What is the Ideal Food Cost Percentage for your Restaurant?
Ideal food cost percentage = average food cost divided by average menu sales
Actual food cost percentage = (starting inventory + average food cost) – ending inventory, divided by average menu sale
Efficient restaurants boast close actual and ideal food costs below 30%.
Ideal food cost is an essential percentage to know. This figure is the cornerstone of professional restaurant management.
As a rule of thumb, you want your ideal food cost percentage to be as low as possible — this means that your restaurant is being financially efficient.
Use your ideal food cost percentage to cut waste, track your performance versus the competition, and pinpoint which dishes on your menu are losing money.
What You will Need to Follow this Tutorial
The good news is that calculating your ideal food cost is easy.
Below, we will take you through some simple calculations which you can do using a basic calculator or spreadsheet app.
You will need to calculate your total food cost first. Then you can calculate your ideal food cost percentage and instantly bag new insights into your business.
Compare your ideal food cost percentage to your actual food cost percentage to see how efficient your restaurant is.
Compare your ideal food cost percentage with your food cost percentage by dish to see which items on your menu are most profitable. Some might be losing money.
We will show you how to boost your business with practical tips to optimise your food cost percentages. Right away too you can change your menu pricing based on your new data. Don’t worry about making mistakes. We will show you the pitfalls.
STEP BY STEP INSTRUCTIONS
STEP ONE: Bust the Jargon
To calculate your ideal food cost percentage, the first pitfall to avoid is the jargon. You will need to be clear about other definitions which sound very similar!
- Food cost percentage describes how much your restaurant spends on food as a percentage of total food sales.
- Food cost percentage per dish describes how much your restaurant spends on food as a percentage of total food sales — per dish.
- Ideal food cost percentage describes how much your restaurant spends on food without taking into account your inventory status, or food wastage and theft.
- Actual food cost percentage describes how much your restaurant spends on food whilst taking into account inventory status, food wastage and theft. (Some definitions for actual food cost percentage also take into account fixed costs such as labour and utilities.
STEP TWO: Collect Some Key Data
You will first need to check your inventory system and collect some key data:
- Beginning inventory: record what value of food you have at the beginning of a particular week.
- Total food cost: make a list of all the food items your restaurant purchased in that week, and sum up the price of each item to arrive at your total food cost.
- End inventory: record what value of food you have at the beginning of a particular week.
- Total food sales: use your POS systems to tell you your total revenue from menu sales of food for the week.
STEP THREE: Do the Calculation for your Ideal Food Cost Percentage
To arrive at your ideal food cost percentage, divide your total food cost by total food sales.
For example, your total food cost might be SAR 16,000. Your total food sales might be SAR 80,000. Your ideal food cost percentage is SAR 16,000 divided by SAR 80,000 = 25%.
Your ideal food cost percentage shows you much your business is spending on food as a percentage of sales — in an ideal world.
Now you’ve got this key figure in the bag, go on to calculate your actual food cost percentage, which shows you how much your business is actually spending on food as a percentage of sales.
How to Calculate your Actual Food Cost Percentage
The calculation for actual food cost percentage is the same as for ideal food cost percentage with one key addition. It takes into account your inventory status at the beginning and end of the week:
Actual food cost percentage = (beginning inventory + total food cost) – ending inventory, divided by total food sales
For example, your beginning inventory might be SAR 40,000. Your total food cost over the week might be SAR 20,000. Your ending inventory might be SAR 36,000. Your total food sales might be SAR 80,000. Actual food cost percentage of 30% = (beginning inventory of SAR 40,000 + total food cost of SAR 20,000 = SAR 60,000) – ending inventory (SAR 36,000) = SAR 24,000, divided by total food sales of SAR 80,000.
Compare your Ideal and Actual Food Cost Percentage
If you compare your ideal and actual food cost percentage, you can see how much food is getting wasted in your restaurant.
For example, your ideal food cost percentage might be 25%. Your actual food cost percentage might be 30%. That’s a difference of 5% which is down to theft, waste or over-purchasing.
How to Calculate your Food Cost Percentage per Dish
Now you have got an overview of your food costs, you can get down to specifics. With your food cost percentage per dish, you can pinpoint which menu dishes are saving or losing you money. To do this, you calculate your food cost percentages per dish, rather than by total cost.
You will need two key figures: your total food cost per dish, and your sale price per dish.
A top tip here is let your computerised inventory systems do as much of the work as possible, as the initial phase is labour-intensive.
First, calculate your total food cost per dish:
- Find on your system (or create) a list of the prices of all your ingredients.
- Get hold of a copy of your menu and list all the dishes. Assess the cost of each ingredient per dish. You can do this how you like. But here is a step-by-step guide. First refer to your list of prices for all ingredients. Determine how much ingredient is used (by weight or eye). Divide the total weight sold to you in bulk of this ingredient by the total amount used in the dish. This will give you a percentage figure. Multiply this percentage figure with the total cost of this ingredient as sold to you in bulk to arrive at the cost per dish for this ingredient. Repeat for each ingredient.
- Add up the cost of all ingredients used in the dish. This gives you your total food cost per dish.
Secondly, use your POS analytics to establish total sales by dish.
Divide your total food cost for a particular dish by its sale price to arrive at your food cost percentage per dish.
For example, you may be looking at a particular dish that is a main course of steak and chips. You may decide that, on average per dish, the steak costs SAR 18, the chips cost SAR 3.60, the oil costs SAR 0.24 and the seasoning costs SAR 0.40.
This gives a total food cost for this dish of SAR 18 + SAR 3.60 + SAR 0.24 + SAR 0.40 = SAR 22.24
From your menu, you can see that you charge SAR 80.00 for steak and chips.
So your food cost percentage for this dish is SAR 22.24 divided by SAR 80.00 = 27.8%
One way of seeing how well your steak and chips dish is doing is to compare its food cost percentage with your ideal food cost percentage for the whole restaurant.
For example, the food cost percentage for your steak and chips is 27.8%. Your ideal food cost percentage is 23%. Your average actual food percentage is 25%. So your steak and chips is on the expensive side of things. You will need to compare its food cost percentage with other dishes to see how expensive.
Now you’ve secured some key metrics about your restaurant, what actions can you take on the basis of your new information?
How to Optimise your Food Cost Percentage
- Be experimental with portion sizes. Make small changes, and adjust as you go according to the feedback you get. Be practical. If plates come back half-full, then look at reducing portion sizes. But unless you are doing a minimalist style of cuisine, do not go too far – people have a fixed idea of what is a ‘normal’ portion, which only changes under certain circumstances.
- Don’t give away free stuff like bread and butter unless your food cost percentage per dish for these items is at a healthy level. (It should be close to your ideal food cost percentage.)
How to Price your Menu?
- Absolutely key here is to highlight your most profitable dish. There are a number of ways a good graphic designer can do this visually. Also, you can help create impact for your most profitable dish by reducing the items on offer around it on the page.
- Why not consider reducing the number of dishes you have available anyway? Take the opportunity to chop out the dishes that, thanks to comparing your food cost per dish and ideal food cost, you know are losing you money. Consider investing in reprinting new menus. This has proven to be a critical step for many successful restaurants.
- You may need to raise prices if your food cost percentage overall for the restaurant is very high (32%+).
- This could mean either your food costs are too high (owing to chronic waste occurring in your processes somewhere) or your sales prices are too low. If your food costs are reasonable, your prices may need adjusting upwards to increase your total sales figure.
- Make small changes only, and see how sales react. Be cautious. Keep on making very small price increases until sales show any sign of slowing as a result.How you can improve food costsMake more carbohydrate-based dishes. It is a simple solution, but it works. Carbohydrate-based dishes like pasta usually involve cheaper ingredients than protein-based dishes. Choose seasonal produce. Using products that are in season is usually a selling point for a restaurant in itself. But it will also save you money.
How to Avoid Common Mistakes
- The best way (by far) to avoid common mistakes is to keep educating yourself. Keep looking for advice. You’ve found this tutorial – and there’s plenty more out there online.
- Learn from what mistakes you do make. Use your ideal food cost as an anchor to ground your future financial strategy. Be confident that you will move in the right direction if you keep making informed adjustments.
- Rely on independent experience you can trust. The problems that you face first-time as a restauranteur have been faced before. Consider using consultation services to get you up to speed on the common pitfalls.
We hope you enjoyed this tutorial. Calculating the ideal food cost percentage for your restaurant is absolutely key to managing your margins. So it is important to be clear about how it works, as well as understanding the other metrics involved.
Congratulations — by taking this step you have got a firmer grip on the future of your restaurant.
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