The food cost analysis is the first step in creating a restaurant budget, and its value cannot be understated. The vast majority of restaurants that fail are the result of not having an intimate understanding of the costs associated with running the restaurant. Created properly, a food cost analysis can act as an ongoing tool to monitor your business costs so you can charge your guest appropriately to ensure you hit your profit margins.
Creating a food cost analysis is similar to most other business cost of goods sold (COGS) budgets. However, foodservice requires a bit more digging to find certain numbers, so we are going to break it down for you step by step. I hope it goes without saying that everything we are doing here is done on a computer; pen and paper will take 1000 times longer to complete this process.
If you’ve read any of our other posts you know that our restaurant kitchen design process always begins with your menu and needless to say, so will your food cost analysis. This should begin as a three-part process. I am not going to sugar coat it, it is time consuming; but once it is done, your life will become much easier as you create your budget and business plan.
- Write your menu out as you would present it to your guests. This gives you the opportunity to work through a dish to see what works and what doesn’t.
Example: Roast Chicken Pasta e Fagioli
Roasted breast of chicken, stewed together with pasta, beans, and fresh vegetables, garnished with Parmesan cheese, and served with focaccia bread.
- Once the “guest menu” is completed, then rewrite your menu as listed components. Think of it as if you were giving it to a cook to set up a station to make the dish.
- Roasted breast of chicken
- Kidney beans
- Parmesan cheese
- Focaccia bread
- Now that you have the dish separated into components, you can now start writing recipes for each component because you will create separate a separate food cost analysis for each component of a dish. Obviously if a component is not something you are going to make, such as the Parmesan Cheese, then don’t worry about that. It will be added as an ingredient in to food cost analysis later on.
*TIP: As you write your recipes, write them out in the same format in which you purchase them. This is typically weight or liquid measurements, not volume. For example: you purchase the flour to make the focaccia bread in pounds, so your recipe should be in pounds or ounces, not cups or tablespoons.
Food Cost Analysis
Now that you have the recipes all written out for each component, we can create the food cost analysis. You will need to create a recipe costing analysis for each component, then an analysis for the menu item itself, since it is comprised of ingredients and components. If you were creating a menu item such as a “Fresh Fruit Cup,” you could simply create a food cost analysis of the final dish since there are only ingredients and no components. Following me? OK, good.
You’re going to need to use some form of spreadsheet document that has calculating capabilities like Microsoft Excel or Google Sheets. We use Excel, but I believe Sheets functions in pretty much the same manner. You may be able to find some food cost analysis templates online to make life simple, but if you are experienced with Excel, it may be easier to build your own than to edit someone else’s template.
As you can see by the sample image, it is reasonably self-explanatory. Each ingredient of a recipe is listed individually with the quantity used, then a cost is associated to the ingredient in the same format purchased (pounds/ounces, grams/kilograms).
The column that may not be so self-explanatory is the Yield %. The Yield % accounts for any loss of product based on either fabrication or cooking, and adjusts your total recipe yield and cost accordingly. For example: You don’t use an entire watermelon, typically only the inner red flesh, or if a beef stew recipe calls for 10 lbs of chuck, once meat is cooked, you typically lose 20% of the volume so your final yield of sellable meat is 8 lbs. If you don’t account for the yield percentage reduction, your total recipe volume calculations will be off and you will think you have more portions than you actually do for any respective recipe. Since we would be selling say a 12-ounce portion of beef stew, your number of portions per recipe will be overestimated without accounting for the yield %.
When you are creating your ingredient list, it is very important to account for every item that will go into creating the final dish sold. If your menu consists of take-out items, accounting for things like plastic cups, lids, napkins, etc.; all cost money so they need to be accounted for in the cost of goods sold price.
Indirect Food Cost Expenses
There are also kitchen expenses that cannot be quantified in a recipe, but that indirectly go into making it. Such as hand soap and paper towels from washing your hands, dish soap to wash the dirty pans, soap to scrub the floor, etc. Since the expense of these items goes into making the dishes, they need to be accounted for, so we add a separate non-ingredient item and call it “Utility.” The cost associated for the Utility will vary from restaurant to restaurant, but for the purposes of the initial food cost analysis, we recommend a range of $.10 up to $3.00 for each menu item. Once you are open for a few months, you can figure out a more exact cost by calculating how much money you spend on average monthly for these items, and divide that total amount by total number of dishes sold on an average month.
Once you’ve completed this process for each recipe or component, you can then create an analysis for each menu item, using your component cost per portion or cost per ounce as your ingredient cost in the menu item. If we were serving beef stew, with roasted potatoes on the side for example, beef stew the component, now becomes the ingredient and you can input either your cost per portion, or cost per ounce if you have multiple portion sizes.
Food Cost Budgeting
Now that the food cost analysis is complete for all recipes and dishes, you can figure out your average food costs (20%-25%, or lower is ideal), disposable costs, beverage costs, or whatever you feel is most appropriate for your concept and budget forecasts.
If you will also be retailing items that will be sold in the same format that you purchase them in, such as say protein bars for a health club cafe, you should create a similar COGS spreadsheet for these items as well. This will be beneficial when you create your overall expense and sales forecasts in your restaurant budget.
*TIP: If you are familiar with Excel, you can easily create an inventory list based on your ingredients and send that list to your potential vendors and ask for pricing. Once you receive the pricing back, you can plug those numbers into your list and link them to the cost cells for your ingredients. This can be a little time consuming based on the size of your menu, but once it is done, when the cost for ingredients changes, you can simply change the case cost in your list and it will change your costing analysis to reflect the change in total food cost.
As a current or future restaurant owner, you know that everything costs money, and understanding exactly where the money is going is the first step to ensuring a profitable bottom line. We hope you see this as more of a tool for your business more so than a necessary task that must be completed. If you understand the importance of creating an accurate food cost analysis, but simply don’t have the time or are not comfortable with spreadsheets, please Contact Us and we will be happy to guide you through the process.
We’ve helped develop dozens of business plans with clients over the years, and know how daunting of a task it can be when you are starting from scratch. We always recommend using a software platform to make things easier after you’ve completed your food cost analysis, using our Free Food Cost Calculator. Palo Alto Software has several programs to help entrepreneurs develop their business, sales and marketing plans. We encourage all of our clients to use since it makes life so much easier, theirs and ours! We’ve placed some links below to their software that you can view by clicking the banner.