Guest blog post: written by Joshua Graves, Restaurant365.
Many resources for restaurant owners and operators focus on how you can increase sales and drive new business. And while healthy sales levels are important for a positive profit margin, your sales are only half of the profit calculation.
In addition to your sales, you also need to examine how you are controlling your costs. Optimized costs improve your profit margin. On the other hand, if you aren't able to control your costs, you are effectively shrinking your profit margin.
How your restaurant business controls your costs in your day-to-day operations determines your long-term profit margin. It's worthwhile to examine your expenses and whether there is room for improvement.
When looking at your expenses, consider starting with your food costs—one of your restaurant group’s largest expenses. Here are a few key techniques you can implement to help your restaurant optimize food costs.
1. Understand your food cost percentage
The first piece of your food cost puzzle is understanding how to calculate food cost percentages in a restaurant.
Start with your cost of goods sold (CoGS), which is what you've spent on ingredients over a certain time period to make the menu items that you are selling. CoGS for a specific period of time can be calculated with this general formula:
CoGS = Beginning Inventory + Additional Inventory - Ending Inventory
Once you know your CoGS, you can calculate your restaurant food cost percentage by dividing CoGS by your sales over the same period of time:
Restaurant Food Cost Percentage = CoGS / Sales x 100
By calculating your CoGS as a percentage of sales, you are better able to understand what portion of your sales is going toward the actual ingredients. This is key to begin controlling food costs and optimizing your profit margin.
Many restaurants' average food cost percentage falls between 28-35%. While this is the commonly accepted industry benchmark for "standard" food costs, the exact percentage can vary widely depending on the type of restaurant and other service factors.
So while you can consult industry benchmarks, the most important restaurant food cost percentage number to track is actually your own historical data. This percentage reflects your unique restaurant business and helps you compare your own restaurant or restaurant group’s performance over time.
2. Set up your POS to track restaurant inventory
Your point of sale (POS) system tracks extremely valuable data about your day-to-day sales and product use. Being able to pull POS data about your restaurant inventory provides insight into current and past inventory management of your restaurant business.
Accurate restaurant inventory requires a seamless integration between your restaurant inventory management software and your POS system. If you want to improve your restaurant inventory management—a key part of your food costs—start by examining your POS.
Sales data that is automatically tracked in your POS can be used to calculate theoretical inventory and food cost levels (more on that below). You can also use your POS integration to help you automate recipe costing and calculate food costs in real-time, informing pricing and ordering decisions.
3. Conduct daily and weekly food inventory reports
Consistency is key for restaurant food cost control, so implementing daily and weekly food inventory reports can help you stay on top of food costs.
First, whenever it is that you count inventory for reporting, it should always fall on the same day and roughly the same time. Your inventory after a busy Saturday night looks significantly different than your inventory after receiving Tuesday's orders. Even though they are only a few days apart, these numbers would provide a skewed picture of inventory. With uniform counts, you know you are comparing apples to apples, rather than apples to oranges.
In addition to consistent inventory counts, your store-level management team should also be examining daily and weekly food inventory reports to inform ordering.
One of the best ways to manage your food costs is to avoid over-purchasing items that you don't need. The more efficient your food and beverage orders, the less product on your shelf that might go to waste—and the more money left for your bottom line.
Your food orders need to be based off of accurate inventory counts and sales forecasting. If your managers have access to daily and weekly food inventory reports, they can place data-driven orders and keep your food cost streamlined.
4. Track variances between actual vs. theoretical food costs
Before you can make decisions that improve where your food cost currently is, you need to know where it should be.
First, track your theoretical food cost by costing out your menu and calculating the theoretical food cost based on the sales from your POS. In this calculation, assume that there was perfect portioning, no food waste, and no mistakes. Then, calculate your actual food cost for that same period of time.
The difference between the two numbers, known as the actual vs. theoretical (AvT) food cost variance, indicates where there is room for improvement in your food cost. The variance is a gap in your profit margin, due to some element of food waste like spoilage or improper portioning. AvT variance analysis is a powerful tool for controlling your food costs, because it can show you exactly where to look to start addressing areas of waste.
While it would be extremely time consuming to complete by hand, your inventory management integrated with your POS system can automate much of this process. End-to-end inventory management systems can automate invoice uploading, track recipe costing, and record stock counts. With these tools in hand, you can calculate your food costs in near-real-time.
5. Calculate your average daily inventory cost
Your restaurant business can make more accurate purchasing decisions if you calculate your average daily inventory cost. Use the following formula to determine this cost:
Total Inventory Cost in a Specific Period ÷ Number of Days in that Period = Average Daily Inventory Cost
For example, if your total inventory cost for a period of 30 days is $90,000, your average daily inventory cost is $3,000.
By calculating your daily inventory cost, you to start thinking about restaurant inventory as more of a fixed cost. From here, you can better grasp the dollar amount of inventory your restaurant goes through for a set sales amount.
With that information, you are equipped to train your team to answer questions before ordering. How much inventory should be on the shelf? How much do we need in between deliveries? These types of questions can help your team hone your food cost over time from the store-level and up.
6. Use inventory tracking to reduce waste
Preventing and reducing food waste is a key component of controlling food costs. Food and beverage inventory that is wasted instead of turned into sales can drive up your overall food cost.
As described above, part of that tracking is monitoring inventory loss, or the variance, that comes from issues like FOH staff errors, incorrect preparation, or kitchen waste. Start addressing food waste by examining what specific items have the largest variance. Your largest variances indicate where you may need to implement more staff training or reconsider ingredient usage.
If you want to reduce food waste further, engage with your store-level team. Consider implementing something like a food waste log to document what is happening on the kitchen level. Team members can use the log to note spoilage, errors, and spillage, giving you a direct view into the patterns of food waste.
7. Price menu items for maximum profit
Your recipe cost and sticker price determine your profit margin on each item. When you are managing your food costs, you should also be examining how you are pricing individual menu items.
Your pricing should be determined by your recipe costing, which maps out the cost of every ingredient for an item down to the penny. Once your recipes are standardized, recipe costing can be automated through your restaurant management system, importing menu items from POS and mapping them to recipes.
Understanding the accurate cost of making a dish allows you to make data-driven decisions about your food costs. You can see whether items are underpriced or overpriced to hit your target profit margin. From there, you can make decisions about revising recipes or adjusting prices to change the profitability of an individual item.
When your menu is priced appropriately, and you're making a healthy profit margin, you can better control your food cost.
8. Track vendor pricing
The final key to controlling your food costs is to track the prices coming from your vendors. Any given week, your restaurant may be ordering multiple different items from a number of suppliers. Your managers are busy and don't always have time to check every line item on an invoice, but a vendor price spike that slips past your team can have a large effect on your food costs.
Catching vendor errors in orders or invoicing can be difficult to do in the moment. Restaurant management software can help you identify pricing errors by alerting you when an ingredient falls outside of the quoted contract price. You can also use the solution to compare vendor price across locations and track any differences in contract pricing.
With automated solutions helping you keep an eye on vendor pricing (without your managers spending hours in the back office), you are better set up to manage food costs overall.
Controlling your food costs, day to day, has an enormous impact on your overall profitability. Your POS integration, restaurant inventory management, and other restaurant management tools can help your restaurant better control food costs and maintain a healthy profit margin.
Restaurant365 provides the restaurant industry an all-in-one, cloud-based restaurant management platform incorporating accounting, operations, inventory, scheduling, payroll and HR to simplify day-to-day management, control food costs and optimize labor costs.