How you price your dishes on your menu can make or break your business. Price dishes too high, and customers won’t order them. Price dishes too low, and you won’t generate enough revenue to cover your expenses. By taking a deep dive into understanding your food costs, you can improve your chances for success. Lucky for you, we’ve got restaurant pricing down to a science. We’ll help you figure out how to set menu prices that will cover your expenses and ensure that your restaurant is financially healthy.
Sounds boring and stressful, right?
Don’t worry, and we got you covered!
We will go through step by step on how to calculate your ideal and actual food costs so you can price your menu ideally and even identify where you might be able to save money.
What Is Food Cost?
Before we go into detail, let’s understand more about what food cost means.
Food cost is the ratio of the cost of ingredients (food inventory) and the revenue that those ingredients generate when dishes are sold (food sales).
What is Food Cost Per Serving? And How Do I Calculate It?
Before you decide the price of your menu, you need to find out how much your food costs to make one serving of each item in your menu. To calculate your food cost per serving, find the sum of the ingredient cost per serving.
Example:
Uncle Yong of Havelock Road Fried Oyster Omelette wants to figure out his famous Fried Oyster Omelette cost per serving. The dish consists of 100 gm of potato starch, 20 gm of water, 70 gm of oyster, 2 tbsp of oil, 20 gm of fish sauce, 16 gm of light soya sauce and 1 egg.
Uncle Yong buys his ingredients in bulk and pays for S$30 for 10kg ($3 for 1kg) of potato starch. He calculates that 100 gm of potato starch for a single dish of Fried Oyster Omelette costs S$0.30. Uncle Yong does the same calculations to determine the cost per serving of the remaining ingredients in the Fried Oyster Omelette.
Why Is Food Cost Percentage Important?
By monitoring your food cost percentage (typically between 28-35% of your total operating cost) a restauranteur can know when to change prices, products and purchase quantities to improve his or her percentage.
The slightest change in the price of goods and/or the number of sales can affect a restaurant’s profit significantly.
There is no One-Size-Fits-All Number for Food Cost
A common misconception about food cost percentage is that every restaurant should aim for a perfect number. In reality, a healthy percentage can vary depending on the products you sell, food cost control, and the market you serve. For example, a steakhouse can run a food cost percentage close to 35 percent, because the cost of its ingredients is much higher. On the other hand, a restaurant that serves primarily oyster omelette like Uncle Yong, which is cheap to buy in bulk, might run somewhere around 28 percent. Both percentages are acceptable according to the context of the restaurant.
First, you need to have values for the following things:
Beginning inventory value: the value (S$) of the inventory you purchased at the beginning of the month.
Purchases: the value (S$) of the inventory you purchase throughout the month and wasn’t part of your beginning inventory.
Ending inventory: the value (S$) of the inventory left over at the end of the month.
Total food sales: the dollar value of your sales for the month, which you can find in your POS sales reports.
To calculate your food cost percentage, first, add the value of your beginning inventory and your purchases, and subtract the value of your ending inventory from the total. Finally, divide the result by your total food sales.
Let’s see how Uncle Yong would calculate their food cost percentage using these values:
Uncle Yong’s food cost percentage is 25%, meaning that 25% of his revenue goes towards paying for ingredients.
Average Restaurant Food Cost Percentages Can Vary by Meal
In the same way that food cost percentage targets can vary between restaurants, they can also vary within a restaurant. This is would usually happen if your restaurant serves both breakfast and dinner, or you have both a coffee bar and a sit-down restaurant, for example, breakfast foods, like eggs and bread, are much less expensive than seafood and high-quality meats you might serve at dinner. It’s essential to take these variations into consideration when calculating the overall food cost percentage and taking inventory of your ingredient costs. Now, do keep in mind that there are some ingredients that you can’t really measure and put that into your food costing system. For example, Uncle Yong’s famous Fried Oyster Omelette, dishes like that are made to order and things like soya sauce and water are hard to measure. So, Uncle Yong has to estimate those ingredients into his food cost.
How Your POS can Help With Your Food Costing
Mapping your recipes to your POS system menu items helps you understand and control your food costs. Recipe costing breaks down menu items to the details of portion size and individual ingredients, calculated to the penny.
Manually calculating menu item costing is error-prone and time-consuming. The usage and yield of each food ingredient determine recipe costs, but tracking this by hand on an inventory list can be unreliable. With a restaurant inventory management system integrated with your accounting and POS system, you can automatically track the yield from each food item on your menu by mapping inventory against sales.
Click below for the food cost template.
To sum it up, understanding your food cost might be confusing however it will will bring so much more pros as it helps you to determine the operational success and profitability of your restaurant - Knowing your base cost of your ingredients will help you estimate your finished product price at a higher cost so that you will be able to cover in the manpower/labor, utilities, operating expenses etc.
Caroline Yap is the editor and intern at iCHEF Singapore. She manages iCHEF Club, a growing community of F&B owners in Singapore – organizing events, an online newsletter, and the F&B Entrepreneur Bootcamp, the only regular workshop on opening a new restaurant in the country. In her spare time, she loves drawing, painting, and creating new visuals. Her love for Korean food runs deep such that you can spot her at any famous Korean Restaurant in Singapore.
