Food Cost Formula: Learn the Right Way to Calculate Restaurant Food Cost

Rising food costs can crush a restaurant's profitability. The crazy part about this is many restaurants are getting worked up and in a panic looking at the incorrect number. When it comes to the food cost formula, there's only one way to do it correctly, and I mean one way. Stay with me and learn the right way to calculate your restaurants food costs.

First I want to tell you that no matter when you're watching this video, your food costs are rising. For example, is there a week where your broadline distributor doesn't walk into your restaurant talking about how some commodity product will be astronomically high next quarter due to some catastrophic event like citrus crops being virtually wiped out in Florida due to a hurricane? Add to that inflation and recession, and it becomes more and more important to know where your food costs are.

Before I share with you how to calculate your food costs the right way, let me tell you where most restaurants go wrong.

One, purchases divided by sales. They just take all their invoices, whatever that total is and divide it into the sales that came in that month for food. Well, it's an incorrect number because in one month, you might have ordered more product than you needed and your sales were slightly lower than forecasted. The next thing you know, your food cost looks falsely high the next month, you don't order so much product because you had some from the last month. It was still good, still usable, and your sales were astronomical. With your purchases low, and your sales much higher, your food costs go really, really low. It doesn't work that way. That is an incorrect number.

Two, not counting everything. Meaning you're not taking inventories, or you are taking inventories, but you're not counting all the things that you prep on the shelf, the components of dishes like diced onions and peppers, things like sauces, soups, side dishes, desserts, things you make from scratch. When you don’t count all of your inventory, this is going to give you a false reading on a high food cost.

Three inflating your purchases. What do I mean by this? Well, when your broadband distributor invoice comes in and there's paper, janitorial, smallware, equipment on there, those aren't food. You don't sell those things. So, unless you remove those and only focus on what the food purchases were, you're going to have a high number.

Four, using a spreadsheet. I'm telling you right now, you can't use a spreadsheet anymore. Yes, you could set it up. Yes, it's going to work for a little bit, but it's not going to be accurate. It's going to be hard to maintain. You're not going to do it. So you're going to have inaccurate numbers. Plus, it's so difficult to add brand new products and put them in shelf-to-sheet order that you often don't. So, you're missing complete items that came in just that week. Now, in a perfect world, you're actually counting everything. You're using software and you're separating your purchases on each and every invoice.

Again, this is where software is really important. Not sure what I mean about that. Make sure you search my YouTube channel. I talk about this often if you're here, you know that there's a basic calculation and that basic calculation is simple. It is beginning inventory plus purchases. So what I had on my shelves, based on the last period, last week, last month, whenever you last you took an inventory, plus all the purchases from that day onto whatever the last day of the period is, whether that's a week or a month, does not matter how much purchases came in.

Beginning inventory plus purchases gives you what your total available is, how much food you could sell. If you had $5,000 on the shelf of product, food product, when you started the week, and you purchased $10,000 in product and didn't open the doors at all, you would have $15,000 in product on the shelf. That's the total available.

Next take an ending inventory at the end of the period, preferably a week, could be a month. Whenever you take that total, what's valued on the shelf at that moment, and subtract it from that total available, this gives you use.

Take your total available minus your ending inventory. This is use. What is use? Hopefully you sold it. It could have spoiled or wasted. It could have been stolen or heck, you might have taken it out the back door because you own the place and didn't put it on a waste sheet. It doesn’t really matter how the product leaves because the equation is math. It's blind to reason. That's why we need other systems in our business to track and control how we use our product. 

But that use is the cost of goods sold, the amount of product you used for the money you brought in. Now we take that use divided by gross sales – food sales alone, since we're talking about food cost. And that gives you your food cost percentage. If you come up with say, a 30% number, that means for every dollar that comes in in food sales, you used $0.30 in product.

Now, that is the only way, and it is the right way, to give you the right number.

So when it comes to food costs, it's beginning inventory plus purchases, minus ending gives you use, divided by sales gives you your food cost percentage. That's it.

With the right number, you can make proactive changes back on your budget. To get back on budget, if your food cost is high, you can look at recipe costing cards, re-engineer your menu, look at waste sheets to stop mistakes, your key item tracker to prevent theft, change your menu. You can do so many different things from portion controls to tracking properly.

Now it really comes down to budgeting, though. That's the key word. Where should your food cost be? It is based on your budget. To learn more about budgeting, make sure you search my YouTube channel here for great lessons on why you need to start budgeting. Because it's critical. Knowing your food cost is one thing. Knowing where it should be for you to make money is a totally different story.

Be sure to visit my YouTube channel for more helpful restaurant management video tips.