Running a successful restaurant isn’t just about creating great recipes or a unique atmosphere. To be sustainable, your restaurant must manage costs effectively, and Cost of Goods (COGS) has one of the biggest impacts on your bottom line.
Unfortunately, many operators don’t understand how mismanaging COGS for restaurants can negatively impact profitability and cash flow. Understanding what COGS is, how to calculate COGS in a restaurant, and how to implement best practices for managing it can mean the difference between growing margins and watching profits slip away. Whether you’re a single-unit restaurant owner or managing multiple locations, mastering your COGS is essential for financial success.
What Is the Cost of Goods (COGS) Formula for a Restaurant?
COGS, or Cost of Goods Sold, measures the direct costs of producing the menu items sold to customers. It includes the costs for raw ingredients, such as meat, sauces, or spices, as well as other consumables required to prepare the dishes.
The basic COGS formula always uses the same calculation:
COGS = (Beginning Inventory + Purchases – Credits – Ending Inventory)
When you see this metric as a line item on your P&L, this is the formula used to calculate that value. As an extra step, some restaurant owners also calculate their COGS percentage using this formula:
COGS % = Total Cost of Goods Sold / Sales
This Cost of Goods Sold percentage metric can be invaluable in helping operators identify and fix food cost issues within the restaurant.
COGS Formula Breakdown
The COGS formula gives a clear picture of the total cost of the goods used to generate sales over a specific period. By comparing the changes in inventory to the sales volume within the same period, restaurant operators can quickly identify any unexpected increases in costs and work to identify and fix the root issue.
Beginning Inventory
Beginning inventory is the value of all food-related inventory on hand at the start of the period. This value is generally taken from the previous period’s P&L Ending Inventory.
Purchases
Purchases account for all new inventory bought during the current period. This value will generally match the total food items listed on all the invoices from your food suppliers during the period. These invoices may also list certain credits (which are subtracted in the COGS formula above) or non-food items, such as cleaning supplies (which are not included in the overall COGS formula).
Ending Inventory
Ending inventory represents the dollar value of remaining stock at the end of the period. To calculate this value, you’ll need to take an inventory count, multiply it by the cost per item, and add them together to get a total value. Automated inventory tracking tools can greatly simplify the process of calculating ending inventory.
How to Calculate COGS in a Restaurant
Calculate your restaurant cost of goods sold with the COGS calculator below! Simply enter the dollar value of your opening, purchases, credits, ending inventory, and sales. Then, click “Calculate COGS” to see your restaurant’s cost of goods percentage.
COGS Formula Tips
Consistency and accuracy are key when measuring your restaurant’s inventory, as even small errors can lead to significant miscalculations in your cost of goods sold. Establishing consistent processes ensures your numbers stay accurate, giving you confidence in any operational decisions based on these metrics. Below are specific tips to help refine your approach to inventory management and COGS calculation:
Audit Your Inventory
Conduct regular inventory checks to avoid discrepancies caused by spoilage, theft, or mismanagement.
Standardize Measurements
Record inventory in consistent units (e.g., pounds, gallons) each period to prevent confusion.
Leverage Technology
Use inventory management tools or software tailored for restaurants to streamline tracking and reduce errors.
Account for Specials
If you run promotions or limited-time menu items, factor these sales into your calculations.
Best Practices in Counting Restaurant Inventory
Maintaining accuracy is important when tracking and managing COGS in your restaurant, but it doesn’t have to be overwhelming or time-consuming. By adopting restaurant COGS best practices, you can ensure greater efficiency, accuracy, and consistency in your inventory processes. Below are some effective strategies that can help streamline this essential task and improve your overall operations.
Establish a Consistent Counting Schedule
Set a specific day and time each week for inventory counting to ensure consistency and accountability among staff. For even greater accuracy, perform your counts after closing whenever possible to avoid interruptions, and use a two-person system with the same individuals counting and recording.
Organize for an Efficient Process
Make sure all inventory items are clearly labeled and stored in designated areas for easy access and quick identification. This not only speeds up the counting process but also minimizes errors, helping to maintain accurate records and reduce unnecessary costs.
Utilize Technology
Use automated inventory management software to efficiently track stock levels, set reorder alerts, and generate reports. This technology will save time, reduce waste, and help you make informed purchasing decisions that will boost overall profitability.
Leverage Your Data in Multiple Areas
Calculating and managing your COGS gives important insights into your overall food cost, but you can also use the data in other areas of your restaurant. When calculating inventory and COGS, plan to leverage that same data to review your recipe costing and menu analysis. This strategy allows you to see how different menu items are performing and make informed decisions about pricing and product mix.
Common Restaurant COGS misconceptions
Understanding and managing Cost of Goods Sold is crucial for maintaining profitability in your restaurant. Unfortunately, there are several common misconceptions that can lead to errors and inefficiencies when calculating COGS.
“I don’t need to count inventory because my purchase invoices tell me how much I’ve used.”
Purchase invoices only reflect what has been bought, not what has actually been used in the restaurant. Without conducting regular inventory counts, you cannot accurately track usage or account for waste, spoilage, or theft. To manage COGS effectively, implement a consistent inventory counting system and compare the data against purchases and sales to get a complete picture of your inventory and usage patterns.
“Buying in bulk helps me save money.”
This misconception sounds plausible but is not always true and can often lead to higher costs if not managed carefully. Excess inventory can result in spoilage, waste, and increased storage costs, erasing any potential savings you could have realized from bulk purchases. Instead, focus on making smart and efficient purchasing decisions based on actual sales and usage data rather than buying more than what is needed just to chase a few pennies.
“COGS should be the same across all my restaurants / restaurant types.”
Cost of goods sold (COGS) can vary significantly depending on location, menu offerings, supplier relationships, and operational efficiencies. Standardizing COGS across all your restaurants often disregards these unique variables, leading to flawed benchmarks and decision-making. Instead, evaluate COGS on an individual basis, and adapt your decision-making strategies to align with each location’s specific circumstances and market conditions.
“My COGS is what it is – I can’t lower it without hurting sales.”
Lowering COGS does not necessarily mean sacrificing sales or quality. By negotiating better supplier contracts, optimizing inventory management, and reducing waste, you can achieve significant cost savings without negatively impacting the customer experience.
Managing Food Waste in Your Restaurant
Wasted food drives up COGS, as it represents money spent on ingredients that are never sold to customers. When food is wasted, you’re essentially throwing away both the raw costs of the ingredients and the labor associated with preparing them. By focusing on eliminating unnecessary food waste, restaurants can reduce their COGS and improve profitability.
Here are several strategies for how to reduce COGS and better control your food waste:
- Track your waste: Go old-school with a clipboard or waste bucket in the kitchen so you can immediately quantify when and how much food is being wasted.
- Implement portion control: Using portion cups and other measures helps ensure customers receive the correct serving size every time without excess.
- Repurpose ingredients: If you identify items that are close to their use-by date, repurpose them creatively — such as turning unused vegetables into soup stock — to maximize their usability.
- Keep inventory levels low: Lower inventory levels help minimize waste by avoiding excess stock that spoils before it can be used. They also set a conscious mindset with your staff to avoid over-portioning. (e.g. “Don’t use too much cheese – it needs to last until tomorrow when our truck arrives.”)
These strategies, along with other food waste tips, can help create opportunities to elevate your menu and improve your bottom line.