Calculate Your Food Cost Percentage And Secure Your Bottom Line

Let’s start this article with a bold statement: impressive revenue growth doesn’t mean anything. 

Not unless you’re able to keep expenses under control. If your costs go up proportionally, your bottom line remains more or less the same. You want to be sure profit is going up and not stagnating. Or worse, going down. If you’ve been focusing on revenue alone, your bottom line will likely drop due to the investments you made to boost sales.

That is especially true in the realm of food delivery. Third-party delivery apps charge a hefty fee for the use of their technology, marketing, and logistics. These things are hard to set up as a restaurant owner, so partnering with delivery apps makes perfect sense. But it takes a big chunk out of your margins, nonetheless. 

A deep insight into the expenses allows you to make operational improvements to boost revenue and help you cut avoidable costs without reducing standards.

Don’t get me wrong—growing your turnover is important, but it is not the only KPI you should monitor. 

Food cost matters. A lot. 

Understanding the numbers 

If you don’t keep your expenses in check, you’ll work harder than ever without making more money. 

It’s easy to fall into a trap, especially for scaling food service businesses. They expand rapidly and blow the lid on costs—a justifiable situation in the short term but unhealthy long-term. 

Your bottom line is revenue minus expenses. Many restaurant operators focus only on the revenue side of the calculation. Controlling the costs simply seems too hard. They feel there are too many moving parts. This gives forward-thinking F&B managers, head chefs, and CFOs a definite advantage.  

It all begins with understanding the food cost percentage.  

In this example, food costs account for 35% of turnover. Let’s reduce this to 5% and see what happens to the profit. 

Profit goes up 2,4 times. Sounds too good to be true? Think about it; CoGS is one of the highest cost centers of a food business. Even the slightest reduction in the food cost percentage significantly impacts the bottom line. 

That is why keeping track of food cost metrics is a must for restaurant businesses—delivery is most definitely part of f&b operations.

Why food cost percentage? 

Okay, let’s backtrack a few steps. Ask any restaurant CFO, and they’ll tell you the primary cost centers of the restaurant business are:

• Rent

• Labor

• Food costs or COGS
  

Rent and labor are somewhat fixed expenses. You can’t stop paying rent or cut your staff’s paycheck in half. Food costs, on the other hand, are manageable. It hinges on solid operational procedures for the back-of-house. 

The question is: how do you assess back-of-house protocols and workflows? 

Answer: you keep tabs on the metrics. And one of the most important numbers to watch is - you guessed it - food cost percentage.  

It shows how much of the restaurant sales are funneled back into food ingredients. On average, that number is between 28% and 32% of total sales. High-end restaurants have peaks up to 45%, while super lean virtual brands can go as low as 20%. The good news is that there is no perfect number. Your ideal ratio depends on the market and the product you serve. Don’t get lulled to sleep, however. It represents a lot of revenue—no matter what category you fall in.

Of course, you can’t blame food businesses for spending money on food. It’s the primary resource. The thing is, restaurants leave good money on the table when they continuously make avoidable expenses. By the way, product quality doesn’t influence the food cost percentage much. The sale price will reflect the higher cost for top-tier products and vice versa. The difference in cost gets filtered out in the calculation. You’ll understand as soon as we dig into the formula. 

What influences food cost percentage?

All in all, nine things:

• poor portion control

• weak intake procedures

• over-purchasing

• inaccurate calculations

• pilferage

• accounting errors

• unrecorded sales

• ingredient price increase

• guesswork in the menu pricing department
  

Food cost percentage offers a benchmark. You know profits are leaking away somewhere when it goes up too much. 

So, let’s do the maths.

Food cost percentage: the formula

Step one is to determine the timeframe in which you are working. Let’s say: week 34. Step two, get the actual food cost and turnover for that week.

Once you have the numbers, you have everything you need to calculate the food cost percentage for week 34.  

Food Cost Percentage of week 34 = (Actual Food Cost / Turnover) x 100 

If you want to understand actual food costs without getting all tangled up in unrelated calculations, follow the link to the article by Apicbase: How to Calculate Food Cost? Formulas for Chefs and F&B managers. It explains which formulas you should use to handle your CoGS. 

That looks easy—what’s the catch?

As you can see, the formula itself is straightforward. The crux is collecting the data and doing so week after week. 

It is a manual and time-consuming affair that is prone to errors. Getting your hands on the actual food cost alone involves weekly stock counts, spreadsheets, and many back-and-forths between departments. That is why local operators tend to ditch the food cost metrics and focus solely on the P&L. If the numbers are black, they call it a day.

This leaves room for a gazillion blindspots. For all you know, half the menu isn’t hitting the target margin, which eats away at the already razor-slim profit margins in the food service industry. 

In fact, scheduling weekly stock counts, as mentioned above, alone can add up to 10% to a restaurant business's bottom line (see Restaurant Inventory Statistics You Have To Know).

The solution: back-of-house automation

If you want to keep your food cost percentage under control, you should look into F&B management platforms, especially if you’re running multiple outlets and expanding.

These solutions handle the numbers-crunching without the hassle of continuous manual updates. The platform pulls in the data from your POS systems and gives you real-time insights into CoGS at every location. A system like Apicbase, for example, digitizes all back-of-house processes. Plus, it automates the metrics, which allows you to make informed decisions and maximize profits at every opportunity and unit.