Are you the type of student who absolutely loved mathematics in school? Or were you among the ones who hated it from the bottom of their souls? Well, we have good news for you (or bad, depending on which of the two categories you belong to). Going into the restaurant business, you would be required to do a little bit of calculation to address the issue of how to calculate food cost for a recipe. This is where the food cost percentage formula comes in.
Decoding The Food Cost Percentage Formula
Today’s environment is utterly dynamic – you simply cannot predict these changing times. For instance, restaurants were struggling to survive when the pandemic hit us with all its might. One way by which they could have handled the impact was through the determination of their food cost percentages. So, what exactly is it?
Food cost percentage is a fairly simple concept. It basically helps you calculate and know exactly how much you make on every dish you sell. It’s nothing but the ratio of the ingredients used to make the dish and the revenue generated upon sale of the dish, which is usually expressed as a percentage.
The food cost percentage formula is very effective in setting the price of a dish in a restaurant. If you do not want to incur a loss on your dish, this formula is the one you must be using to ensure your revenues cover your costs. Now, you can set your own ideal food cost percentage taking into consideration other costs such as labour and rent. Restaurants usually set their ideal percentage somewhere between 28% – 35% of their revenues.
The Significance of the Food Cost Percentage Formula
As you might have guessed already, food cost helps you examine the profitability of your restaurant. For instance, if your food cost keeps rising despite the stagnant menu prices, you would straight away know that your restaurant is headed for losses.
Your restaurant business is heavily dependent on the price of the ingredients that you choose to make your dishes. If your restaurant sells chicken dishes, then you’d know that the cost incurred or revenue earned from your dishes would be impacted.
Therefore, careful analysis via the food cost percentage would enable you to know when to change menu prices, search for new suppliers, or even change your menu to remain profitable.
How to Calculate Food Cost for a Recipe
As complex as it may sound, calculating the food cost percentage isn’t that tough. Rather, it would require you to invest some time into it as you would be needed to gather information about your costs and break them down into individual servings. Here are the three basic parameters that must be included while calculating the formula:
- Opening and closing inventory cost (which is nothing but the cost of inventory lying with your business including at the beginning and end of the time period which can be a week, a month, etc.)
- Cost of purchases made during the same time period
- Total amount of sales during the week
Here’s how you calculate your food cost percentage:
(Opening inventory + Cost of purchases – Closing inventory) / Total sales for the period
When you multiply the resulting number by 100, you get your required food cost percentage.
Suppose there’s a restaurant named Charlie’s. They have an opening stock of Rs. 20,000 at the beginning of the week on a Sunday. Charlie’s made additional purchases of Rs. 5,000 during the week, and had a closing stock of Rs. 15,000. Therefore, Charlie’s total food cost would be Rs. 10,000 (Rs. 20,000 + Rs. 5,000 – Rs. 15,000). Now, suppose Charlie’s total sales during the week were Rs. 50,000. Thus, their food cost percentage would be 20% [(10,000/50,000) * 100].
A food cost percentage of 20% is pretty solid to go with. If you get a high food cost percentage of 40% or above, you should think of strategies to cut your costs and make your business more profitable. This can be done in numerous ways, like:
- Identifying suppliers offering better deals
- Decreasing the portion sizes of your dishes
- Revising the prices of your dishes on the menu
- Revisiting your operational processes and making necessary adjustments
Going through all of the above to determine what costs you are incurring per dish can be a tedious process. However, every single penny matters when it comes to your business. Thus, you can set better prices for your dishes and maintain profitability by knowing the costs you are incurring.
Take Help from Experts!
The food cost percentage formula is an extremely useful calculation for the reasons already mentioned above. Do you know what else can further help reduce your costs and increase your profits? A restaurant POS software. Reach out to us at Possier to know more about this cutting edge software and how it can help you reduce your costs.