How To Control Cost of Goods (COGS) In Your Restaurant

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Restaurant Cost Of Goods (or to some, Cost Of Sales) take up a significant amount of a restaurant’s overall expense. With already narrow margins becoming even slimmer during a pandemic, every penny counts. Unfortunately, many owners/operators fail to see how, if mismanaged or handled inconsistently, COGS for restaurants can have a majorly negative impact on profitability and cash flow. Point-blank: It’s critical to the health and survival of all restaurants that you understand your COGS and how to manage them accurately – here’s how.

What is the Cost of Goods (COGS) formula for a restaurant?

The COGS acronym, stands for Cost Of Goods – or for those of you who call it Cost Of Sales – that works as well, and when you see COGS on your Restaurant P&L. What is the COGS formula?

( OPENING INVENTORY + PURCHASES – CREDITS – ENDING INVENTORY ) / SALES = COGS

COGS formula breakdown

  • Begin with opening inventory
    • This is inventory at the start of the period you’re looking at within your financial statements
      • If it’s weekly, it’s the beginning of the week
      • If it’s monthly or period, it’s the beginning of the month or the period
    • Opening inventory is represented by a dollar amount of the product that you start with
  • Next, add in your purchases
    • This is the most straightforward – these are the purchases that you make out make throughout the week
  • From there, subtract any credits and the ending inventory
    • Ending inventory is the dollar amount of inventory you have left on your shelves at the end of the accounting period or at the end of the week
  • Finally, to evaluate the cost as a percentage of your sales, divide the dollar amount above into your sales
    • This number paints a picture. It starts to tell you how much money you’re actually making on the food/bev that you’re selling

COGS formula tips

  • When reviewing the COGS formula, your sales basis is the sales for that cost basis
    • This means your food cost is a percentage of food sales, liquor cost is a percentage of liquor sales, etc.
    • You should have corresponding cost categories with your master sales departments
      • Therefore, the percentage is based on your specific sales basis
  • For operators who count inventory by the week, this formula is the most accurate way to calculate the costs of the product that you’ve gone through during the week
  • If your restaurant doesn’t count inventory, change the opening and ending inventory to “zero.”
    • The formula still applies
    • This means your cost is simply based on:
      • Your purchases minus your credits, divided into sales
      • Inventory is not factored in

Why should restaurants count their inventory?

Counting inventory is the best way to get an accurate representation of what your true usage is. Your inventory should be a total of all the food product, nonalcoholic beverage, beer, wine, liquor, (Note: For QSRs we suggest including your packaging in this as well), etc.

Additionally, when you count inventory you touch everything inside the restaurant. This includes all the equipment, the storage areas, walk-in freezers, etc. So, while you’re counting, you can simultaneously perform a facility maintenance check. In doing this, you’re able to catch any maintenance issues before they become a bigger problem.

Finally, remember that your total inventory dollars live on your Balance Sheet. This is recorded as an asset and represents the total dollar amount of product that you have on your shelf. Here are some top tips for a stabilized inventory:

  • Try and keep your inventory as low as you can without running out of product
    • The more inventory you have on hand, the less cash you have in your bank
    • Reducing your total inventory will help free up some of that cash
  • When reviewing your total inventory on hand, period over period, week over week, make sure you don’t have large swings that could negatively impact your cash

In the image above, the up and down “EKG chart” of your cost as a percentage of sales, when it’s only based on purchases, is not meaningful data.

All the best restaurant operators excel at troubleshooting ways to mitigate their waste. Additionally, they can determine if customer behavior changed or if an item is priced incorrectly. Operators who are able to do this so well utilize meaningful data to guide their troubleshooting.

When you’re counting inventory and have an expected cost percentage baseline, you’re enabling yourself to make, proactive, meaningful business decisions.

Best Practices in counting inventory​

  • Two-person counting system
    • Always have the same person call out the inventory and the same person record it
  • Consistent counting units
    • Make sure you count the product the same way each time
  • Organize and Maintain Shelf-to-Sheet Count Sheets
    • Try to make your count sheet flow in a way that’s shelf-by-shelf
  • Keep inventory levels low
    • Keeping inventory levels low helps you count product quicker as well as manage theft, spoilage etc.
    • Low inventory helps with cash flow
  • If you can’t consume it, don’t count it (unless you’re a QSR then you can and should include packaging)
    • Utilize a declining spending budget to manage supplies (paper products and to-go packaging)
      • These products should be budgeted out

WATCH OUR COST OF GOODS 101 VIDEO:

Common COGS misconceptions

  • Purchases are the same as usage: FALSE
    • Go back to the COGS formula. Just because you had x amount of purchases for the week doesn’t actually mean you sold all that purchased product
    • If you’re not counting inventory, whether or not that product was actually sold, it should still be reflected as your cost for that week
  • My cost is high because I purchased extra for the next period: FALSE
    • Again, go back to the COGS formula. Higher purchases don’t have any bearing on your cost because you’re inventorying the product
      • The usage is still what you actually utilize throughout that accounting period
  • Buying in bulk saves money: TRUE/FALSE
    • This one is a catch-22. Just because you might save a dollar through bulk discounts, doesn’t mean that you’re going to use the product
    • If you want to buy in bulk, be smart when you do it based on the history of your product usage
      • Ask yourself if saving a dollar here and there is truly going to help you out in the long run
  • Inventory is a time suck: FALSE
    • Think of inventory as an investment – you have tens of thousands of products sitting on your shelf, which is an asset and an investment to the business
      • Inventory should be properly received, manage, stored, and tracked
      • The more accurate and consistent your inventory is, the easier it is to identify areas of opportunity and concern.

By engaging your management team in the inventory process and having a real baseline that they can make meaningful decisions on, you’re ultimately going to save more money with the impact they can have, than the actual labor dollars it costs for them to perform inventory.

Managing food waste in your restaurant/bar

  • Declining Spending Budget & Ordering PAR Levels
    • Get your whole team involved in forecasting and make sure the order writers know the PARS should be as fluid as your sales are fluid
      • How do you do this? Use a declining spending budget that keeps track of purchases throughout the week and tells you how much you have left to spend
  • Waste tracking
    • Go old-school. Use a clipboard or even a waste bucket in the kitchen to help quantify that waste
    • If you insist on ringing it in through the point of sale, void that sale (with the category of waste) instead of comping or discounting it
      • Make sure you check with your state to see what’s required with waste. This is especially relevant to liquor. Some jurisdictions require spillage to go through your POS to ensure it’s all accounted for
  • W.E.P.T
    • W: Waste – Is it truly waste like spoilage? Is it over-ordering on those PAR levels?
    • E: Error – Is it a mistake in the way the servers are ringing in something through the POS? Do they know the difference between a void in a comp?
    • P: Portion Size – Restaurants are businesses pennies, and if half an ounce of extra dressing is going on your salads, those pennies add up quickly.
    • T: Theft – Is product going out the back door? Is it being given away to customers without being rung in?
  • Keep inventory levels low
    • Lower inventory levels are proven to minimize your waste
    • The less product available, the less likely your staff is over-portion
    • Keep in mind this is a delicate balancing act
      • Never keep your inventory levels so low that you’re running out of product because that reflects poorly on your brand; Find the level that works for your restaurant

Bonus strategy to reduce food cost

If you’re not currently involved in any manufacturer rebate programs (or Group Buying Organizations (GBO’s)) then you might be missing some cost savings that could help decrease your overall cost. A group buying organization leverages the purchasing power of all its members to negotiate contracts with suppliers that end up benefiting everybody in that organization. As part of a larger group, you’ve got strength in numbers, which leads to lower product costs that you couldn’t attain on your own.

Building relationships with all of your direct vendors and reps from all of your food and beverage vendors can help you maximize those savings that the national corporate chains are actually getting from negotiating their own rebate programs, just by finding out what you’ve got available in your area. You can check with your main distributors to see what programs they might have available to you. Learn how a manufacturer rebate program can benefit your restaurant!

LISTEN TO THE FULL PODCAST EPISODE BELOW!​