The Only Beverage and Food Cost Formula You Need
Food and beverage costs can be your BFFs or you biggest enemies. It’s all in how you calculate your costs and use them to price your menu. The goal is to build in a margin that ensures profitability while being acceptable to guests. We’ve got you covered with the only beverage and food cost formula you need and tips for using it.
Here It Is: The Winning Beverage and Food Cost Formula
Combined with these 11 menu pricing strategies, figuring out your food and beverage cost percentage empowers you strategically price your items and set a healthy margin. The beverage and food cost formula is also a useful tool for your kitchen manager to make orders and stock inventory without going over budget.
Calculating your beverage food cost formula is easy and can be recorded anywhere from a bar napkin to a spreadsheet (although we don’t recommend the bar napkin approach).
A quick note, we’ll be referencing food cost throughout this blog, but you can apply all formulas and tactics to beverages as well!
First, gather the information you’re going to need for the food cost formula. Those factors include:
- Opening Inventory Value: The value of physical inventory in stock at the beginning of the week
- Cost of Purchases: The dollar value of items or ingredients you’ve purchased throughout the week
- Closing inventory Value: The value of what is still in stock at the end of the week
- Food Sales Revenue: How much food your restaurant has sold in the past week
Once you have those details, use the following food cost formula to calculate your food cost percentage:
Opening Inventory Value + Cost of Purchases – Closing Inventory Value = Usage Amount
Usage Amount/Food Sales Revenue = Costs of Goods Sold (%)
It may seem like a lot of information that you have to plug in. Fortunately, the details are easily obtained by tracking food orders and inventory.
How to Set Food Cost Goals
Now that you know how to run a food cost formula, what percentage should you be aiming for?
A quick Internet search will tell you that the average food cost should be 25% to 30% for most restaurants. However, your percentage could vary depending on the type of restaurant you’re running.
A quick service or fast food establishment usually keeps its food costs on the lower end of the spectrum. Other businesses may exceed it. For example, a high-end steakhouse could see food costs up to 40%.
No matter what kind of restaurant you’re operating, having a good handle on your food cost formula is essential to managing your budget.
Food Cost Formula Frequency
When it comes to how often you should run the food cost formula for your restaurant, you can run the numbers every week, month, or year. It’s up to you and your operator to determine a frequency that works best for your business
However, due to fluctuating wholesale food prices, it’s recommended to run your food cost formula at least once per month to effectively budget for your business. Track your weekly inventory and purchases so those numbers are available when you’re ready to use the food cost formula.
The food cost formula is also an effective way to find potential savings on your menu items. At least once per year, run the formula on each ingredient of your signature or high selling dishes. As the prices of certain products rise, you can make adjustments with more cost-effective substitutes.
Food Cost Percentage versus Gross Profit Margin
Keep in mind that the food cost formula does not calculate the total profit margin for your menu. The food cost formula only measures the profit of your food inventory. Other factors are included when determining the total profit margin for your restaurant.
The profit margin indicates the overall profit after all of your expenses are taken into account. This includes details like:
- Food Costs: How much your restaurant is spending on food
- Cost of Labor: How much you pay your employees
- Overhead Expenses: What it costs to keep your doors open (rent, utilities, licenses, etc.)
- Maintenance: Most restaurants budget for monthly maintenance costs, in case a piece of equipment fails and needs to be replaced.
- Marketing: What it costs to promote your restaurant
Using food cost formula is a good practice for successful restaurants, but remember to track other expenses as well.
Importance of Food Costs
By running the food cost formula consistently, restaurant owners can determine menu prices that will maintain or increase their food profit margin.
It may seem tedious to run the food cost formula each week or month. But this simple formula can protect your business from being negatively affected by rising food costs.
Ignoring your food costs could lead them to financial issues with your business. If left unchecked, they may shift to the point where your restaurant is losing money on menu items.
Consistently running a food cost formula catches potential pricing issues early on. Once you’re aware of the problem, you can make menu adjustments before your restaurant starts losing money.
The Food Cost Formula in Action
Knowing the food cost formula is just half the battle – now you need to apply it to your business. Here’s an example:
Say that your restaurant made $22,000 in food sales last week. You started with $10,300 worth of inventory and had $8,200 left at the end of the week. You also spent $5,500 on new orders and ingredients throughout the week.
Here’s what the breakdown would look like:
- Opening Inventory: $10,300
- Purchases: $5,500
- Closing Inventory: $8,200
- Food Sales: $22,000
Now, just plug in the numbers to the food cost formula:
$10,300 + $5,500 – $8,200 = $7,600
$7,600/$22,000 = 34.55%
Congratulations! Your food cost for the week is 34.55%, meaning that you’ve achieved 65.45% profit for your food inventory!
Now that you see how easy it is to run a food cost formula, work with your chef or restaurant operator to determine your percentage goal and how often you want to review food costs. This easy step could save your business some serious cash.