Food sales are the chief source of revenue in the restaurant industry. That's why refining your food cost formula can help you maximize profits.
In this article, we'll share everything you ever wanted to know about using a food cost formula to calculate your food cost percentage for greater profitability.
What is food cost percentage?
Food cost percentage is simply the cost of the ingredients you use to make your menu items, but described as a percentage of your restaurant sales. For example, if you have a food cost percentage of 30%, that means for every dollar your restaurant makes, you're spending about 30 cents on food.
You can calculate your food cost percentage for your overall business, a specific location or even a particular category of item. It's a great way to understand your profits and whether you need to adjust your menu prices.
Most restaurant owners across the industry aim for a food cost percentage between 28 and 35%, but every restaurant is unique. This range is a general guideline, but your restaurant may have different needs based on the type of food you serve and where you are located.
Why is a food cost formula important?
A good food cost percentage formula is a key way to improve your restaurant profit margin. If the food cost percentage for a particular item on the menu is found to be too high, you can then adjust by raising the price, changing the recipe to use lower-cost ingredients, or even removing the item from your menu. If a menu item has a low food cost percentage, you can focus on encouraging more sales of it to boost profits. And before launching a new menu item, calculating your food cost percentage will help you determine whether its juice is worth the squeeze.
How to calculate food cost percentage
Many restaurants automatically calculate their food cost percentage with their point of sale system and inventory management software. Calculating your food cost percentage by hand needs more time and effort, but can be done if you have accurate records.
Total food cost formula
Food cost percentage should be measured over a specific period of time, so when using this formula, use the same time range for each of the variables.
You can calculate the total Cost of Goods Sold by taking the value of your existing inventory at the beginning of the time period, adding the cost of any new inventory purchases during that period, then subtracting the value of your inventory at the end of that period.
Food cost formula for an individual menu item
To calculate the food cost percentage of a specific menu item, use the following formula:
This food cost percentage formula means you list each ingredient and its cost (including garnishes), and then determine how much of that ingredient goes into each serving, to calculate the cost.
How to price your menu based on food cost percentage
While there are several menu pricing strategies to help profitability, one approach is to use your food cost percentage to determine menu prices. For example, if a burger costs $3 in ingredients, and your target food cost percentage is 30%, then you should charge customers about $10 for that burger.
Menu pricing depends on a number of factors besides the cost of food — including the type of food you make and your location. You should understand who you want as customers, as well as what other nearby restaurants charge. Also, don't forget about the indirect costs — if a dish on the menu requires a longer prep time or expensive equipment to make, be sure to include those costs in your price.
"We've been facing challenges like sourcing ingredients, and balancing food costs. But what's helped us succeed has been consistency, listening to our customers, and adapting. Take the time to really understand what your customers want, and fill those needs."
How do I use my food cost percentage?
Once you know what your food cost percentage is and how to calculate it, here are some ways you can use it to drive profits for your restaurant.
Engineer your menu: Break down costs for your dishes and categorize menu items by how profitable and popular they are. Then redesign your menu with these insights, including writing new menu descriptions and using visual cues to drive sales of higher-margin items.
Reduce food waste: The restaurant industry adds enormous amounts of food waste to landfills each year. But restaurant owners can take a number of steps to reduce food waste — including better managing inventory, finding creative ways to use surplus food, or running limited-time specials. These strategies will not only lower your food costs, but they'll also help the planet.
Research lower-cost suppliers: Restaurant suppliers appreciate loyalty, but it might make sense to find options from cheaper suppliers if you feel you're being charged too much for raw materials. You can also talk to your current suppliers about renegotiating your rates.
Consider decreasing portion sizes: Are your customers always taking home leftovers, or finishing their meals with food left on their plate? If so, consider offering smaller portions. You'll reduce waste and also save money on inventory.
Invest in technology: It's tricky to stay on top of all the numbers on your own. But using the right tools — like the DoorDash Merchant Portal, which provides DoorDash partners with valuable sales and customer insights — can quickly and easily give you access to the data you need.
"Because of food media, a lot of people think chefs just hang out, they're just creative in the kitchen, and they're having fun, eating and drinking. There's a lot of behind the scenes work that needs to be done. We have really small profit margins, so you really have to be diligent about your food costs, labor costs, and rent costs."
Your food cost percentage is an important tool
By watching your food cost percentage, you can control your bottom line and gain new opportunities to expand your business. Get more tips on how to review and adjust your menu pricing to increase profitability.