Setting menu prices is a delicate and vital task that may well decide the success of your business. If dishes are priced too high, customers won’t order them. And if dishes are underpriced, your business won’t make a profit. You might lose money if the price of a dish drops too low—even if items are selling well. For these reasons, restaurants need to understand their food costs and how they affect the business’s bottom line.
How do you calculate food cost?
Simply put, a restaurant’s food cost is the ratio of ingredient costs to the revenue generated from the food sales using those ingredients. The end result is usually represented in a percentage. The percentage is calculated by finding the total cost of food sold and dividing it by the sales generated from the finished product. The basic formula breaks down as such:
Food Cost = (Beginning Inventory + Additional Purchases – Ending Inventory) / Food Sales
Using this equation results in a percentage representing how much of a dish’s price is used to create the dish. The average food cost percentage varies. Each restaurant will be unique in overhead costs and operating expenses, but speaking in general terms, a profitable restaurant should aim for a food cost percentage between 28% to 35%.
Steps to manage your food cost percentages
Understanding your food cost percentages is just the first step. Many restaurants operate with razor-thin profit margins – especially in a post-pandemic atmosphere. If you are thinking about adjusting menu prices to adapt to your food costs, follow these steps:
• Calculate the food cost per serving for each item on your menu
• Determine the food cost percentage you are currently operating
• Based on your expenses and overhead costs, determine an ideal food cost percentage
• Adjust the pricing of menu items based on your ideal food cost percentage
• Monitor how your customers and your sales react
At NCCO, we strive to be a partner in growth. We provide quality products, training, and support to ensure that your business is safe, healthy, and operating at its best.
Food safety and proper handling techniques can be the answer to lowering production costs for some restaurants. If you are interested in learning more, contact us today.