Business Insights

How Food Cost Calculations Can Increase Profitability

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Running a successful restaurant takes more than culinary genius – it takes a mind for business. Food cost calculations can feel overwhelming, but it doesn’t have to be. Let’s dive into how to use some basic calculations to increase your operation’s profitability.

Food Cost Calculation Basics: Here’s the basic formula for all food cost calculations.

Beginning Inventory $ 
PLUS (+) purchases $ 
MINUS (-) ending inventory $
EQUALS (=) Cost of Sales $

Based on this formula, in order to achieve actual and accurate foods costs, inventory is essential. Interestingly, chain restaurants conduct inventory and cost calculations every week whereas broadline operators tend to only take inventory monthly. Chain restaurants are also on average three to four times more profitable than broadline operators, showing a direct correlation between best inventory practices and profitability. So in essence, best practice is to track usage, not purchases.

The good news is that improving your inventory practices is easy to do. Best practices begin with getting organized and include separating inventory into categories and locations, counting on the same day and at the same time, following “shelf to sheet” methodology and “spreading the sugar” – meaning more than one person counts the inventory.

Once you have these basics in place, you can then focus on your Restaurant Financial Calendar and decide which is best for you. There are three main types of fiscal calendars: Monthly, 4-4-5 and 13 Period.

Monthly calendars calculate food costs each month regardless of how many weekends or days are in that period. It’s often an operator’s default calendar when just getting started.

The 4-4-5 calendar breaks each quarter into two 4-week periods and one 5-week period, all with an equal amount of days and weekends. This calendar makes accrual of labor simpler (payroll). It also makes the comparison dollars exact and provides a consistency factor to help decipher between calendar anomalies and substantive trends.

The 13 Period calendar also provides consistency and is based on 52 weeks a year broken into 13 4-week periods. It includes an equal amount of days and weekend days and provides simple comparison between periods. It’s also ideal for identifying week-to-week trends. This calendar’s only drawback is it can be confusing aligning what month is what period.

No matter which calendar you use, the next step is to decide if you will track costs on a cash basis or an accrual basis. With a cash basis, transactions are recorded when bills are paid whereas for accrual basis, transactions are recorded when invoices are received.

Adopt these best practices and you’ll enjoy a clear understanding of which food items are profitable and which are not, allowing you to adjust your menu and maximize each ingredient. The end result is increased overall profitability and guest satisfaction, all thanks to a little math.

Ready to get started? We’ve provided a FREE downloadable PDF handout to help.

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