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Optimizing Food Cost Percentage for Maximum Profits

Restaurant & Hospitality Insights

November 1, 2018

Kevin Ryan, CPA

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Optimizing Food Cost Percentage for Maximum Profits

There are numerous costs associated with operating a hospitality business. Some of these costs, for the most part, are fixed (i.e. occupancy, insurance, equipment, etc.), while others are variable and beyond your control, especially labor and food costs. A successful restaurant business is likely to be operating efficiently, and has all of its labor, food, and overhead costs under control. Even so, with respect to all of the variable costs, the restaurant owner needs to be most vigilant about monitoring food costs.

Food costs are the single most significant cost in the hospitality industry. How you prepare the food, and how it tastes, will bring your customers in and keep them coming back - but the operation has to have enough margin to stay profitable enough to keep the doors open. Restaurants’ finances are comprised of many small transactions. If you are not paying attention and accounting for everything involved in plating the product, it will cost you a chunk off of your bottom line. Optimizing your food cost percentage can not only help you reach maximum profits, it might be the difference between staying in business and shutting down.

Monitoring Food Costs

There are different areas of information that are needed to arrive at the food cost/food cost percentage. In order to arrive at your food costs for a specified period of time, you need to take the following into account:

  • What is the beginning of the period inventory?
  • What are the food purchases for the period (even if you have not yet paid for the product)?
  • What is the end of the period inventory?

If you add the beginning of period inventory and purchases, and then subtract the ending inventory, you can identify your food costs. If you then take your food cost amount and divide that by your food sales for the period, you will arrive at your food cost percentage. The following is an example with numbers:

It’s often not enough to calculate total food cost – you need something to compare it to in order to know whether your restaurant is succeeding. You need to compare your actual food costs to your ideal food costs. This model calculates total costs and total sales for each item.

As you can see, notwithstanding theft or waste, looking at your food cost percentage in Fig, 1 and comparing it to your ideal food costs in Fig. 2, there is a 5% of profit available that can be added to your bottom line.

Keeping inventory is an essential part of the computation for food costs, and this obligation should not be overlooked. Inventory should be taken consistently, and on the same day of each period. Weekly inventory and food cost calculations are best and the most informative. Monthly inventories and food cost calculations are better than nothing but you should strive for weekly numbers.

Tips to Reduce Costs

    • Profit Control: Food cost is an integral part of pricing your menu items. You want to make sure you have the recipe written out, with the appropriate weight/portion size for each item so you know how to price the item when you put it on the menu. Also, don’t forget to take into account waste/spoilage/theft as all of those items occur.

    • Menu Engineering: Another beneficial practice is to change your menu throughout the year so you can remove the items that are not selling or making you enough profit. You also want to keep your menu seasonal by serving (and therefore buying) products that are in season and less expensive at that particular time of year.

  • Recipe Review: Review your recipe and see if it fits within your ideal food cost percentage. If it doesn’t, then see if you can adjust the recipe.

Optimal Margins on Food

There are many different ways to get your customer thinking about ordering your higher margin products – the more they think about them, the more they order them! There may be some items that yield a better margin – and those are the items that you want to continually promote. It could be that you are well-known for the product, in which case you want these signature items it to have the best placement on the menu, and something that the server suggests. Keep in mind, however, that not all of your products are going to have the optimal food cost percentage. You might not get the optimal price on certain food items – even though they are high in demand and necessary for business, because your competitors might offer the same item for a lower price. This is why it is important to promote your signature items and balance out your margins.

Even though calculating food costs is a bit time consuming, it helps restaurant owners make better decisions, so the investment will pay off. Understanding how to go about doing it, and interpreting the results in order to implement better practices, will undoubtedly benefit your business. A restaurant that does $2 million dollars in food sales and can lower their food costs by 5% will add $100,000 of profit to its bottom line! It is very much worth the effort.