When it comes to restaurants, a great way to understand your costs is by understanding all the costs that go into a menu item. Food cost is quite an intensive process and requires calculations from each menu item.
We’ll show you step by step the best way to come up with a reasonably accurate food cost of a single dish on your menu.
Step 1: Decide which menu item you want to use. List every single ingredient in that dish. We mean every single dish that goes into it, even ketchup, condiments, and other things. Anything that cost something.
Step 2: Figure out each ingredients cost. Lets say you take tomatoes. If a tomato cost 80 cents and you get 4 slices, then a slice of tomato should cost 20 cents.
Step 3: Add up the ingredients costs for the dish measured out, without including labor or serving the dish.
Step 4: Did you price the meal right? Make sure to divide the menu price by the food cost. If you meal cost $10 and you charge $20, then you food cost is 50 percent (which is not that great….). Most restaurants shoot for a 30% food cost.
Step 5: Add in overhead costs. This includes things not related to food you need to run the restaurant. These are things such as labor, rent, marketing, taxes, and other things. Take when it will cost to run the restaurant on a daily basis and then divide that number by the number of customers you think you’ll serve every day. If your overhead is $1,000 per day and you have 200 customers each day, your overhead per person is $5.
Step 6: Combining the overheard cost as a guide, decide the ideal food cost percentage. Lets say you charge $5 a meal with overhead cost of $3. Then you are left with $2 profit per meal. You’ll definitely have to charge more.
Step 7: Take a look at the prices listed in your menu to figure out if they’ll cover your overhead and food costs – and if you’ll be able to make a profit. So if you’ve calculated an ideal food-cost percentage of 20 percent and a dish uses $4 of ingredients, you can’t sell that dish for any less than $20.
Step 8: Different items might need different food cost percentages. Beverages generally has higher margins than food items.
Step 9: Check sells according to food cost percentages to see how profitable your business is. Selling at a low cost? You might need to raise prices to stay in business.
How To Figure Out Food Cost Percentage?
Like above, this is a very simple formula to figure out exactly what your food cost percentage is. While the CostBrain software can do this automatically for us, we can also do it by hand.
The formula is: Just divide the menu price by the food cost. This will give you the percentage of the price that comes from food. How do you know if your food cost percentage is correct? While lets say you sell a meal for $18 and your costs are $6. Following the equation will let you know that your food cost is actually at 33 percent which is generally within the realm of where you would want to be.
What About Restaurant Overheads?
You may want to figure in all the overhead that your restaurant has. This includes everything from wifi to your power bill. We actually covered some factors article about restaurant utilities. Just make sure not to leave anything out. Even the toilet paper and paper towel you use is an expense. It takes more than just your servers and cooks to keep the restaurant running. Don’t forgot about rent as well for the building!
When it comes to overhead, there is plenty. Restaurants that don’t know how to keep their overhead costs low often struggle to come to profitability. Depending on where you are your most expensive overhead will be different. For those in expensive cities, often the rent will be the biggest overhead. In Times Square rents can be as high as $2000 per square foot! As a rule of thumb, the busier the area, the higher the cost per square foot.
What Is Your Ideal Food Cost Percentage?
This is debatable, but our rule of thumb is 30% for food. For beverages such as beer and wine the food cost will be a lot harder. Ever wonder why you pay $8 for a beer that probably cost them less than $1? Thats because many restaurants make a lot of sales on beer and wine. Its a great way to make back some of the margins you are losing on food. Other high margin products include salad. I often struggle to ever order a salad at a restaurant just because I know how high their margins are. Lets face it, lettuce is cheap!
For your standard fare such as burgers, fries, etc, you are shooting to hit 30%. This generally gives most restaurants enough cash per food item to be profitable. If you can do better than that and still get high sales, than great! If your margins are far worse, than you better figure out a way to get your costs down or you may have a hard time remaining profitable.
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