If you’re planning to open a restaurant, or if you’ve already opened one and you’re worried about your current return on investment (ROI), then the first thing you need to look at is how your food costs tally up to your sales. In the food service industry, food cost is everything when it comes to profitability; but it’s absolutely essential to providing a quality product if you want to be successful. This is the challenge that every food service entrepreneur faces — optimizing profitability while providing quality.

These five tips can help you accurately calculate how much you’re investing in food, how this investment weighs against your revenue earnings, and what you can do to maximize your profits without cutting corners on quality.

1. Create Direct Costs Sheets for Each Menu Item

Costs sheets should include anything that’s considered a direct cost, such as ingredients that go into each food item or drink.

In a standard restaurant cost sheet, you’ll want to name the dish, list each ingredient (including the amount used and relevant cost for the dish), notate the recipe yield (number of portions per single recipe preparation) and total recipe cost, and finally calculate the portion size and cost. You’ll also want to add special notes, such as increases or decreases in ingredient prices.

You can create a standardized recipe cost sheet by using a template, or by utilizing restaurant accounting software (which we’ll discuss below).

2. Include Food Loss in Your Calculations

Food preparation usually involves a certain amount of waste, such as fruit/vegetable peels and meat trimmings. Likewise, a certain amount of spillage and spoilage happens as well. And when it comes to meat, there’s always the dreaded “drip loss.”

Drip loss primarily occurs due to trimming and heating, and can account for as much as a 34 percent loss of meat. Be sure to account for drip loss — plus spillage, spoilage and prep waste — when calculating direct food costs per portion in your menu items.

3. Determine a Pricing Formula to Follow

Typically, food service providers add 28 to 35 percent to their direct cost of a menu item. Restaurateurs can choose from a variety of pricing formulas to calculate food cost against ROI. Here’s a look a three of the most popular pricing methods.

• Dividing the Costs by Portion

Here’s an example of this method: If you purchase 100 pounds of ground beef at $2.00 a pound, your purchase price for the beef is $200. If you’re selling quarter-pound hamburgers, then your meat costs $.50 for each burger. Do this for each component of your burger, calculating the cost of the bun, cheese, vegetables etc. If your burger ends up costing you $1.50 in ingredients, then by using this method you can divide $1.50 by 30 percent to get your price for the burger, $5.00.

• Competitive Pricing

Some food service providers base their pricing on their competitors’ prices. For example, the owner of a barbecue restaurant might look at the menu of another popular barbecue place in town, and either price items exactly the same or slightly lower to attract customers. This method works best for entrepreneurs who are running a formulaic-type restaurant with items that are identical to those of its competitors. For a fine dining restaurant, however, this wouldn’t be the best option because of the uniqueness of the menu — plus, competitive bargain pricing isn’t typically a consideration for fine dining patrons.

• Market/Popularity Pricing

This method works best for fine dining restaurants, as well as for restaurants that attract a large following.

Popularity pricing is just what it says — it allows the restaurateur to charge more according to public demand. If the restaurant is in a high-traffic area, offers something unique in the way of fine dining, or corners a niche market (such as the best Chicago-style pizza in town), then the owner can charge whatever he or she wants, within reason. If people are willing to pay that much, then the restaurant will succeed. In order for this to work, however, the product has to be outstanding and well worth the price.

Whatever pricing formula you decide to use, it’s important to sit down with your accountant and managers and do a food cost inventory on a regular basis — such as every two weeks, or at least every 28 days or so. This gives you a chance to not only stay on top of the books, but also identify price increases in products and ingredients. If costs on certain ingredients continue to rise, consider deleting the items that use those ingredients, or raising menu prices on the items involved. 

4. Use a Food Cost Management Software

One way to make things easier for your cost management is to invest in a food cost management software point of sale (POS) system such as Toast, Aloha or Micros. This type of software will provide all the tools you need for calculating recipe and portion costs, keeping track of increases/decreases in ingredients and managing control through drip loss and spoilage. By using software management, you’ll also have everything on record where you can quickly find it, so you won’t waste time tracking down missing files or inventory sheets.

5. Invest in a Reputable Accounting Service

Whether you’re running a food truck or a five-star restaurant, the best way to keep track of food costs is to invest in a quality accounting service. An outsourced service can provide everything from essential bookkeeping services to payroll setup/administration and inventory cost management. Plus, an accounting service can give you the necessary help you need in filing taxes, and help you stay compliant with new tax regulations. In addition, an outsourced accounting service can give you the advice you need when it comes to calculating and managing food costs, as well as costs in overhead and labor.

While a software service can provide you with tools, it can’t give you the valuable real life advice you need in money management and cost control. However, an accountant can help you optimize your food management software tools so that you can get the most out of them. That’s why the best scenario is to have both in place — a good software program plus an experienced accountant — to guide you through every financial aspect of your business.

If you’re looking for cutting-edge financial management tools that can increase your ROI, boost your growth, and give you the freedom to manage your restaurant the way you want to, Founder’s CPA can help. We are licensed and certified public accountants who specialize in restaurant accounting services, and we’ll provide expert solutions for all your financial management issues. Whether you need help in bookkeepingpayrolltaxes or other accounting services, our team will give you the professional help and guidance you need so you can concentrate on running your restaurant. Just contact us to schedule a free consultation by phone, and we’ll help you get started on the right path to greater financial management.

Managing food costs is one of the biggest keys to success in the food industry — but you need the right tools to do it accurately. With the right software and good outsourced accounting services, you’ll have the tools you need to keep food costs down, while still giving your customers a reason to keep coming back.

Schedule a free consultation with Founder’s CPA today!