Buzz
Managing a restaurant, catering service, or culinary school can be an expensive and complex endeavor. To ensure your business operates smoothly, you must regularly and accurately calculate food costs. There are three main calculations to focus on: maximum allowable food cost (the cost you can afford); projected food cost (the estimated cost of your menu); and actual food cost (the amount of food you need to purchase for your business). Comparing these three figures will help you adjust and reduce expenses, ensuring long-term business success.
Steps
Calculate Maximum Allowable Food Cost
Understand why this calculation is necessary. The maximum cost informs you of the percentage of your business's operational budget that can be allocated to food while still maintaining profitability. Without this figure, you cannot determine whether your actual food cost (calculated later) aligns with expectations to achieve your desired net profit.
Start by calculating your operating budget. The operating budget of your business includes current and projected expenses, as well as expected profits. To determine your monthly operating budget, keep the following figures in mind:
- Target profit
- Hourly labor (servers, dishwashers, etc.)
- Monthly labor (managers, owners, head chefs, etc.)
- Utilities (gas, electricity, water, internet, etc.)
- Fixed costs (rent, mortgage payments, insurance, etc.)
- Fees and licenses (taxes, liquor licenses, business permits, food service permits, etc.)
- Supplies (cleaning materials, non-food kitchen items, plates, takeout containers)
- Marketing
- Maintenance
Determine how much you need to spend each month. Opening a small eatery is a significant risk, even for experienced restaurateurs. To give your restaurant or catering business a competitive edge, you must be prepared to invest in it—while also safeguarding your personal interests to avoid bankruptcy. Utilize small business loans and support programs from both private banks and national initiatives. Consider taking on a business partner to increase investment; the partner can either be directly involved in operations or simply provide financial backing for a share of the profits.
- Assess your finances: Create a monthly household budget that includes rent/mortgage, transportation, food, personal insurance, and all other personal expenses. Do not sacrifice personal stability for the sake of the business.
- Calculate debt repayment options. Beyond understanding interest rates, decide whether you plan to make minimum payments or pay off debts as quickly as possible. How much of your personal savings and business income will go toward debt repayment? How much will remain?
- After considering personal finances and debt repayment, decide how much you can invest in the business monthly.
- Compare this amount to your operating budget. If you cannot meet the budget, adjust it instead of straining your finances.
- Consider consulting an accountant or bank officer to determine how far you can safely stretch your finances.
Calculate the percentage of the budget allocated to each expense. Once you’ve determined your monthly expenses, identify the proportion of the budget allocated to each cost category as outlined in Step 2.
- For example, assume you can spend 100 million VND monthly on your restaurant.
- You and your manager each earn 5 million VND per month. Combined, monthly salaries amount to 10 million VND, or 10% of the budget.
Calculate the maximum allowable food cost each month. Once you have the percentage for each expense, add them up. The remaining percentage of the budget is the maximum amount you can spend on food to achieve your target profit.
- Monthly salaries (10%) + Hourly wages (17%) + Supplies (5%) + Utilities (6%) + Marketing (4%) + Fees and Licenses (3%) + Maintenance (4%) + Fixed Costs (21%) + Target Profit (5%) = 75%
- In this example, 75% of the maximum budget is allocated to everything except food.
- To calculate the maximum allowable food cost, subtract the above percentage from 100%.
- 100% - 75% = 25%
- If your monthly budget is 100 million VND, you can spend up to 100 million x 0.25 = 25 million VND on food to achieve a 5% profit (100 million x 0.05 = 5 million VND) each month.
Calculate Actual Food Cost
Choose a start date for your weekly evaluation period. Just as you pay rent, utilities, and other expenses on a fixed date each month, you need to calculate food costs based on a regular cycle. Analyze your inventory at the same time each week—perhaps on Sunday, before or after the kitchen opens.
- Always conduct inventory checks outside business hours to ensure no food is being delivered or used for cooking.
Determine the “beginning inventory” date. On the first day of your “financial week”—in this case, Sunday—inspect all the food in your kitchen. Accuracy is crucial, so refer to invoices to see how much you paid for each item. For example, you might have paid 70,000 VND for 15 liters of cooking oil, with 2 liters remaining at the start of the financial week. Calculate the exact value of the 2 liters: (70,000 ÷ 15L) = (X ÷ 2L). Solving for X, you’ll find you have 9,000 VND worth of cooking oil at the start of the week. Repeat this calculation for every food item in stock.
- Add up all the amounts to determine your beginning inventory—the monetary value of the food in your kitchen at the start of the financial week.
Track purchases. Throughout the week, you’ll order food as needed, based on what sells best on your menu. Keep all purchase invoices organized in your office so you can track exactly how much you’ve spent on food each day.
Calculate the beginning inventory again on the first day of the next financial week. Repeat the process from Step 2. This will give you a figure that serves two purposes: it’s the beginning inventory for the next week and the “ending inventory” for the current week. Now you know how much food you started with, how much you purchased, and how much remains at the end of the week.
Determine the amount of food used to prepare dishes sold during the week. At the end of each shift, the restaurant manager should calculate total sales. Review daily sales reports and sum them up to determine weekly food revenue.
Calculate the actual food cost for the week. In Part 1 of this article, you calculated the maximum allowable food cost as a portion of your total budget. Now, you need to determine the percentage of your budget actually spent on food. By comparing these two percentages, you can identify whether you’re overspending on food to maintain smooth business operations.
- To calculate the actual food cost, use the following formula: Food Cost % = (Beginning Inventory + Purchases – Ending Inventory) ÷ Sales Revenue.
- In our example, assume Beginning Inventory = 14 million VND; Purchases = 3 million VND; Ending Inventory = 15 million VND; Sales Revenue = 7 million VND.
- (14 million + 3 million – 15 million) ÷ 7 million = 0.30 = 30%.
Compare the maximum allowable food cost with the actual food cost. In this example, we calculated the maximum allowable food cost as 25% in Part 1 and the actual food cost as 30% in the previous step. Now, we know that we’ve spent too much on food to achieve the 5% profit target.
- Adjust weekly food purchases to better control inventory. Aim to reduce the actual food cost to match or fall below the maximum allowable food cost.
- Remember, this calculation may be inaccurate if you miscount inventory, use inconsistent units for pricing (e.g., counting 10 tomato cans but pricing by the crate), lose invoices for counted inventory, or include invoices for non-existent items (e.g., returned goods).
Calculate Projected Food Cost
Calculate total costs. For each menu item, determine the cost to prepare it. For example, the cost of making a cheeseburger breaks down as follows: 300 VND for the bun; 86 VND for 30g of mayonnaise; 86 VND for 1 slice of onion; 200 VND for 2 tomato slices; 1,100 VND for 250g of meat; 30 VND for 7g of ketchup and mustard; 60 VND for 30g of lettuce; 260 VND for 2 slices of American cheese; and 330 VND for a bag of fries. The total food cost for the cheeseburger is 2,400 VND.
- Multiply the food cost for each item by the number of units sold weekly.
- Add them up to calculate the total cost. In the example above, assume the total cost is 4.5 million VND. This is the amount you spent preparing meals for the week.
- Ensure all ingredients are tightly portion-controlled. This guarantees that every chef serves each dish at the same cost.
Calculate total revenue. Now that you’ve calculated the cost of preparing meals for customers, determine how much you earned from each dish. For every menu item, multiply the selling price by the number of units sold weekly. Sum the revenue from all menu items to get the total revenue.
- In the example above, assume you earned 12 million VND in revenue for the week.
Determine the projected food cost. To calculate this, multiply the total cost by 100, then divide by the total revenue. In the example above, solve the following expression: (4.5 million X 100) ÷ 12 million = 37.5. The projected food cost will account for 37.5% of your budget.
Analyze the projected food cost. Now you know how much profit your food business generates in a week. Compare this figure with the maximum allowable food cost to determine if menu prices need adjustment. In the above case, the maximum allowable food cost from Part 1 is 25%, and the projected food cost is 37.5%. This is a significant issue! You need to increase total revenue to bring the projected food cost down to the target of 25%. Adjustments can be made by raising menu prices.
- You can slightly increase the prices of all menu items—perhaps by 5,000 VND for cheaper dishes or 40,000-60,000 VND for higher-cost items.
- Review sales data to identify the most popular dishes. You can raise prices for bestsellers more than less popular items—customers are often willing to pay more for favorites.
- Consider removing low-selling items. They are unlikely to generate significant revenue. Continuously reevaluate your menu to ensure you’re utilizing all inventory effectively.
Tips
- You can conduct both purchasing and sales activities on the same day.
- The most recent price paid for each food item will serve as its inventory value.
- Avoid receiving deliveries during inventory checks.
