cost, this dish should be priced at $12.50 rather than $10.
You can take many steps to bring down the food cost percentage in your restaurant. For more information on increasing your venue's profitability, check out our complete guide to increasing profit margins in your restaurant.
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ResDiary can also help your restaurant perform better in myriad other ways. With promotion solutions and targeted marketing campaigns, we can help you get more diners into your venue and work towards repeat business.
Discover how your team can work more happily and efficiently with help from the right technology, like ResDiary's restaurant booking system. We've created a great guide to help you optimise operations in your restaurant, bar, or hotel.