In the best of times, running a Restaurant can be a challenge, with tight margins, high turnover,  and a demanding schedule. During a global pandemic, it has become even more difficult. Restaurants have been particularly hard hit by shutdown orders, along with laws that prohibit indoor dining, or limit capacity to 50% or less.

Restaurants across the country are facing dire circumstances due to COVID-19. One way that many restaurant owners can tighten their belts and increase their profits is through calculating their Food cost percentages. This technique can be used at any time, not just during a health crisis.

Determining your food cost percentage is the most effective way to ensure that your restaurant thrives. By taking a close look at your food costs, you can tailor your menu and make changes to remain profitable. Below, we outline the basics about food cost percentage, including how you can calculate it for your own menu.

What Is Food Cost Percentage?

Food cost percentage is a way to determine how much your restaurant makes on any given dish. An item’s food cost is the ratio of ingredients and the revenue that those ingredients generate when sold. It is always expressed as a percentage.

Food cost is often used to determine the price of a dish in a restaurant. Business owners want to make sure that they aren’t selling their product at a loss, so they use this number to set a price. For example, if a restaurant sells a basket of chicken wings that has $3.00 in ingredients (chicken, sauce, celery, blue cheese dressing), then it will want to set the price for that basket of wings at something over $3.00 based on their preferred food cost percentage.

Restaurant owners typically set an ideal food cost percentage based on a number of factors, including their other expenses for labor and rent. Many restaurants aim to keep food costs between 28 and 35% of their revenue. This number can vary significantly based on a particular business’ needs.

Why Is Food Cost Percentage Important?

Food cost is one of the key indicators of profitability for a restaurant. If a restaurant allows its food costs to get too high in relation to menu prices, its profit margins become even tighter — and the business may fail.

Restaurants run on incredibly tight margins as it is. Any change in the price of goods or the number of sales can significantly affect a restaurant’s bottom line. For example, if the price of meat shoots up (as it has during the COVID-19 pandemic), then it can impact profitability unless the menu price changes as well.

By closely monitoring food cost percentage, restaurant owners can know when to change menu prices, look for new suppliers, or even switch up their menu entirely to stay profitable. While doing this requires a certain amount of work, it is critical to your success as a restauranteur.

How Can I Figure Out My Food Cost Percentage?

Calculating food cost percentage isn’t difficult. However, it can be a bit time-consuming, as you gather information related to your expenses, break down those expenses into individual servings, and put together data on your sales.  To get started, you will need three things:

1. Inventory cost, including both the value of your inventory at the beginning of the week and at the value at the end of the week
2. Purchases made during the week
3. Total food sales

To calculate your food cost percentage, add the value of the inventory at the beginning of the week to the value of your purchases made during the week. Then subtract the value of your inventory at the end of the week. This number — your food costs — is then divided by your total food sales.

For example, if you have a beginning inventory value of $15,000 at the start of the week, made $3,000 in purchases throughout the week, and had an ending inventory value of $12,000, your food costs were $6,000 ($15,000 + $3,000 – $12,000 = $6,000). If your total food sales were $14,000, then your food cost percentage is 42.85% ($6,000 divided by 14,000 = 0.4285). This means that 42.85% of your total revenue went towards paying for ingredients, which is higher than average.

For many restaurants, a food cost percentage of 42.85% is too high. You can determine your ideal food cost percentage by dividing your total food costs for a set period of time by the total food sales for that same period. For example, if your total food costs are $3,000 and your total food sales are $8,800, then your ideal food cost is 0.34, or 34%.

There are a number of ways that this hypothetical restaurant can cut costs and reduce their actual food cost percentage to meet their ideal food cost percentage. This may include:

• Finding vendors with better prices
• Reducing portion sizes 
• Adjusting menu prices
• Changing kitchen practices

For example, if the restaurant’s food costs went up due to waste in the kitchen, the owner could work with the chef and staff to reduce costs associated with spoiled foods or throwing too many ingredients away.

Once you know your ideal food percentage, you can use this number to set menu prices — and to reconfigure them as necessary. Consider a restaurant that sells a turkey club sandwich with fries for $12.99. The cost per serving of this $4.75. When you divide $4.75 by 0.34 (the ideal cost percentage for this restaurant), you get $13.97. This menu item is underpriced, and currently represents a food cost of 36.5%. Pricing it at $13.99 will ensure that the restaurant stays on track financially.

Going through your menu to determine the food cost per serving and determining whether it meets your ideal food cost percentage may seem tedious. But in the restaurant business, where every penny counts, it is vital to your success. This is particularly true in 2020, when it is harder than ever to operate a profitable restaurant.

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