There are two variable expenses that you need to know, understand and be able to articulate at any moment as a successful restaurant owner or manager: Food Costs and Labor Costs.
These two line items are the bulk of your restaurant's expenses and if not managed will sink your ship. I will discuss labor costs in a future blog entry, so today we focus on food costs.
What is Food Cost?
Food Costs 101:
Some consultants or restaurant experts may define food cost as "your product cost ot make that menu item / revenue from that menu item" For example, let's take a simple quesadilla that you sell for $6.95:
1 flour tortilla - $0.17
1/4 c. shredded cheese - $0.41
3oz. chicken breast - $0.83
1/8 c. green pepper - $0.07
1/8 c. onion - $0.04
Cost of products to make that menu item / Revenue of menu item = $1.52 / $6.95 = 21.8% food cost. Since restaurants usually shoot for a 28-31% food cost, this product looks like a super star! If you are new to calculating food costs, this is a good place to start. *We will look at using these numbers when we talk menu engineering in a future blog.
Food Costs 301
As you become a more experienced owner or manager, I would encourage you to start looking at your food costs in a different way, not just by menu item ... but by inventory item. Our example above, if you only look at menu items you will never take spoilage, theft, replaced orders, or other "mistakes" into consideration.
If this quesadilla has a 21.8% food cost, but the chef dropped it on the floor and had to remake it, now it has a 43.6% food cost.
1. Pick a time period. I always recommend a month. The first day of the month and the last day of the month. You will want to start with a food inventory (hopefully you are already doing this, if not - check out this blog post on how to do food inventory). This is not just a one-time deal; your time frame needs to be set up for regular food cost assessment. You will need to work with your accountant as well as your managers in order to have all the information you need regarding sales, purchases and inventories available to you when the calculation is done.
2. Collect your sales for the same time period. Total all of your customer checks (or reports received from point-of-sale cash registers). You only need to include the sales that are generated specifically from food sources and should fit within the time frame that you are looking at. If you are focusing on only food costs, deduct any beverage sales from your total.
I recommend doing the same exercise for your beverage costs, catering costs, etc.
3. Determine your Cost of Food Sales. These are the costs that are related to your food sales and include purchases as well as well as adjustments for inventory level. It is very important not to just include purchase in this part, but also to include the difference in your inventory (from the last time you calculated your inventory, until this time).
4. Calculate Food Cost Percentage. Once you have your cost of food sales (including inventory adjustments) you can determine your Food Cost Percentage. This is determined by taking the total that you came up with in determining your Cost of Food Sales (Step 3) and dividing it by your actual food sales (Step 2), the number that you come up with is your FOOD COST. Food Cost = Cost of Food Sales / Food Sales Once you have calculated your food cost percentage, you need to take a hard look at the numbers themselves. While most restaurants that operate successfully consistently generate Food Costs between 28% - 31%, the kind of restaurant you are running will have an impact on your overall percentage.
5. Dig in to the numbers. Do you have inventory that is being wasted regularly due to spoilage? Is there a certain cook that is remaking more dishes than other cooks? Are employee meals being rung up and accounted for? (it's ok if you give your employees a free meal during their shift, it just needs to be rung up and accounted for) Are there items in inventory that don't sell? (we will look at menu engineering later) Are you cross utilizing inventory in multiple recipes? Did that price of chicken go up $1.00/lb., but you never changed your menu price?
Figure out where you have opportunity to cut food costs, without impacting service, or quality.
One and DONE!
No, no, no, no. Did I happen to mention NO?!
By determining your Food Cost on a regular basis, you can develop a powerful analytical tool for comparing months as well as identifying trends in customer purchasing or in product fluctuations that you can counter by being prepared to deal with. All in all, it is a valuable tool that you will come to appreciate.
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