How To Accelerate Your Profit by Tweaking Your Food Costs. – Part One

Why food costs can make or break your business.

I’m sure I won’t be telling you anything new by saying food costs are important.

But do you know quite how bloody critical they are to your business, and how big of an impact a tiny saving in food costs can have on your profit?

Did you know that just a 10% reduction in your food costs could increase your profit by up to 70%!!

Food costs represent about 30% of your business costs, so managing your food expenditure closely can often be the difference between success and failure in the restaurant game.

This post is part one of a two-part series focusing on food costs.  

It will show you quite how important understanding your food costs is; where operators often go wrong, and how to ensure you’re accurately monitoring your food costs in order to build profit.

The second post of the series will then show you how to reduce your food costs.

What should your food costs be?

Food costs will change depending on the business, the offer, and the market you’re operating in. As a rule, I consider a really healthy range to be between 28 and 32% of turnover. However in most cases 35% can still be viable, so long as your staff costs and other expenses are also within a healthy range. 

Amplifying your profit

As I mentioned, a small saving in your food costs can have a profound impact on profitability. As you can see in the example below:

In this scenario, the café is turning over $800,000 in revenue. That’s about $2,200 per day.

We can see in the first column that their food costs are $280,000, which is 35% of their turnover. And their operating profit is $40,000, which is 5% of turnover.

But look what happens in the second column when our café saves 10% on their food costs!

By reducing their annual food costs by $28,000, or just $77 per day, they’re able to increase their profit by a whopping 70%.  Taking them from a $40,000 profit to a $68,000 profit.

Imagine if they were able to make some similar savings to their staff costs and fixed expenses too!

Pricing your menu

If you don’t know exactly what your food costs are, it’s impossible to know how you should be pricing your meals.

At best you will be taking a guess at what you think the menu item is worth, and what your customers are prepared to pay.

But in doing so it’s entirely possible you’re pricing your menu unprofitably low. Or you may be pricing it too high, and not achieving the sales volumes you would if you were able to drop you price slightly.

Accountants can only do so much

Frequently a business’s food costs are given to the owner at the end of the financial year by their accountant.

This is really handy information, however, the problem with this approach is that the accountant is giving them information, that is in some cases, more than 12 months old.

This massive delay in getting these figures means that information is way out of date and the business owner isn’t able to do much to react. Worst of all, they’ve been missing out on the potential profit gains all this time!

Accountants are very good at being able to show you what your food costs are, but they’re not hospitality experts. They’re unable to tell you where your food costs are blowing out, and what you should do about it. This is where an experienced restaurant consultant can come in handy!

Don’t lump your drinks in with your food

All too frequently revenue is reported as one figure without food revenue and beverage revenue split out.

Similarly, food and beverage costs are lumped together.

The effect of this is that your high-margin beverages are reducing your total COGS (cost of goods sold) as a percentage of turnover, and it’s impossible to tell what the actual food costs are.

If you can’t accurately measure your food costs, you can’t reduce them, so it’s vitally important that your food and beverage revenue, and costs, are separated.

How do you measure food costs?

Setting yourself up to be able to track your food costs does take a little bit of time, however, the potential payback for your efforts makes it highly worthwhile.

Step One: Establish your theoretical food costs

For every item on your menu, work out the cost of every single portioned ingredient in the recipe.

You can get the cost of each ingredient from your latest supplier invoice; just make sure you’re excluding any local sales tax such as GST or VAT.

From there you can enter the costs into a simple spreadsheet, or one of the many online food cost apps.

You may find that the price changes regularly on certain ingredients. If this is the case, it’s best to take the average price in that range, or the highest price.

You should also make sure you include any anticipated wastage, which may be caused by trim, stock spoiling or order mix-ups. Depending on the menu item and your business, you may simply want to add this on as a percentage of your total cost.

Step Two: Work out your actual food costs

With the hard part now behind you, you can now track your actual food costs at the end of each month. Or more frequently if you prefer.

To work out your actual food costs you need to carry out a simple stocktake procedure.  -By counting your stock on hand at the end of service on the last day of the month, you can then easily work out the total value of this stock.

This number actually gives you two important figures: the value of the opening stock for the month ahead, and the value of the closing stock at the end of the month just been. –They’re the same thing!

Now your actual food costs can be calculated using the simple formula below:

Actual Food Costs = (Opening stock + Stock purchased during month) – Closing Stock

Let’s put some actual figures in here so that we can see how that formula works.

Stock on hand 1 July (Opening stock) = $6,000

Stock purchased during July = $30,000

Stock on hand 31 July (Closing Stock) = $8,000

($6,000 + $30,000) – $8,000 = $28,000

Step Three: Comparing actual and theoretical food costs

Comparing your actual and theoretical food costs each month is a really valuable exercise.

While a gap between these two figures of about 2% is tolerable, any more than that is essentially wastage. And this wastage is in reality margin that is escaping from your business.

Closing this gap is therefore a brilliant opportunity to improve your profitability; and in part two, I’m going to show you how to do this.

IN SUMARY. . .

Your food costs are one of your business’s biggest costs and contributors to profit. It’s therefore vitally important that you understand your food costs and track them every single month, as small savings here will hugely improve your profitability.