How to Calculate Food Cost Percentage and Increase Profits

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Summary:

  • Food cost is the ratio of how much a dish costs to how much revenue it generates.
  • There are two formulas used to calculate a food cost percentage — the actual food cost formula and the ideal food cost formula.
  • The recommended food cost percentage is between 20-35%.

It takes about four steps to calculate food cost percentage, which doesn’t sound too difficult. But when you count the number of ingredients in each dish, and the number of dishes on your menu, the amount of number-crunching you have to do really adds up.

The food cost percentage formula is one of the most important when running any restaurant business. It indicates whether you’re on the path of making or losing money, as well as which exact ingredients should be substituted.

If you’re just starting out, however, it’s common not to know how to calculate food cost percentage. This article explains the exact formula and every step needed to figure the optimal food cost percentage for your establishment.

What Is the Food Cost Percentage Formula?

Before digging into each individual ingredient and dish, it helps to know what the food cost percentage formula actually looks like.

Food cost refers to the ratio of ingredient costs (inventory) and the revenue generated by those ingredients (sales). Food cost is usually presented in the form of a percentage.

There are two different food cost percentage formulas — one to calculate actual food costs, and one to calculate ideal food costs.

Actual food cost

Knowing your actual food cost starts with inventory. The ingredients you have on hand have a corresponding dollar value, and monitoring how much is used, or spent, during a certain time period is a good measure of how much actually goes toward food cost. (This is the same formula used when calculating the cost of goods sold, or COGS, in most businesses.)

Here is the actual food cost formula:

(Beginning inventory + purchases – ending inventory) ÷ food sales = actual food cost

At the beginning of the week, list all the ingredients you have in inventory along with each one’s value. If you make any additional food purchases during the week, list these down as well. Then, at the end of the week, take inventory again. Also calculate for the week’s total sales.

Add the value of the beginning inventory to any purchases made, then subtract the value of the ending inventory. This will give you the value or cost of what was spent during the entire week. Then, divide this number by the week’s food sales, and you will get your actual food cost.

For example, say a matcha cafe has a beginning inventory of $5,000 worth of matcha powder, $4,500 of various milks, and $2,000 of sweeteners, which totals to $11,500. During the week, they purchased an additional $1,000 worth of milk. At the end of the week, their remaining inventory included $2,500 of matcha powder, $1,500 of sweetener, and $2,500 of milk. Their sales for the week were $15,000.

Applying the actual food cost formula, this would give us the following:

11,500 (beginning inventory) + 1,000 (purchases) – 6,500 (ending inventory) ÷ 15,000 (food sales) = 0.40

This reveals that the matcha cafe has an actual food cost of 40%.

Ideal food cost

The ideal food cost is the hypothetical percentage you would pay if everything went perfectly — no food spillage, waste, or portion inconsistencies. Although it doesn’t account for real life occurrences, the ideal food cost is used as a measure of comparison.

The formula for the ideal food cost is:

Food cost ÷ food sales = ideal food cost 

In this formula, food cost is the cost of all ingredients on the plate, and food sales is the price paid by the customer for the dish.

To get the food cost, you have to figure the exact ingredient price of the portion size used on the plate. Do this for every ingredient, all the way to the spices and seasonings. Then, add the numbers together for the total food cost. Divide this total by the food sales to get the ideal food cost.

Following the above matcha cafe example, the ideal food cost of a matcha latte is broken down below:

$0.40 (1 teaspoon matcha powder) + $0.25 (2 teaspoons sweetener) + $0.55 (3/4 cup milk) = $1.20  

If a restaurant sells each latte for $4.25, the ideal food cost calculation would be:

1.20 ÷ 4.25 = 0.282

The ideal food cost percentage for a matcha latte is 28%, which is about 12% below the actual cost. This discrepancy might be due to spilled ingredients, food spoilage, or not measuring portions or ingredients correctly.

It’s necessary to take control of the food costs in your kitchen. A good first step is knowing how to use food cost formulas.

How to Use the Food Cost Percentage Formulas

Two people calculating food cost percentage

Your actual food cost and ideal food cost should be as close as possible. Experts interviewed by The National Restaurant Association recommend that restaurateurs keep food costs at an average of 33%. However, the general rule of thumb ranges anywhere between 20-35%.

The food cost percentage will naturally vary, depending on the type of restaurant, dish, or even the ingredients used. A fine dining restaurant that serves seafood and quality meats, for example, has a higher food cost percentage than fast food or quick service establishments that don’t usually make use of expensive ingredients.

Appetizers, desserts, and beverages also tend to use more affordable ingredients. Despite having relatively low food costs, these dishes can be sold at a higher markup that still falls within standard market rates. To help offset high food cost dishes, a food establishment should include some low food cost dishes and strive to maintain balanced menu pricing. An effective way to do this is to save more expensive ingredients (and high food costs) for entrees, while saving on more affordable ingredients (with low food costs) for appetizers, beverages, and smaller plates.

Furthermore, it’s important to regularly review your cost of food. Moving even a few percentage points can create a big difference in your bottom line, and can indicate whether or not your business is actually earning a profit.

4 Ways to Improve Your Food Cost Percentage

If there’s a big gap between your actual food cost and ideal food cost percentage, there are several things you can do.

1. Lower inventory cost

The first step is to adjust the current numbers in your actual food cost calculation. Being able to see a breakdown per ingredient allows you to pinpoint exactly where you can lower costs. Perhaps you can work with more affordable suppliers or purchase food supplies in smaller batches, which also helps reduce the risk of spoilage and simplifies inventory management. And if you see customers often leaving food on their plate, consider reducing the serving size. These changes will help to reduce food waste and lessen your overall food cost.

2. Substitute expensive ingredients

If certain food items are getting more expensive or no longer in demand (i.e., pumpkins during fall, halibut during summer), consider reducing their quantity or swapping them for other options. In-season ingredients are not only more affordable and available, they are also an effective way to keep menu items interesting.

3. Increase menu prices

Sometimes, lowering the cost of ingredients is not an option. In this case, you may have to increase your menu prices. To keep your customer base, it’s best to do this in small increments and make sure your prices are still competitive. You can also feature a special low-cost ingredient that justifies a higher price, such as using affordable, chopped vegetables in a fried rice instead of just serving plain rice. Experimenting with optional add-ons and toppings may help increase your profit.

Alternatively, you can also look for ways to lower other expenses, such as overhead, equipment, or labor costs. Using a service like Pared can enable food service businesses to maintain a lean full-time staff, and hire only as needed for weekends or events. Using the app, a restaurant owner can find an extra prep cook or server in as little as two hours.

4. Start with the food cost percentage first

Another benefit of the food cost formula is you can work backwards to figure out which ingredients will result in the ideal percentage. This may be an easier approach, especially if customers hold certain expectations of your brand. Start by selecting a desired price for the dish. You can base this on competitors’ prices or how the dish fits with the rest of the menu (i.e., it would be inconsistent if an establishment served $5 appetizers alongside $85 steaks).

If you prefer to start with a menu price in mind, the food cost percentage formula would look like this:

0.30 x food sales = (beginning inventory + purchases – ending inventory)

(Note: In this example, we use 0.30. However, feel free to use any number between 0.20-0.35, which is the ideal food cost percentage range. Replace “food sales” with your decided menu price.)

Say you’ve done your market research and you want to add a new sandwich that costs $14.99 on your restaurant menu. In order to keep your food cost at 30%, you can only use $4.50 worth of inventory. Having this ceiling cost in mind helps you determine what and how much of each ingredient you can use.

For instance, if you’re set on using a specific type of pastrami, you might have to compromise on your bread. Or if you want to put a pickle on the side, you may have to reduce the slices of cheese. However you decide to cut your total costs is ultimately up to you. But you may find it easier if you first know exactly how much you can spend.

Food for Thought

Three servers working behind the counter and smiling at camera

When doling out servings and ingredients, it’s easy to forget about food cost control. Spending too much and earning too little, however, will keep any restaurant owner from succeeding in the long run. To cover expenses and boost profit margins, it’s crucial to be aware of your food cost percentage.

The more you know about your finances, the better you’ll be able to balance the ideal cost for your company and guaranteed satisfaction for your customers. In order to best implement your food cost formula, it’s important to have a team you can trust. Pared provides you with the trusted staff members you need for your food establishment in as little as two hours. We’ve already done the legwork with vetting so you can book with confidence. Sign up today and see what it’s like to never be short-staffed again.

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