How To Calculate Food Cost Percentage

Feeling the pinch from rising food costs? You’re not alone. In the span of just one year, food prices in Australia have seen a 7.5% increase, with essentials like bread, dairy and meat leading the hike.

 

The good news is there are various ways to save on ingredients. In fact, most restaurants spend 7-9% more on food than they ideally should. Keeping track of your food cost percentage is critical to your business’ bottom line. It shows you how profitable your items are and helps you make smart choices about pricing and inventory. 

 

If you have yet to crunch those numbers, it’s never too late to get food costs on the right track. In this article, we’ll explore how you can track your food cost percentage, control your restaurant budget and increase profits.

What is Food Cost Percentage?

Food cost percentage is a big deal for any restaurants looking to turn a profit. Put simply, it shows you how much of your sales go towards buying ingredients. Think of it like a grocery bill stacked against your total restaurant income. 

 

By calculating this percentage, you can identify if you’re spending too much on raw ingredients. This also helps keep your restaurant running smoothly without blowing the budget. 

 

Tracking food cost is important for restaurants, but it’s not just about protecting the bottom line. Let’s get down to why restaurants need to keep their finger on the pulse of food costs.

Why Food Cost Percentage Matters

Sure, keeping the doors open and making a profit is any restaurant’s top priority. But food cost percentage goes beyond simple money matters. A good grasp of food costs also helps you make better operational decisions. 

 

Here’s how understanding food cost percentage can benefit your restaurant: 

Identify areas for potential cost savings

Keeping an eye on your food cost helps you see where you might be able to stretch your budget a little further. Let’s say seafood is a major contributor to your overall food cost. Then, perhaps you could try finding alternative suppliers without sacrificing quality. 

Gain a competitive advantage

In restaurant hotspots where competition is fierce, strategic menu pricing becomes the edge for your business to stand out. By understanding food costs, you can set menu prices that keep customers happy while still maintaining a healthy profit margin. 

Make menu adjustments

Not all menu items contribute equally to your profitability. Calculating your food cost percentages lets you see which dishes have a healthy profit margin and which ones might need some work. 

 

Consider offering slightly larger portions on high-profit dishes to keep customers happy. You should also highlight these dishes on your menu to encourage better sales.

On the other hand, low-profit dishes might benefit from a recipe revision. Minor tweaks such as using more budget-friendly ingredients or adjusting the serving size could go a long way in maximising your cost here. 

Minimise waste and improve inventory management

Food waste is a hidden cost that can impact your profits. Tracking food costs helps you spot where produce might be going to waste. This lets you make smarter calls for stock-ups and save some extra cash.

Take salads, for instance — maybe you’re ordering too much lettuce and the excess always ends up wilting in the fridge. Tracking what you have and buying based on what sells helps you avoid waste and keep those food costs in check.

Gain location-specific insights 

If you run a multi-location restaurant, understanding your food cost percentage becomes even more valuable. Comparing costs across branches helps you spot locations that might be overspending. With that, you can re-strategise and take targeted actions to ensure consistent profitability. 

How to Calculate Food Cost Percentage

There are two main ways to calculate your restaurant’s food cost percentage. Here’s how:

  1. Food Cost Percentage for Entire Restaurant

Your restaurant’s food cost percentage tells you how much of your budget goes toward buying the ingredients. Here’s the formula: 

 

Food Cost Percentage = (Cost of Goods Sold (COGS) / Total Food Sales) x100

 

Let’s break it down further.

 

Cost of Goods Sold (COGS): This is the direct costs associated with the food you sell. To calculate COGS, you’ll need to consider:

 

  • Beginning Inventory Value: The dollar value of your food inventory at the start of a period. This can be the beginning of the week or month. 
  • Purchases: This is the total cost of all food items purchased during the period above.
  • Ending Inventory Value: The final dollar value of your food inventory at the end of the same period. 

 

COGS = (Beginning Inventory Value + Purchases) – Ending Inventory Value

 

Total Food Sales: This is the total revenue generated from food item sales during the period. 

 

  1. Food Cost Percentage Per Dish 

Ever wondered how much your best selling menu item costs to make? Calculating your food cost percentage per dish helps you figure out the profit you make on each dish. Here’s how:

 

Food Cost Percentage per Dish = (Total Cost of Dish per Serving) / Price of Dish Charged) x100

 

Total Cost of Dish Per Serving: Sum of the individual costs of all the ingredients used in a one serving.

 

Price of Dish to Customer: This is the price you charge for the dish on your menu. 

The Ideal Food Cost Percentage

Generally if your restaurant is maintaining a food cost percentage between 28 to 35%, you’re in a good spot.

 

This means that for every $1 of revenue from food sales, 28 to 35 cents go towards the ingredients. Of course, that figure could also vary based on:

 

  • Type of Cuisine: Fancy or out-of-season ingredients in a high-end restaurant will naturally cost more than burgers and fries at a fast food joint. 
  • Overhead Costs: Don’t forget your rent, staff salaries and utilities. If these weigh on the higher side, you may need to balance things out with a slightly lower food cost percentage to maintain profitability. 
  • Menu Pricing: If you’re trying to win volume with lower menu prices, you may need to manage food costs more tightly.

 

How do you get to the sweet spot with your restaurant’s food cost percentage? Here’s a quick formula: 

 

Ideal Food Cost Percentage = (Total Food Cost / Total Food Sales) x 100

Let’s say your restaurant’s total food cost is $3,000 and the total food sales is $10,000. That would make your ideal food cost percentage 31%. 

If your actual food cost percentage is 35%, that means you’re missing out on as much as 4% in potential revenue. In that case, you might want to explore ways on how you can lower your food cost percentage. 

 

Keep reading for ways to lower your food cost percentage.

How to Lower Food Costs

With everything costing more these days, Aussies are eating out less often than they used to. This makes controlling food costs even more crucial for restaurants in 2024.  

Keeping food costs in check is an ongoing quest but there are ways to help you cut margins without sacrificing customer satisfaction.

Portion control is essential

Serving the right amount is key to keeping food costs down. Oversized portions mean wasted food and lost profits. Invest in tools like scales and portion spoons, and train your staff for consistent portioning. 

Keep an eye on dishes that are consistently left unfinished — it could be a sign that portion size is inflated. 

 

Embrace seasonal ingredients

Seasonal ingredients not only shine with flavour, but they also often cost less to acquire. Design your menu around these fresh offerings and get creative with menu items! You might even attract a whole new group of customers. 

Local farmers are also cutting out the middleman to get better quality produce at lower prices. Getting to know your local farmers and building a relationship with them can also help you keep the costs down. 

Adjust menu pricing based on food costs

Tracking your food costs regularly helps make sure you’re charging enough to keep your profits healthy. Be adaptable with dishes that cost a lot to make, and be open to adjusting prices or exploring recipe tweaks. 

Additionally, you can also offer lunch deals or smaller portions of popular dishes. That way, you keep customers happy and your margins healthy.

Invest in restaurant technology

Smart solutions for restaurant management can go a long way in increasing revenue. An inventory management software lets you track your ingredients, so you only order what you need.

An online booking system like Now Book It helps you predict how many customers to expect. This equals less waste and more savings. You can even schedule the perfect number of staff to handle the crowd to cut down on labour costs.

Explore alternative suppliers without compromising quality

Building strong relationships with your suppliers is the secret recipe in our books, but in this market, always be open to negotiating bulk discounts, loyalty programs, or payment terms. 

Consider joining group purchasing organisations (GPOs) and team up with other restaurants for stocking up on inventory. Also, don’t sleep on local farmers or wholesalers especially when it comes to high quality seasonal produce. 

Take Control of Your Food Budget

Calculating your food cost percentage is the first step, but optimising costs and maximising profitability is an ongoing process. Keeping an eye on your food costs helps you see where the money’s going and make adjustments in a timely manner.

Take control of your food budget to make smarter decisions and boost your restaurant’s profitability in this competitive landscape.

 

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