Understanding how to calculate food cost – and then applying those figures strategically to business operations – is a prime driver of restaurant success. It’s a reality many seasoned restaurant leaders acknowledge, often by way of hard-earned, costly lessons.
Historically, controlling food costs has been a challenging feat complicated by a dynamic environment with ever-shifting prices, a cumbersome calculation process, and the need to account for other operational issues demanding management’s attention. As a result, many “set it and forget it” – determining food costs once but not revisiting them again, even as the environment changes.
To cost out a cheeseburger and fries, for instance, you need to know the price of the bun, the eight-ounce patty, the two-ounce slice of cheddar cheese, the piece of lettuce, the one-ounce tomato slice, and the seven ounces of fries. Commodity prices often fluctuate, meaning the cost to put a cheeseburger and fries before the customer today isn’t what it might be in a month. Without awareness of, say, a 10 percent jump in the price of your ground beef and a nickel increase in the cost of your bun, your profit margin shrinks, and you’re none the wiser.
This threat of dwindling margins is why mastering the basics of food cost management – from calculating plate costs to determining food cost percentage – and then monitoring these key figures vigilantly is vital to your business.
Enter Back Office as a trusted ally capable of streamlining the food cost process and providing you with the insights you need to drive performance.
The 411 on Food Costs
Let’s start with some key definitions to ensure understanding.
Food Cost
Food cost is the amount a restaurant pays for specific ingredients, such as 50 cents for a hamburger bun and $4 for a pound of 80/20 ground beef.
Plate Cost
Plate cost is the price of all the ingredients necessary to produce a specific dish measured out and then added together. In the case of a plain quarter-pound hamburger with the ingredients noted above, the plate cost is $1.50 – the 50-cent bun plus $1 for a quarter-pound patty.
Cost of Goods Sold
Cost of goods sold (COGS) is the total food cost over a period of time, such as a week or a month. The formula to determine the COGS is: (Beginning Inventory + Purchases) – Ending Inventory.
Food Cost Percentage
Food cost percentage is the ratio of ingredient cost to sales price. To calculate this percentage, divide your total COGS (how much you spent) by the total sales for that period and multiply by 100. Restaurants generally aim for a food cost percentage of roughly 30 percent, though that figure could vary depending on the type of operation you’re running.
Prime Cost
Prime cost encompasses your total direct cost of production. It includes the raw materials – namely, the ingredients or food costs – and labor costs like salary, taxes, and benefits. Because a restaurant’s prime cost is one of its largest expenses, you can increase your bottom line by controlling and lowering this figure.
Why Is It Important To Know Your Food Costs?
Understanding your food costs is essential to running a successful restaurant because these expenses directly impact your bottom line, especially amid present times when rapidly rising prices can eat into your profit margins.
Additionally, knowing your food costs will influence the decisions you make to create a financially healthy and sustainable business. With a solid understanding of your food costs, you’re in a better position to:
- Set appropriate menu prices: You can determine plate costs and food cost percentage goals and set menu prices that consider your market and customers.
- Maintain profit margins: Restaurants operate on historically slim margins – often about 3 to 5 percent – so understanding the dynamic nature of food costs will help ensure your margins never shrink below an acceptable level.
- Manage your overall budget: If your food costs rise, you can tighten the strings in other areas to improve profitability or take steps to increase revenue.
- Grow your business: By grasping food costs and maintaining healthy margins, you can create reasonable forecasts and make enterprising business decisions with confidence regarding marketing, operational expenditures, labor, and expansion opportunities.
Without an ongoing understanding of your food costs, you’re not quite running blind, but you’re certainly putting your operation’s well-being and long-term viability at risk. Food costs require constant monitoring in a dynamic market where the cost to produce a particular dish shifts over time, whether due to simple supply-and-demand economics or more complex factors, such as weather and geopolitical happenings.
In March 2024, for instance, wholesale prices for beef and veal were up 12.4 percent year over year, pork was up 7.8 percent, processed poultry jumped 6.2 percent, and butter soared 18.7 percent, according to data from the National Restaurant Association (NRA).
Beyond the constant ebbs and flows of pricing, other factors can influence your recipe costs. Vendors might close shop, or products might get discontinued, forcing you to find substitute options.
Ongoing attention to food costs positions you to optimize the performance of your restaurant and capture success.
How To Calculate Food Costs … in Real-Time … With Ease
Traditionally, operators have calculated food costs manually. This process involves painstakingly entering numbers into a spreadsheet – and doing so consistently lest the spreadsheet falls apart and becomes useless. Of course, manual entry is undeniably time-consuming and prone to error.
With Back Office, you can get a handle on food costs to regain time, streamline your operation, and facilitate a healthier bottom line.
Back Office prides itself on being the most accessible restaurant food cost software on the market. It removes the guesswork of managing food costs and provides real-time, actionable reports to inform decision-making and boost profitability.
Simply snap a photo of an invoice from your supplier or connect your food vendors to Back Office, and the software does the rest – automatically digitizing and importing every invoice line by line. With your recipes installed in the Back Office system, the technology automatically tracks your food spend and COGS without the hassle of invoice data entry or inventory counts.
When an invoice comes into Back Office, the software instantly updates your ingredient prices alongside your inventory and the reports detailing key metrics like margin and food cost percentage. This integration gives you a no-hassle way to monitor the ingredients pushing up your recipe costs and impacting profitability. After that, you can reconnect with vendors to explore new terms, investigate alternative products, or reconsider a dish’s place on your menu. If you incorporate substitute products, Back Office takes care of that, too, so you don’t have to update your recipes, inventory, or reports.
As a result, you gain a complete understanding of your food cost in real-time, taking control of a prominent restaurant expense that can easily hamper your bottom line.
Reap the Rewards
Make no mistake: sound recipe costing is smart business, and knowing how to calculate food cost is vital to your restaurant’s performance.
Empowered by Back Office, you can instantly know your food cost and make strategic decisions to drive your business, from adjusting menu prices to investigating new suppliers to unleashing a digital marketing campaign promoting higher-margin items.
Learn more about Back Office and discover the benefits of a solution designed by restaurant operators for restaurant operators, particularly when it comes to controlling your food costs.
