Authored by: Brian Duncan, Director of Business Development
Most franchisees are tossing wads of cash into the kitchen trash can every single day.
Not because of any external factors. But because they don’t know how much they are spending to produce their dishes and are therefore not in control of their restaurant food costing.
As a franchisee, you might not be able to shop around for cheaper ingredients. But that makes it all the more important to stay on top of the things you can control.
The shocking fact is that a 3% reduction in food costs could earn a successful franchise over $10,000 in extra revenue each month. This article will show you how to make that bonus income a reality for your business.
Ready to take action and start to calculate and control your food costs? This guide will help you:
- Understand why staying on top of your food costs is so important and how to control food cost
- Make fundamental food cost calculations including Food Cost Percentage, Cost Per Menu item, and Food Cost Variance
- Use your calculations to gauge your performance and make improvements
After reading this guide you’ll be a restaurant food costing calculator, chomping at the bit to start improving processes, reducing food waste, and improving your margins on every dish sold.
How Important is it to Control Restaurant Food Costing?
A small reduction in food costs can have a huge impact on the business. Especially when multiplied across time.
A study of 114 restaurant sites over three years by WRAP, Waste & Resources Action Programme, found that by reducing food waste alone, the average site saved two cents on every dollar.
And by engaging staff in proactive campaigns to reduce waste and limit overproduction, the restaurants achieved an average ROI of $7 for every $1 spent.
Now let’s take a look at an example to back up the bold claim made in the intro to this guide:
Let’s say a hot dog franchise called Ralph’s Hot Dogs turns over $350,000 per month with food costs accounting for 30.8% of the monthly revenue. Factoring in other costs, the business returns a profit of $32,300, as shown in the following table.
Now imagine the team put in some measures to cut food costs. The operator tightened up portion control on items like cooked onions and ketchup, improved training so there was less waste during preparation, and took control of their recipe costing so they could track any changes. The improvements result in a 3.1% reduction in food costs.
|Metric||High Food Costs||Lowered Food Costs|
|Food Cost Percentage||30.8%||27.7%|
|Food Cost||– $107,800||– $96,950|
|Staff Cost||– $150,000||– $150,000|
|Overhead Costs||– $60,000||– $60,000|
|Gross Profit||= $32,200||= $43,050|
This table shows the difference the modest improvement makes to the bottom line. A 3.1% reduction in food costs results in a 34% increase in profit. Or $10,850 in the business account that month that wouldn’t have otherwise been there.
Spending on food makes up a large proportion of the costs for any food business. So small changes have a huge impact –and larger improvements can be monumental.
The first step on the road to getting these kinds of results is to start calculating your food costs. That way you can take control and make positive changes.
How to Calculate Your Food Costs
Calculating food costs might sound harder than completing a mathematics degree at Oxford University. But it needn’t be. Restaurant operators have a wealth of tools at their fingertips to help crunch the numbers and stay in control.
Simple spreadsheets can help you understand and track your recipe costing. And restaurant food costing software that takes in data from your POS and other systems can go even further and automate the whole process.
But being aware of the key calculations and what they mean for your business is crucial to understanding how much you’re spending on food and where you could spend less without compromising on quality.
Let’s go through the most fundamental calculations and how they can help you keep a lid on your costs.
Actual Food Cost – aka. Restaurant Cost of Goods Sold
The first calculation you need is the Actual Food Cost, which tells you the value of the ingredients you have used in a given period. FYI, in non-restaurant settings, it is known as the Cost of Goods Sold.
To make the calculation, you’ll need to know how much stock you used over the period, including what you already had, and the purchases you made during the period.
You will need:
- Starting Inventory – the value of the stock at the start of the period
- Purchasing Inventory – the value of new purchases during the period
- Ending Inventory – the value of your stock at the end of the period
Here’s the Actual Food Cost formula:
Actual Food Cost = Starting Inventory + Purchasing Inventory – Ending Inventory
Let’s take a look at how you would calculate the Actual Food Cost for Ralph’s Hot Dogs:
To calculate the Actual Food Cost for the month of June, take:
- The value of the inventory at the start of the month: $8,000.
- The $4,000 spent on ingredients in June
- The value of inventory at the end of the month: $10,000.
8,000 + 4,000 = 12,000
12,000 – 10,000 = 2,000
Actual Food Cost = $2,000
That means the business used $2,000 worth of ingredients in the month of June. But why do you want to know this?
Because armed with this information you can calculate the Food Cost Percentage, a figure that gives you a benchmark for how well you are controlling food costs. And a staging point to make further calculations.
Food Cost Percentage
To get a useful figure to see how to stack up against other restaurants and see how you’re doing month-to-month, you can compare your Actual Food Cost to your Turnover. Although it’s not enough to tell you where to make meaningful improvements – more on that later – it does give you an idea of how well you’re doing.
The restaurant Food Cost Percentage should be in the ballpark of 28-32%. By calculating yours, you can see where your performance stacks up.
Here’s the formula:
Food Cost Percentage = (Actual Food Cost / Revenue) x 100
Let’s go back to our hot dog franchise example once again:
Take the Actual Food Cost for June from the example above and divide it by the monthly revenue: 2000 / 6500 = 0.30769
Now multiply the figure by 100 to get the percentage = 30.769
Food Cost Percentage = 30.8%
Immediately, you can see that the food cost percentage is looking okay, but there is room for improvement. Where to make the improvement? That’s where the next concept comes in.
Cost Per Menu Item
You can figure out the Food Cost Percentage for each recipe to get a granular view of profitability per dish sold.
Let’s look at how you would cost a hot dog to illustrate:
This simple spreadsheet tells you the unit, amount, and cost of each ingredient to give you the cost of producing one serving.
Here are the formulas to work out what you’ve spent on one menu item across time :
Food Cost Per Menu Item = Cost of Ingredients x Quantity Sold
Now you know how much it costs to make each serving and you can work out the Food Cost Percentage Per Menu Item. Armed with these numbers, let’s go further.
Ideal Food Cost & Ideal Food Cost Percentage
This is where it gets really interesting. As we introduce hypothetical food costing calculations. Your Ideal Food Cost is what your food costs would look like in an ideal world – with perfect portioning and no wastage, pilfering, or spoilage.
It’s useful to know because it gives you a comparison with reality so that you can figure out where you’re losing money. That’s where you can start to make positive changes and attempt to reduce your food costs.
Here are the formulas you need:
Ideal Food Cost Per Item = Total Cost Per Menu Item x Total Sales Per Menu Item
Your POS should be able to hand you the total sales figures. Add the figures together for all your menu items to get the total for your Ideal Food Cost. Then turn it into a percentage as we did with the Actual Food Cost.
Ideal Food Cost Percentage = (Ideal Food Cost / Revenue) x 100
Back to hot dogs:
If the food costs for all those hot dogs and other items sold in June came to $1,800 and sales totalled $6,500, the Ideal Food Cost Percentage calculation would look like this:
1800 / 6500 = 0.2769
0.2769 x 100 = 27.69
Ideal Food Cost Percentage = 27.7%
What can you do with your Ideal Food Cost Percentage? You can compare it with your actual Food Cost Percentage to find out your Food Cost Variance.
Food Cost Variance
The Food Cost Variance tells us the difference between the Actual Food Cost Percentage and Ideal Food Cost Percentage. In other words, it tells you how far away from perfection you are.
Here’s the formula:
Food Cost Variance = Actual Food Cost Percentage – Ideal Food Cost Percentage
Now let’s figure out the Ralph’s Hot Dog’s Food Cost Variance:
Actual Food Cost Percentage = 30.8
Ideal Food Cost Percentage = 27.7
Food Cost Variance = 3.1%
A variance of 3.1% is not too bad. But it suggests that more can be done to bring down food costs. The number tells you the extent of changes that need to be made so you can start looking into where the discrepancies lie.
For example, is there a problem with portion control? Or are one too many layers being peeled off your onions?
You can calculate your Food Cost Variance as a whole for a given period as well as per menu item. Together with the other calculations we have mastered, this gives you a granular view of your food costs so that you know where you need to make changes to reduce food costs and boost profitability.
Grab Control of Your Food Costs With Smarter Restaurant Management Software
With your newfound mastery of these fundamental food cost calculations, you can go about making changes to training and production processes to reduce your food costs without reducing the quality of your offering.
But you don’t have to make all these calculations manually or scrabble around trying to find purchase receipts from your suppliers.
With smarter restaurant management software, all the data is stored in the cloud, ready for you to access at the click of a mouse. And many of the figures you need are simply generated by the software.Find out more about how HungerRush can help you streamline operations and run a more efficient restaurant.