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.