How to Keep Track of Your Food Costs

For small restaurants and bars, every penny counts and losing sight of your costs can significantly impact your bottom line. Get to know the tools and resources available to help you track and reduce your food costs below.

When managing a restaurant budget, your food costs are one of those financial aspects that you can’t just set up once. You have to consistently track and manage your budget to ensure you keep your food costs low and reduce your food waste to protect your restaurant profit margins. In fact, after staffing issues, high menu costs are cited as the number one concern for small independent bar and restaurant owners.

Running a restaurant can take up much of an owner’s time, and it’s rare to find the opportunity to do the thorough analysis that is required to track food costs properly. And with the increases in inflation and the ongoing supply chain issues, maintaining reasonable prices while sustaining profitability is becoming more of a challenge. This guide will help you with simple ways to track your food costs easily and determine if you should adjust menu prices while keeping your customers happy and not appearing to overcharge.

Why It's Important to Track Food Costs

Your food costs are a measure of the menu price of dishes against how much the ingredients to make the dish cost. According to Lorri Mealey with The Balance, “food cost should be in the neighborhood of 25% to 35%. In other words, if you pay $1 for something, you should usually charge a minimum of $2.85.”

Your restaurant food costs determine your restaurant’s financial health and can help you assess menu pricing and strategies. Regarding your restaurant budget, food costs are one of the most challenging aspects of balancing your budget.

1. Increase Profits

In the food industry, there is a lot of accounting for when focusing on profitability, including staff, the space, daily operations, and food costs. Calculating accurate food costs can help you to increase your restaurant profit margin by ensuring you are making the most out of your menu items.

2. Optimize Ordering

You can get a better idea of your inventory needs by tracking your food costs which allows you to optimize your ordering. You can optimize your ordering with the outcomes to ensure you order just enough to reduce unnecessary food waste and ensure you have enough ingredients to make it through the week.

3. Improve Customer Experiences

Your customers will visit your restaurant to eat their favorite menu item. If you are out of any ingredients, your customer’s experience can turn negative and could damage customer loyalty.

How to Calculate Food Costs

Running any business requires you to calculate a budget and continue to update your budget to monitor your restaurant and its profitability. Reviewing your budget regularly can help you keep better track of your finances and help you set and achieve your goals. With the right tools, you can easily manage your budget and stay on top of the cash flow within your restaurant.

Calculating your average food cost percentage is essential to regulating the budget and determining the menu prices to maintain profitability. The average food cost, shown as a percentage, is the highest expense for any restaurant or bar, and it can easily go overlooked as you focus on the many aspects of running a successful business. 

The simplest way to determine your food cost is by determining the costs of your ingredients versus the revenue those ingredients produce for each meal sold. You can get this number one of two ways:

1. Period Costs

Take the total costs for a specific time period and divide them by the total food sales during that same time period.

2. Plate Cost

Take the food cost of a menu item and divide it by the sales price or the plate cost and multiply that ratio by 100. Keeping track of both numbers can help you to determine your menu pricing more accurately and help you to achieve your cost goals. It’s the first step you want to take to accurately track and manage your food costs and determine your menu profitability

You can analyze how your costs change over time to give you insights into how food costs are trending to allow you to make decisions on whether you need to improve cost control efforts or update menu pricing. 

Food costs are just one of the many aspects of controlling your small pub, restaurant, or bar’s bottom line. You’ll want to ensure your restaurant is staffed appropriately while maintaining profitability. You can use tools to determine your labor costs, such as the Sysco Source Labor Cost Calculator, to help you accurately assess the full scope of your expenses.

Knowing your food, labour, utilities, back bar supplies, bar hardware supplies, etc is critical to your bottom line.

Tools to Help you Track Your Food Costs

Tracking your food cost percentage is vital to protect the bottom line of your restaurant. You need to consider the many factors impacting how to manage food costs by considering portion sizes, recipe costs, and menu items. There are a lot of software solutions and tools that can help simplify the task of tracking your food costs. These tools can help you manage your food costs better while optimizing  your profitability. 

1. Restaurant Inventory Management Systems

Restaurant inventory management systems can help you in several ways beyond tracking your food costs. An all-in-one system can help you track ingredients, manage vendors, and provide low stock notifications. Ideally, you would want one that integrates or has a functioning POS that can help you to automate many of your inventory management tasks and even alert you when it is time to order more. The features continue to improve as technology and smart functionality advance. Some inventory management systems even have built-in price trackers to keep an eye on rising costs to help you better manage your bottom line.

2. Food Cost Calculators

To balance expenses and calculate food costs, entering it in an excel spreadsheet can be time-consuming and can sometimes lead to inaccurate predictions. You want to be able to leverage real tools that can help you quickly calculate your food costs. There are a lot of apps available, but the American Foods Group has an easy-to-use Food Cost Calculator that allows you to email and print your calculations for you to reference at any time.

A great resource to track and calculate food and beverage costs is Hailo Data’s Food and Beverage Cost Management Document. The download provides support with systems for calculating cost of goods sold (COGS), recipe costing, inventory management and more.

Tips on How to Manage Food Costs

Your food costs can change drastically over time and if not kept in check, can create a financial burden that can threaten the success of your small restaurant. When ingredient prices rise or shrink, you want to be able to strategically manage your menu prices while ensuring the positive customer experience remains intact. Follow these simple tips to help you manage and lower food costs.

1. Track Food Prices

Food prices are always changing depending on a number of factors, including simple supply and demand, weather, transportation costs, and more. With inflation being at a 40-year high, tracking food prices is more important than ever. You can check the USDA Food Price Outlook reports to see the trends and forecasts for what to expect for food prices on average.

2. Manage Portion Sizes

Controlling portion sizes and edible portion cose can play a major role in controlling your food costs. You want to be sure you are serving just the right amount of food to your customers. You can determine if your portion sizes may not be right by:

  • Tracking plates that come back to the kitchen and observing if there are leftovers.
  • Taking note if there has been an increase in requests to box up leftovers.

These are indicators that you may need to cut back on portion sizes for your menu items.

Ensure your kitchen staff is properly trained and has the right tools to measure equal portion sizes for every meal. Even a minor shift in your portion sizes can significantly impact your overall food costs.

Write Prep Sheets

For each dish, build a prep sheet that contains preparation instructions for each dish with weights or measures for each component of the dish.  (Don’t worry, over time the experienced staff won’t need to refer to it).  This makes it very easy for new kitchen staff to learn the correct plating methods for a dish. 

Post Plating Pictures

Take pictures of finished dishes to help staff learn how to plate orders just right. 

Invest in Restaurant Inventory Management Software

Tools like Optimum Control from TracRite can make it very easy to manage portions, track your costs, and train new staff.  There is an initial investment in time and effort to set it up, but the savings generated can reach into thousands of dollars per year.

3. Take Inventory Daily or Weekly

You should be taking inventory of your food regularly to keep track of your food usage and get a better idea of the associated costs. You can use your inventory to determine what you need to order less of and maybe what you need more of.

4. Offer Daily Specials

Using daily specials, you can reduce your food waste and, subsequently, your food costs. If you have ingredients you may not have an opportunity to use or – more commonly – have leftover inventory from that you would like to use up, leverage the talents of your chefs to create a unique menu item to offer as a special. You’ll want to encourage your front-of-house staff to recommend your specials to help reduce food waste.

5. Research Vendors and Suppliers

Even if you have a great relationship with your current vendors and suppliers, keeping track of any new suppliers popping up in your area is always a good idea. You can use competitor research to leverage better prices with your current vendors or switch if it makes more sense. You can also schedule quarterly reviews with your suppliers to ensure you get the best prices.

6. Use Menu Engineering

Menu engineering is an in-depth review of your menu to analyze the popularity and profitability of your menu. Menu engineering uses psychological tactics to help to increase your restaurant profit margin by strategically restructuring and redesigning your menu. You can determine the least popular items and remove them if needed. Menu engineering increases profits while maintaining a great customer experience. Learn more about the psychology  behind menu engineering and top tips in our Psychology of Menu Design blog post.

At its most basic, menu engineering requires you to:
* know what each item on your menu costs you (see above)
* know your margin of profitability for each item (list price minus cost)
* determine if there are menu items with low profitability that you can either redesign (to reduce the cost), reprice or (if they are unpopular) remove

As Sebastian Rankin writes for Lightspeed, “Menu engineering is a way to evaluate a restaurant’s menu pricing by using sales data and food costs to guide which dishes to feature and their menu price. Equipped with that data, menu engineering involves categorizing menu items based on their popularity (sales volume) and profitability.”

Lightspeed has a great chart for organizing your menu items into four groups based on Popularity and Profitability.

Lightspeed Menu Matrix

Source: Lightspeed

7. Manage Food Orders

The harder you are willing to work to optimize your food orders, the more you will be able to save. You can offer a limited menu to cut the number of ingredients you need, buy seasonal produce for extra savings, and opt for more prep work to reduce costs.

8. Reduce Food Waste

Managing your food costs relies heavily on reducing your food waste. Food waste is inevitable, but there are measures you can take to help reduce the waste. You can get creative to use food before it spoils or to use up any scraps to make broths or soups. Creating a compost bin using your food can also help reduce costs in other areas of the restaurant.

You can also manage food waste by ensuring your front-of-house staff is trained to take accurate orders. Make sure they have the resources they need to take orders and encourage them to work on their accuracy with their customers. Provide them with notepads and pens and ensure part of their service is to repeat orders back to the customer.

9. Conduct Sales Forecasting

Sales forecasting can be crucial in organizing your menu and optimizing your food costs. Every quarter, you should look at trends from previous months or years to identify patterns to provide insights into what the possible future of your sales within the next quarter will look like. Sales forecasting can help lower food waste, optimize ordering, ensure you properly schedule staff, and more.

Conclusion

Managing and tracking your food costs can seem overwhelming, but ensuring your restaurant is successful is essential. For small restaurants and bars, every penny counts and losing sight of your costs can significantly impact your bottom line. You can get the most accurate data by using the tools and resources available to help you track your food costs. Accurately tracking can increase your profitability while maintaining customer satisfaction for your restaurant or bar.

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