Understanding Your Food Cost

Give 100 cooks the same recipe for a soup and you’ll end up with 100 different soups. It’s one of the greatest things about the industry; everyone puts their own flavour on things. One person’s salty is another person’s bland. Perhaps John doesn’t like pepper as much as you and omits that ingredient; Jane might have more of an affinity for carrots and adds a touch more than called for.

How people calculate and eventually arrive at their ending food costs is quite similar to this as well. Just like the soups, however, there are great, good, and less than good methods.

While it’s clear that there are many variations of what is described as “food cost”, these varying methods can be grouped together into two main discernable categories: Raw and Actual.

Let’s delve into what these two categories are, who commonly uses them, how you can calculate them, and what to look out for when using them.

Method #1: Raw Food Cost

The formula to determine your Raw Food Cost is as follows:

• Raw Food Cost = Food Purchases (FP) / Food Sales (FS)

Who commonly uses this method?

This is arguably the most commonly sought-after metric of success in single-unit, independently owned commercial restaurants. You are heavily focused on money coming in and money going out.

Why use this method?

You’ll have a rough understanding of how much your food is costing you on an overall basis and can use this metric as the catalyst to adjust your recipe engineering and pricing. It’s moderately easy to stay on top of with the help of a great bookkeeper and a good invoice management system.

Things to watch out for:

Too often this system is abused by operators attempting to game the books and portray the food cost as something other than what it truly is. It’s for that very reason why bonuses or incentives should never be attached to food costs calculated using this method. It’s too easy to conceal poor menu engineering, especially if your sales aren’t predominately food.

E.g.: It’s entirely possible that your target food cost is 30%, your store typically returns a food cost of plus or minus 2.5% of that mark but the recipes are poorly engineered for a higher cost of 35%.

The “scheme” is simple: quit spending cash in the week or days leading up to the end of the accounting period. Doesn’t sound so bad, right? Isn’t that the goal? If you’ve read a few of our posts now, you’ll understand just why consistency is the true key to your success.

A giant red flag that it’s currently happening in your establishment? Consistently running out of products near the end of the accounting period.

Running out of your preferred products leads to the knee-jerk reaction of replacing the product with a substitute. “We sell so many of those - we can’t run out”.

Find out Saturday evening your Chef didn’t order those 7-ounce, wing-on/skin on chicken breasts from your distributor? You might have some problems finding a suitable substitute product at Safeway. Do you just serve two portions of your 4-ounce chicken breast that you use strictly portioned and sliced for another dish? Worse yet - do you just leave the dish 86’d for the week?

Imagine the customer who comes in every week for that specific dish - what are we doing to their expectations of us? How many chances do they give us?

When you stop attempting to game the system and not run out of products, those food costs will always display their true engineered costs. Don’t kick them under the rug - embrace the challenge.

Method #2: Actual Food Cost

The formula to determine your Actual Food Cost is as follows:

• Actual Food Cost = Opening Inventory (OI) + Food Purchases (FP) - Ending Inventory (EI) / Food Sales (FS)

Who commonly uses this method?

This is the common approach of most multi-unit, corporately owned restaurant entities, or restaurants focused on growth and expansion. You are not just accounting for purchases; you are invested in analyzing your inventory metrics to boost your profitability and consistency across the brand.

Why use this method?

Not only is it the gold standard for displaying an accurate food cost percentage, you’ll also track much more data than just total expenses. Recording your food inventory values at the ending of a period provides both tangible (awareness of inventory turnover ratios, waste reduction efforts and menu engineering insights) and intangible benefits (physically counting and weighing products increases the stock awareness of the individual counting - they know where everything is hiding!).

Consistently analyzing your inventory variances down to the individual classifications (Dairy, Meats, Seafood, etc.) leads to opportunities in your menu engineering efforts. Are you bringing in a whole case of blueberries because they were on special only to watch them wither up and die on the shelf? Do you need to purchase that entire wheel of expensive parmesan or is there an alternative, smaller product?

Plus (and this is the best part), once you get into a rhythm of always having “just enough” products on hand at any given time and maintain a stable inventory level, the calculation for the food cost gets even simpler.

E.g.: Let’s imagine you keep your food inventory to $5,000 consistently and plug it into the Actual Food Cost calculation from above.

$5,000 (OI) + $25,000 + (FP) - $5,000 (EI) / $75,000 (FS) = 33% Actual Food Cost

By keeping the inventory variances to a minimum, you’ve effectively removed their impact from the food costs and allows you to focus on purchases over sales by default.

Things to watch out for:

So, you’ve done an inventory count and are looking at a ton of numbers - how do you make sense of it? What’s a good inventory versus a bad inventory?

It’s all in the consistency. I know; you’re probably sick of hearing me say that. But it’s true. Allow me to explain:

New stock should always be arriving “just in time”; the old stock of it should be in use upon delivery of the new items. If your menu is engineered effectively and your prep systems are engineered for greatness this should be happening in your stores by default!

How else do you know if it’s working? Monitor the variances in your total ending food values with the goal of keeping them within 1.5% of each other. Think of your ability to keep within those margins as the canary in the coal mine; venturing outside of that safety is an indication of over/under-spending.

Which method is right for me?

Whenever possible, your food cost totals should always be calculated using the Actual Food Cost formula.

You wouldn’t throw out a perfectly good head of lettuce; why do that with your data? Think about it. Purchasing from your suppliers provides you not with just a 50-pound sack of carrots but also valuable data about your operations.

Each product is associated with a unique classification with its own shelf-life and storage characteristics. Those 2.5 sacks of carrots you have in inventory? They’re only good for 5-12 days. Perhaps it’s time to make some soups or start adding them to the daily vegetables! High levels of seafood in your inventory? It’s only good for 1-3 days max. Danger, danger! High levels of canned or dry goods? While not ideal, their shelf life is expectedly much longer.

Starting to see what I’m saying?

By conducting inventories with properly cost ingredient count sheets (more on that in a later post) you will gain a greater understanding of how your menu is engineered, where your money is residing in your kitchen and the efficiency of your prep and purchasing systems.

However, sometimes the feedback is there is not enough time to do inventory counts or nobody within the establishment knows how to accurately interpret the data. Staffing has been and always will be an issue within the hospitality industry. Time is also a luxury, both in the slowest and busiest of restaurants.

That’s why both of these methods are common practice - it’s up to you as the individual to decide on your level of comfort as it pertains to risk. Method #1 is inherently riskier than Method #2 with the lack of supporting information and risk of gaming, albeit it’s much easier to implement and execute.

No matter your choice, I hope you have gained a bit of insight from reading this post and that we’ve been able to unravel the mystery that is: your food costing.