The Importance of Calculating Food Costs
Every restaurant operator has a multitude of responsibilities. From profit optimization to menu engineering, there’s never a shortage of factors to contend with.
Thanks to recent spikes in inflation and rising costs, food cost percentage is suddenly back as a hot topic — and for good reason. By even the most conservative estimates, costs have spiked around 20% for some restaurants – even more in big cities, resort towns, and other high-demand establishments.
If your restaurant is struggling with keeping operations afloat while keeping pace with ever-increasing menu ingredients expenses, understanding how to calculate food costs is critical. Let’s take a look at the importance of food cost percentage, different variables that impact your overall cost structure, how to calculate food costs, and more.
How to Calculate Food Cost Percentage:
The food cost percentage formula is relatively simple…you’ll need to have the following inputs, all in dollar value, ready to go:
- Beginning Inventory: inventory you started the period with
- Purchases: purchases made throughout the period
- Ending Inventory: inventory on hand (remaining) at the end of the period
- Total Food Sales: all food sales from the period
Take your numbers from the inputs above and put them in the food cost calculator below to find your food cost percentage!
Food Cost Percentage Calculator
Food Cost Percentage Example
The following example illustrates just how important it is for your restaurant to fully grasp how to calculate food cost and how a slight increase in percentage can negatively impact your entire restaurant operation.
A detailed look at your food cost percentage provides more accurate tracking and forecasts for your P&L statement. This insight also empowers your purchasing department to make the best decisions for entire menus and even single ingredients.
Example of calculating food cost:
For this purpose, suppose your restaurant serves 500 customers daily.
If the average customer spends $20, and you have an up-to-date & accurate assessment of costs via weekly purchase tracking and weekly inventory, you will be able to accurately calculate your food cost enabling you to seamlessly project restaurant cash flow & profits from your entire menu.
Now, what if your food cost percentage calculations are off by even 25 cents per customer, and you’re spending that much more on your ingredients? That’s an extra $125 per day – or in yearly terms, an extra $32,500!
Small changes, huge impact. You’d never purchase a lot of ovens or automatic dishwashers without having a complete understanding of the costs. Well, that’s the same with food cost percentage.
What’s more, if you dig into the details and pinpoint which ingredients fluctuate on a weekly or monthly basis, or are more likely subjected to inflation spikes, you can anticipate these increases and make more informed purchasing decisions. All to the benefit of your entire operation.
Benefits of Understanding Food Cost Percentage
In the restaurant industry, knowledge is power. And knowing how to calculate food costs and track percentages is, in many ways, somewhat of a superpower! Get your costs locked in, and your restaurant will enjoy:
- Superior menu engineering. From your go-to menu items to individual ingredients, it’s always better to have the most accurate expense information at hand. This allows you to deliver high-quality menu offerings to customers while keeping costs as low as possible.
- Higher revenue. With food cost percentages as low as possible, you’re better positioned to optimize profits – and as our example above showed, even the smallest advantage here pays big dividends to your bottom line.
- More efficient supplier/vendor relationships. Your vendors and suppliers are the lifeline to your business. Without a reliable and affordable stream of supplies – including one of our most critical supplies, food – running your business is impossible. Once you have a firm grasp of food cost percentage, you can leverage your partnerships with suppliers and other vendors more efficiently.
- Better forecasting & planning. Food cost percentages are constantly in flux. And while your restaurant can’t predict the future, you can still anticipate changes to costs down the road, if you understand where prices are today.
- Accurate weekly inventory calculations. Regular inventory counting (RASI recommends weekly tracking — and always on the same day/night) – not only helps with food cost percentage and gives you a clearer picture of your entire inventory dynamic, including storage area, equipment, and other assets. There are many reasons to count your inventory; food cost percentage is just one.
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How to Improve Food Cost Percentage Tracking
Here are a few ways you can immediately improve your accuracy:
- Stay on top of industry trends – you’re better able to understand what’s driving food costs and develop innovative ways to save money with purchases.
- Get timely, intelligent data – RASI’s data analytics offer customized information directly related to what matters most to your restaurant.
- Track your past & current data – RASI offers everything from financial reporting to multi-unit inventory tracking to show you past & present food cost percentages.
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Take the next step with your food cost percentage data. Learn how to better calculate food costs with RASI’s complete restaurant accounting services. Schedule a demo now, or drop us a line – we’d love to help your restaurant optimize profits and lower costs today! Keep track of this critical expense category, and you better your chance of staying competitive – all while anticipating possible price hikes tomorrow.
RASI has a host of resources to assist you with weekly inventory and keeping food cost percentage fully in view, even while you concentrate on other crucial business tasks. Our tech-friendly analytical tools, accounting tools and other software applications allow you to manage even the most volatile business landscapes.