Food Costs Formula: How to Calculate Restaurant Food Cost Percentage
If you’re a restaurateur, then you know the drudgery that goes into the day-to-day operations. Your margins are thin. Your staff is recalcitrant. That important delivery never showed up. You know how it is. When it comes to maintaining profitability, the time it takes to do all the calculations for every little ingredient in your dishes can seem both daunting and insurmountable.
Here is how it goes. Let’s say you have a fish ‘n’ chips restaurant. For daily operations, you have to buy the following supplies to be in business:
- Malt vinegar
- Ketchup and other condiments
- Various vegetables
- Frying oil
- Assorted Spices
This is assuming you serve only fish, fries, coleslaw, and tartar sauce. More on menu item selection later. For now, let’s focus on food cost. That’s the amount that you spend monthly on ingredients. You want to serve halibut, which costs about $18 per pound. You serve the halibut in 3.5-ounce portions, which means you get roughly five portions per pound. Hit pause for a second.
Calculate Your Ideal Food Cost
There is a figure called the ideal food cost, which is the amount you have to charge to keep your food cost between 25 and 30 percent. Divide the amount you pay for an ingredient by the amount for which you sell your item. If you operate any higher than 30 percent, you will likely fail.
Going back to the halibut, if a pound costs $18, and you get five portions per pound, each portion costs you $3.60. If you were to sell only fish and not fish ‘n’ chips, to achieve a 30-percent ideal food cost, you would have to sell each portion of fish for $12.
A 10-pound bag of good potatoes costs about $10. A good portion of potatoes is about 5 ounces, which means you get about three servings of fries from each pound of potatoes. That’s 50 portions per 10-pound bag. If 50 portions cost you about $10, in a vacuum, then each portion costs $0.20. That means that the ideal food cost for each portion of potatoes is $0.80.
So, you should be selling your one-piece fish ‘n’ chips for at least $12.80. Using Hibbett’s theory, you could easily make that $12.99, and people will still think they’re “paying $12” for your product instead of paying one cent less than $13.
Because a 10-pound bag of potatoes, which is your “unit,” yields 10 times as many portions as a pound of halibut, which is your “fish unit,” you can make up for price hikes in fish by figuring an inverse percentage for the cost of your potatoes. For example, if the halibut goes up to $20 a pound, your portions would be $4.00 instead of $3.60. You budgeted for 30 percent on the fish, which means you can raise that to 35 percent, making ideal food cost $11.42 instead of 12. But, to make up for it, you decrease the percentage on your potatoes to 20 percent. That means that your ideal food cost for potatoes is $1.00 instead of $0.80. You can, again, apply Hibbett’s theory and sell your plates of fish at $12.99.
What You Need To Be Cautious Of
Of course, nothing works out the way it should when there are so many variables. Our previous example only counted the fish and potatoes. There are other items to count from our list, like cabbage, condiments, and spices for coleslaw, etc. There are also problems like shrink, waste, and computational error that must be handled.
For example, let’s say you need 200 pounds of fish a week because you have good fish ‘n’ chips and are usually able to sell those 1,000 portions of fish a week. But, you buy your 200 pounds and find yourself short on Thursday afternoon. You have to buy more fish. The amount we’re now discussing is the actual food cost. You add the amount in inventory, in this case 200 pounds, and the amount you had to buy to make it through the week. In this case, let’s say that was another 50 pounds. That’s 1,250 portions. You have 523 portions left in inventory at the end of the week.
To figure actual food cost, add the beginning inventory and what you bought, which in this case is 1,250 portions. Subtract the final inventory, which is 523 portions. You sold 727 portions at $12, and that comes to $8,724. Your cost per portion is $4, which means 523 cost $2,092. That’s an actual food cost of 24 percent. That’s good, right? Yes, but you only sold 727 portions when you usually sell 1,000, and you were short of product two-and-a-half days before the end of the week. Where did the rest of the fish go? Likely, it went out the door, so you would have to beef up security.