Food Cost Analysis

If you have been reading the past few posts about food cost, you probably have deduced that I do not like to be surprised.  I especially do not like to be surprised by a bad bottom line result.

I entered my career in restaurants in the days of paper and pencils, and calculators. 

I spent lot of time studying food cost and how to manage it successfully.

No surprises meant that I had to have a very good handle on the factors that contributed to managing my food cost: pricing menu items, watching waste, managing yields, tracking inventory and monitoring team activities.

And I got very good with a calculator and pencil.

If you are using the tools that we discussed in the earlier posts, inventory and plate costs, you will have the tools for analysis of your food cost.  

I always had my inventories set up so that I could compare each food cost category group to both projections and previous results.  For instance, I broke out meat as a category and a subtotal so that the “meat cost of sales” could be tracked as a component of the total food cost. 

If my food cost ran higher than projection, I could go back over each category subtotal and review what the problem might be.  This allowed me to hard target the problem, rather than “swagging” (Scientific Wild A** Guess) to my team. 

For “Plate Cost” I knew the cost of each menu item, what it costs to produce the item and what margin I needed for each item.  I also know the menu mix for each

Item, so I can assess the impact for both my food cost and my bottom line. 

Using that information, I could react very quickly if the cost of the ingredients changed, if my yields changed or if the pricing of the menu item changed. 

For example, in one job that I worked, my General Manager approached me about “my high food cost” on my shifts. His advice to me was “to get my portions and waste under control or he would fire me” and hire someone who would not blow up his food cost.  I didn’t know whether to laugh or swear at his ignorance, but I certainly wasn’t going to take his challenge lightly.  Using my knowledge of inventory and plate cost, I prepared a report for him that clearly demonstrated that I WAS NOT the problem, that his discounting and coupons were the cause of the food cost problem.  Quite simply, he was not charging enough for his food!

Even more interesting, the Area Manager got wind of my little project and asked me to expand my report for the entire last accounting period.  He wanted to share the discounting and coupon revelation with his boss and his entire team.  While I reflected in amazement that the entire organization seemed clueless about the impact of the mandated discounts and coupons, I welcomed the opportunity to bring some common sense to the process. 

I prepared the requested report, for an entire accounting period that clearly demonstrated that our unit had excellent portion control, minimum waste and effective yield management.  The food cost problem was the menu discounting and coupons, something that was corporate mandated. 

While a good case can be made for the coupons driving top line sales, the discounts was used, targeting low margin entrees, hurting the food cost because they did not take into account the high redemption rate by our guests that used the discounts and the price of the food that was used to create the menu items. 

My report certainly did stir things up, from the unit level right up to the regional level.  I gathered several new “friends” in the company, and got labeled the “smart guy”, because I understood Food Cost and could figure it out.   

Of course, being labeled the “smart guy” was also a pretty good career move for me, earning me several promotions, from unit to area to regional within that company, and then beyond.   

They definitely got smarter when they changed the coupons to drive top line sales by “packaging” multiple entrees and appetizers into a special deal, and keeping a very profitable margin while focusing our guests on higher perceived value.  

Still, my goal has always been focus to be very smart about my food cost. 

Food cost is a variable cost, but remember it always tracks with your revenue.  It should remain the same percentage of revenue, no matter what direction your revenue heads, either up or down.  As with labor cost, it is much easier to manage as your revenue goes up, because you have more offsets for errors. 

But you still must have very tight control over the costs for food and the revenue it generates, so it doesn’t impact your bottom line.   

Cheers! Here’s to building profits!

Calculating Plate Cost

If you are changing your menu, or if you just purchased a restaurant, you should do a plate cost of each menu item. 

Plate cost is the total input cost for a menu item.   It really doesn’t matter if you are serving a slice of pie on a plate, or several courses for carryout, you must know what it costs you to present that menu item to your guest.   You then divide that cost amount by your selling price to calculate your plate cost.

After all, if you have a projected food cost for your business, you have to know if each menu item helps you meet your projection. 

Admittedly, it is pretty simple to calculate the cost of serving a slice of pie.  You just start with your cost for the whole pie, and then use the yield to calculate the cost of each slice.  If the cost of the whole pie is $8.80 and it will yield 6 slices, then your plate cost is $1.47.  If your menu cost is $3.95, your plate cost is 37.13%.

Of course, it gets a bit more complicated if your bake your own pies in the restaurant.  In that case you have to have a recipe that your baker follows, so you can add up all the ingredient costs, to determine your cost for the pie.  Then you can calculate your plate cost, using the formula. 

The same applies to your other menu items.  You have to know the ingredient cost, so you must have a recipe for each item on your menu.  If you don’t have a documented recipe then you can’t accurately calculate your plate cost.  Thus the first step in calculating your plate cost for each menu item is to have a recipe, a recipe that is followed for each serving of that menu item. 

Of course, if your have a menu item that has several different ingredients, then you are going to have some work to do, especially if some of those ingredients have their own recipes.  Say that you have a hamburger that is made with your own special dressing.  You must calculate what a batch of your special dressing costs to make and then figure a yield, then determine the input cost of that dressing for each hamburger that you serve. 

Reading this far, your immediate thought might be this sounds like a LOT of work for a very low payoff.  Not really!  First of all, if you have a typical menu you probably have only about 45 to 60 menu items that would need to be costed out.  Second, most menu items have several of the same ingredients, so once you determine the cost of that ingredient portion, you can use that for every recipe. 

The much bigger payoff is that you will know exactly how much it costs you to serve that menu item and thus know if you are charging the correct price for this item on your menu.  And you then can calculate exactly the contribution to profit. 

If you don’t know, then you are just guessing.  Guessing is not the way to run a successful restaurant.

Now that you know the cost of each menu item, you have to make sure that it priced to contribute to your profit. 

10 Tricks and Tips to Make Your Food Inventory Easier and Quicker.

Do your food cost every week.

Unless you work for a chain where the weekly inventory and food cost is mandated, most owners and managers treat the weekly inventory as an “optional” exercise.  Believe me, it is not. 

I always enjoyed doing the inventory because I like to see the result, and make sure that I was meeting my profit goals.  I can’t have a big impact on my Fixed Costs every week, but I can really make sure that my food cost is in line with my projections and goal.  It is a first key step to make sure that your inventory is making you money.    

There is a variety of things that can happen to your food before is turns into revenue, and most of them are bad.  Delivery errors, waste, theft, reduced yields, spoilage, over portioning, recipe mistakes, and comps are adding to your usage without bringing revenue, thus increasing your operating costs and reducing your profits.  Careful inventory management helps you spot the problems, before the costs drive you out of business.

I crave success and thus spent a lot of time making sure my inventory was turning into revenue.  I took ownership of the food from the time I placed the order until I scraped the “leftovers” into the trash can.  Food Cost awareness was a part of my job that I really enjoyed. 

The calculator part is easy.  The handling, arranging, counting and calculating can be just as easy with some planning.  Establish your routine and it becomes very easy.

1)  Review your food inventory every shift.            

            I started every shift touching and checking all of the food.  I always knew what I had “on hand” and what it was going to yield.  I knew what we were going to sell that shift and what we needed to have prepped.  My kitchen staffs always worked from a large white board.  You can’t sell what you don’t have!

2)  Watch what is being used.  Watch prep, item sales and ending counts.

            I always watched what is being prepped and how closely the recipe cards are being followed.  An experienced cook can hit the ingredient measure very close, but for costly food items make sure the recipe is followed, using all the proper measurements.  I do not like waste in the kitchen!  

3)  Watch for the leftovers and “doggie bags”. 

            What is being scrapped off the plate by your bussers and dishwashers?  It is smart to make sure that your guests are getting what they paid for, but are your portions the right size for your guests?  Too small and guests feel cheated, too large and they waste it or take it home to "finish" later?   I don’t want my customers to waste food, and I don't want my menu items "re-served" under less than optimal conditions, so I made sure my portions were right.

4) Be consistent about what you count and when you count it. 

            It makes the most sense to count your inventory when your food stock is lowest, just prior to reordering most of your stock.  Typically, that is going to be Sunday, Monday or Tuesday.  You must decide if you are going to count food items that are “in use”, such as spices that are opened on the spice rack, or menu ingredients that are already prepared.  Prepped and in use ingredients are usually consistent enough to not affect food cost week to week.

5)  Place your food order carefully and check it in carefully.

            Make sure you order everything you need and get everything you are charged for by your purveyors.  Mistakes rarely happen, but it’s very smart to get errors taken care of at the time of delivery.

6) Keep accurate records of purchases and on hand inventory.

            It really doesn’t matter if your food cost bookkeeping is paper based, using a pencil and calculator or if it uses electronics and software, keep accurate records for both this week’s calculations and for your long term records.     

7) Train your team to store the same items in the same manner every day.

            To keep your records accurate, your whole team needs to be on the same page with you about how the food stock is handled and stored.  I kept my rules simple, only unopened, full cases in the stock room, open and partials in back stock, and units in the production and service lines.  It saved me a lot of time to have my team work smart.  

8) Go thru your stock once a day to keep order and know what is on hand.

            Every shift tour included time in all storage areas, opening all doors, and checking in all cabinets.  Part of this is following up on the team, and part of it is to previewing all stock to make sure everything is where it needs to be.  

               

9) Precount your inventory, check units, arrange stock for fast counts.

            Before you start the actual inventory, do a walk through to assure everything is ready for counting.  To do the inventory in the shortest time, you must have everything ready to count, you do not want to have to move items or open boxes to do the count.  Your focus must be on the count and writing it on your ledger sheet.  

10) Count by location, and count the same way at each location each time.

            Door to left, right to left, top to bottom, frozen to dry, it doesn’t matter.  What does matter is the routine.  Routine helps focus you on the count and working through it quickly. 

If you have done your steps, everything is ready, and inventory will go very quickly.     Plan, organize and control your food cost system to insure accuracy and efficiency, as well as profitability.  It will pay off for your restaurant. 

In the next post we are going to talk about food cost for each individual menu item.  Stay tuned!

Food Cost is Important!

Food cost is very important to the operation of a successful restaurant.

The cost of the food you serve could be your largest cost, and the one cost that, if not managed closely, will destroy your profitability.  It is your key controllable cost.

Before you establish your restaurant, or purchase an operating restaurant, you will have a key budget number for your food cost.

Whatever you call it, Food Cost, Cost of Goods Sold or the financial term “Input Cost”, you must have an accurate projection and track your actual cost against the projection regularly. 

What is food cost?

Simply it is the cost of all the ingredients that you use to serve your menu.

It is simple to calculate:

The total value of the food on hand at the start of the accounting period,

plus the total value of all food purchased during the accounting period,

minus the total value of the food hand at the conclusion of the accounting period, which gives you the total amount of food used during accounting period. 

Then divide the total value of the food used during that accounting period by the total net sales to get the food cost percentage for the period.   

To recap: Beginning inventory + purchases – ending inventory = food used / total sales = food cost.

That calculation is the simple part.  Managing it is much more complex. 

Of course you start with a budget and projections of your operating revenue, expenses and profit.  As you build your menu, you calculate a “plate cost” for each menu item.  Finally, you regularly calculate your food cost to see if your actual food cost is in line with your projections or budget.   

The calculation starts with doing a complete inventory of all of your food and beverages.  When the inventory is complete, you have to determine the value for everything on hand. 

How often should you do an inventory?  Or put another way, how often should calculate your food cost?  If you are doing a monthly income statement, then you must do the inventory at least once per month to accurately calculate the monthly income and profit.  But you will want to monitor your operating costs more frequently to be sure that your restaurant is operating to your profit projections.

When all is new, or if you have been having food cost problem, you should be calculating food cost on a weekly basis.  If everything is under control you may decide to extend that to biweekly. 

While I know and have worked with managers and owners that only did a monthly inventory, I would not.  I don’t like to be surprised.  I just believe that if you let four weeks go by, you don’t have the time to react and impact the food cost.  A lot of stuff can happen in four weeks, and most of it is bad.

Food cost is the key cost that you have to keep a very close track on, so that you can keep your restaurant profitable.  Checking it weekly gives you the vital information you need to react to variations in your food cost and get it back on track to your projections. 

In the next installment of this food cost series, we will talk about ways to make your weekly inventory easier and quicker.