Controlling food costs and pricing correctly is the most crucial part of running and scaling a food service business. Even the most successful and popular kitchens won't make a healthy operating profit if they aren't properly managing their purchasing, labour, and other variable and fixed costs consistently.
Out of all the costs, food costs are not only one of the highest concerning food sales, but they fluctuate the most and directly impact the selling price making food costs the hardest to monitor and the most crucial for managing.
Food costs generally account for 28% - 32% of the net selling price for full and limited-service restaurants but can reach up to 40% when using expensive fresh meat ingredients and as low as 20% for low-cost, high-margin recipes such as pizza. For more information regarding benchmarked cost percentages, we recommend you read this restaurantowner.com report.
"You don't always need to sell more to make more. Controlling and managing costs just a bit can create immediate benefits to your bottom line."
Now that we know the importance and presence food costs have on a business's profitability, let's take a look at cost control in action and give you a taste of the savings.
As you can see from the image above, with food costs at 30%, a 7.5% decrease results in a gross profit increase of 15.3%.
How to calculate food costs?
When calculating food costs in your business, there are four core calculations you should consider:
- ideal food cost
- actual food cost
- food cost percentage and
- food cost variance.
Calculating ideal food cost
To calculate your ideal food cost, you must first know the cost of serving each item on your menu. Remember to add any extras that may be consumed as part of the dish e.g. sauces, dressing etc. If you have not already done this, why not build your recipes in Kafoodle’s ingredient and recipe manager and take advantage of our food cost calculator by claiming a free 7-day trial.
Now that you have your recipe costs, determine a period that will provide an accurate average demand from sales.
Now multiply the cost of a recipe by the number of sales in your chosen time frame.
Combine all the recipe's ideal cost figures to receive the ideal food cost for the period used in the calculation.
The formula for the ideal food cost
To calculate your ideal food cost you will need to forecast what you believe you will sell over a period of time (turnover). Turnover does not include VAT or any other taxes.
Now that you have your ideal food cost, multiply it by 100 and divide it by the period's turnover.
Calculating actual food cost
Actual food cost is the value of purchases and stock consumed in a certain period.
Another common term for this calculation is 'cost of goods sold', often represented as the abbreviation CoGS.
Every business conducts its stock count differently, but if you need a quicker, more integrated version to record your stock, reduce wastage, improve purchasing and view value. Learning more about Kafoodle’s inventory feature is a great start.
To calculate your actual food costs, you'll need five values:
- A time frame (example - calendar week, month, quarter.)
- The stock value at the beginning of the time frame
- The value of the purchases made during the time frame
- The stock value at the end of the time frame
- The turnover of the time frame
So, if you wanted to get the actual food cost for January. On the 1st of January, count items in stock and value them using their purchased price.
Add the total value of everything purchased in January to your starting inventory value.
As January ends, take another stock count and calculate its value.
Take the value of your end-of-month stock take and subtract it from the combined total of the initial stock and goods purchased.
Congratulations, you now know your actual food cost!
How to calculate food cost percentage
To calculate your food cost percentage, you need to use your actual food cost multiplied by 100 and then divided by the turnover for a specific time period.
Remember, 28 - 32 percent is a good average depending on the nature of your business.
How to calculate food cost variance
Food cost variance displays the difference between the ideal and actual food cost percentages. The perfect performance would result in a 0% variance.
The food cost variance will indicate overall performance and provide insight into planning, purchasing and waste control.
As you can see above, even though branch two created a more significant turnover, the food cost variance was 4.3 per cent higher than branch 1 and resulted in 1,373.22 of losses.
Food cost variance is crucial to continual monitor as its value only increases as turnover rises. Common reasons for a high food cost variance include:
- Large portions sizes
- Unnecessary ingredient waste during preparation
- Allowing ingredients to go out of date
- Surplus ordering
- Stock theft
- Lack of training
- Human data input errors
Food cost control affects almost every part of a food business and will help refine operating procedures throughout. By managing costs effectively, a company will improve stock control and purchasing, price recipes to increase profit, enhance kitchen procedures and engineer a high-performing menu.
The difficulty isn't using the formulas detailed in this article but accessing reliable, up-to-date data and keeping on top of consistently changing prices.
Automating the effects of price increases from ingredient to menu pricing, creating a single data source for users to view and digitising the recording methods will create consistency and dramatically reduce the chance of human error. All this can be achieved using kitchen management software, saving your employees time and your business wasted profits.