Imagine being a restaurant owner, trying to manage everything from menu creation to customer service, and then realizing that your profits aren’t where they should be.
After analyzing your financials, you find that the primary culprit is the high cost of goods sold (COGS). But don’t worry; we’re here to help you understand the cost of goods sold restaurant and how to lower it.
- Lowering your COGS can increase profitability, improve pricing strategy, enhance inventory management, and support financial planning.
- Calculate your restaurant’s COGS using the formula: Beginning Inventory + Purchased Inventory – Ending Inventory = COGS.
- Strategies to lower COGS include monitoring portion sizes, using seasonal ingredients, negotiating with suppliers, reducing food waste, and keeping track of inventory.
What is the Cost of Goods Sold Restaurant?
The cost of goods sold is an essential financial metric for any business, especially for restaurants. It represents the direct cost of producing the food and beverages that you sell to your customers.
In the restaurant industry, COGS mainly consists of the cost of raw materials, such as food costs and packaging, and any direct labor costs associated with food preparation. You can effectively manage your restaurant’s profitability and financial health by closely tracking COGS.
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COGS will vary from restaurant to restaurant depending on several factors, such as size and concept. For instance, a fancy fine-dining restaurant usually has higher COGS than a fast-food chain since they use more expensive ingredients.
So high COGS is not necessarily because you did something wrong, but it depends on many factors, typically fine dining restaurants. Also, keep in mind that menu prices can balance out higher COGS.
Good Cost of Goods Sold Percentage
According to industry experts, your restaurant’s cost of goods sold (COGS) shouldn’t exceed 31% of your sales. Maintaining a good COGS percentage will help you balance offering food quality and generating profit.
How Important Is the Cost of Goods Sold For Restaurants?
Understanding and managing COGS is crucial for your restaurant’s success. Here are four reasons why:
The profitability of your restaurant relies heavily on managing your COGS effectively. Lowering your COGS directly increases a restaurant’s profit margins and helps you maintain a healthy financial position.
Let’s consider a local sandwich shop as an example. If the owner is not careful with the cost of ingredients, they might be spending too much on high-priced items, resulting in increased COGS. They can lower their COGS and improve profitability by finding alternative, more cost-effective ingredients without compromising quality.
A well-informed pricing strategy is essential for maintaining a competitive edge in the restaurant business. Knowing the cost of goods sold helps you set the right prices for your menu items, ensuring you profit while remaining competitive.
For example, imagine you run a gourmet burger restaurant. So you can accurately price your burgers to cover your ingredient costs, labor, and other restaurant expenses while offering your customers an attractive price point. This way, you can strike a balance between profit and affordability.
Efficient inventory management, particularly food inventory, is vital for any restaurant. Keeping track of a restaurant’s cost of goods sold allows you to manage your inventory purchases more effectively, reducing waste and optimizing the usage of ingredients.
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Consider a busy Italian restaurant that serves a variety of pasta dishes. If the owner does not monitor these restaurant costs, they might end up with too much of one ingredient and not enough of another, leading to waste and potential menu shortages.
Therefore, the owner can adjust their inventory levels accordingly, ensuring a smooth operation.
COGS is critical in creating a realistic budget and financial projections for your restaurant. Understanding your COGS allows you to plan for future expenses, make informed investment decisions, and set achievable financial goals.
For instance, a growing sushi restaurant might plan to expand to a new location. The owner needs to clearly understand their COGS to create accurate financial forecasts and allocate funds appropriately for the expansion. They can ensure that the expansion is financially viable and sustainable in the long run.
How to Calculate Cost of Goods Sold for Your Restaurant (COGS Formula)
Mastering the calculation of your restaurant’s COGS can be a game-changer for managing your finances and improving your bottom line.
In this section, we’ll provide a straightforward COGS formula and walk you through the essential steps of calculating your COGS, including determining your beginning inventory, accounting for purchased inventory, and calculating your ending inventory.
To calculate your restaurant’s COGS, you’ll first need to determine your beginning inventory. This is the monetary value of your inventory at the start of the accounting period, also known as leftover inventory, including food, beverages, and other materials needed to produce your menu items.
Next, add the value of any inventory you purchased during the accounting period. This includes new ingredients, packaging materials, and other items directly related to producing your menu items.
At the end of the accounting period, calculate the value of your remaining inventory. This is your ending inventory and will be used as the beginning inventory for the next accounting period.
The formula for calculating your restaurant’s COGS is as follows:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (COGS)
Let’s look at an example. Suppose Lucy owns a small café. Her leftover inventory is worth $5,000 at the beginning of the month. She purchases an additional $3,000 worth of ingredients during the month. Her inventory is valued at $4,000 at the end of the month. To calculate her COGS, Lucy would use the formula:
$5,000 (Beginning Inventory) + $3,000 (Purchased Inventory) – $4,000 (Ending Inventory) = $4,000 (COGS).
Check these steps on how to read and create balance sheet
5 Ways to Lower Cost of Goods Sold For Restaurants
Reducing your restaurant’s COGS can significantly impact your bottom line. Here are five strategies to lower your COGS and boost your restaurant’s profitability.
Monitor portion sizes
Consistent portion sizes ensure that your customers receive the same experience every time they dine at your restaurant and help control your COGS. By standardizing portion sizes, you can accurately predict how much each ingredient is needed and prevent overusing resources.
To implement this strategy, train your staff on proper portioning techniques and use tools like portion scales and measuring cups. Additionally, consider using pre-portioned ingredients to streamline the process and minimize waste.
For example, suppose you own a burger joint where you’ve noticed inconsistent portion sizes leading to higher COGS. You can ensure a consistent product and lower ingredient costs by introducing a portion scale and training your staff to weigh each patty before cooking.
Use seasonal ingredients
Incorporating seasonal ingredients into your menu can help you take advantage of lower seasonal pricing of ingredients, ultimately reducing your COGS. Seasonal ingredients are often more abundant and less expensive than out-of-season options, which can result in significant cost savings.
To implement this strategy, create a seasonal menu highlighting fresh, local ingredients. You can also work with local farmers and food suppliers to source high-quality, cost-effective ingredients.
For instance, a farm-to-table restaurant might create a summer menu that features a tomato salad with locally sourced heirloom tomatoes. The restaurant can offer a delicious, fresh dish using in-season produce while reducing ingredient costs.
Negotiate with suppliers
Building solid relationships with your suppliers can help you secure better prices on your ingredients and lower your COGS. Regularly review your supplier contracts and negotiate for volume discounts, payment terms, or other cost-saving opportunities.
For example, a pizzeria owner might negotiate a discount on bulk cheese purchases by committing to buying a certain quantity each month. This would lower their COGS and strengthen their relationship with the supplier, potentially opening the door to further negotiations and discounts.
Reduce food waste
Reducing food waste is not only environmentally friendly but also an effective way to lower your restaurant’s COGS. You can use your ingredients better and reduce unnecessary expenses by minimizing waste.
Implement waste reduction strategies like tracking food waste, repurposing leftover ingredients, and educating your staff on proper food handling and storage techniques. You can also use technology like inventory management software to help identify waste patterns and areas for improvement.
For example, a sushi restaurant might notice they regularly discard leftover avocado. By tracking this waste, they can adjust their inventory orders to match their usage, reducing waste and lowering their COGS.
Keep track of inventory
Effective inventory management is crucial to lowering your restaurant’s COGS. By closely monitoring your inventory, you can identify discrepancies, prevent overstocking, and minimize waste.
Implement a careful inventory management system, conduct regular inventory audits, and use inventory management software to streamline the process. Analyze your inventory data to make informed decisions about purchasing, menu planning, and waste reduction.
For instance, a bakery might notice that they consistently have a surplus of unsold pastries at the end of the day. The bakery can reduce waste and lower its COGS by adjusting its production levels based on inventory data.
Behind Your Restaurant’s COGS
Understanding your restaurant’s COGS can provide valuable insight into its financial health. A high COGS could indicate issues with inventory management, portion control, or supplier relationships, while a low COGS might suggest that you’re providing a great customer experience without sacrificing profitability.
By regularly monitoring and analyzing your COGS, you can identify trends, pinpoint areas for improvement, and make strategic decisions to optimize your restaurant’s performance.
Lowering your restaurant’s COGS is a crucial step in increasing profitability and ensuring the long-term success of your business. With tips on portion control, ingredient sourcing, supplier negotiations, and inventory management, our blog provides actionable insights that you can use to optimize your restaurant’s financial performance.
Plus, you’ll stay up-to-date on the latest industry trends and best practices, giving you a competitive edge in the market.
So why wait? Subscribe to our blog today and start taking control of your restaurant’s COGS. It’s a small investment that can pay dividends in the long run.