Controlling food costs is crucial for the success and sustainability of any restaurant or coffee shop. These costs account for the largest percentage of total operating expenses, making effective cost management a priority for enhancing operational efficiency and maximizing resource utilization.
The primary challenge is not merely to reduce costs, but to strategically balance quality and profitability to retain customers.
To take control of food costs, it is essential to clearly define what they are, understand how to calculate them, and implement best practices for managing accounting costs in restaurants.
In this article, we’ll cover these critical aspects, along with how menu engineering and inventory management can significantly impact financial accounting.
This article will ensure you have a comprehensive understanding of the role of controlling food costs in your restaurant’s success.
Understanding how to control food costs
Food costs refer to the total expenses incurred when purchasing the ingredients needed to prepare dishes served in a restaurant.
This includes the prices of raw materials such as meat, vegetables, beverages, and other food ingredients. Additionally, food cost encompasses other expenses like shipping and storage costs, taxes, and losses resulting from spoilage or mistakes in restaurant orders.
It is essential to account for all costs directly related to food and beverages. To calculate food costs, the formula looks like this:
(Beginning inventory + food purchases – closing inventory) ÷ total food sales = Food cost
In the restaurant industry, the ideal range for food costs 25% to 35% of total revenue. This percentage is influenced by various factors, including the type of restaurant, the level of service, and the quality of ingredients.
That’s why upscale restaurants inevitably incur higher food costs due to the use of premium ingredients.
There is a direct correlation between controlling food costs and menu pricing. The cost of ingredients directly impacts dish pricing, ensuring all expenses are covered while delivering a satisfactory profit margin.
Additionally, it is important to consider competitor pricing and customer expectations when setting your menu prices.
To determine the appropriate price for your dishes, consider the following formula:
Ingredient cost ÷ food cost percentage = Menu price
You also need to strike a balance between pricing your restaurant’s dishes and providing value for customers. This ensures and increases customer satisfaction while also achieving your desired profits.
To control food costs and improve cost management, focus on monitoring your inventory and minimizing waste. Doing so will help you maintain an optimal food cost range and enhance profitability.
Best accounting practices for controlling food costs
To manage costs in your restaurant or coffee shop effectively, follow these best practices for restaurant accounting. Costs can be categorized into several categories.
Inventory management
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Regular inventory counts (daily/weekly)
Regular inventory counts help you effectively manage and control food costs.
These counts provide an accurate assessment of the quantities of materials available in a warehouse, track consumption, and identify damaged or missing items.
By maintaining accurate inventory counts, restaurant owners can significantly reduce waste and theft, enabling them to make informed purchasing decisions.
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Use inventory management software
Modern inventory management software helps boost efficiency and reduce food costs. These tools facilitate accurate and detailed monitoring of inventory, from receiving raw materials to tracking usage.
They can also send alerts when specific items are low in stock and provide real-time tracking of inventory levels.
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Avoid overstocking or understocking
Effective restaurant inventory management enhances efficiency and profitability while minimizing excess spending. Overstocking can lead to waste due to spoilage, as raw materials sit unused for extended periods.
Conversely, insufficient stock can result in a sudden shortage of materials, causing delays in fulfilling customer orders or discontinuing certain menu items. This can lead to customer dissatisfaction and loss of business over time.
Tracking COGS
The cost of goods sold (COGS) refers to the direct expenses for producing or preparing food and beverages in a restaurant. This includes the cost of raw materials and ingredients. To calculate the gross profit, COGS are subtracted from generated revenues.
Understanding COGS is essential for gaining insights into operational efficiency and profitability.
To calculate COGS, use the following formula:
Beginning inventory + purchases – ending inventory = COGS
Point of Sale (POS) data can be integrated with accounting tools to enhance cost management in restaurants.
For instance, Foodics offers accounting and financial management software designed specifically for restaurants and cafes. It provides comprehensive solutions for managing financial operations efficiently.
This software automates accounting entries, tracks expenses, manages payroll, and handles tax liabilities, all while ensuring compliance with legal requirements.
It offers complete control over restaurant data, facilitates tracking changes, sets access permissions, and supports regular data backups.
Furthermore, Foodics’ accounting software connects with the POS system to produce real-time reports, aiding restaurants in making informed decisions and streamlining auditing processes.
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Monitor COGS trends over time
It’s important to monitor your COGS data to analyze your restaurant’s financial performance so you can make informed purchasing decisions. By tracking market trends, you can identify potential fluctuations in raw material prices.
Additionally, comparing current costs to those from previous periods allows you to assess the effectiveness of your cost management strategies.
Menu engineering and profitability analysis
Menu analysis is a data-driven approach that helps improve restaurant performance and increase profitability.
By combining cost analysis, consistent quality, and smart marketing strategies, you can create a competitive and profitable menu.
But how can you achieve this while effectively managing restaurant costs? Follow these steps:
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Identify high and low margin items
Use sales reports from modern restaurant point-of-sale systems to pinpoint your best-selling dishes. Compare their preparation costs and profit margins.
Classify menu items into high, medium, and low-margin categories, and analyze the performance of each dish based on cost and revenue data.
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Modify menu items based on cost and performance
Once you’ve identified your top-selling menu items, consider enhancing features, adding similar items, or removing low-selling or low-margin dishes. This approach will help improve your restaurant’s accounting.
Monitor accounting data for better decision-making
Accounting data provides valuable insights into food costs, waste, and revenue per dish. This information supports menu adjustments aimed at reducing expenses and increasing revenue.
Periodic financial reports highlight trends, allowing you to make informed decisions that boost profitability.
By analyzing sales alongside associated costs, dish pricing can be optimized based on actual performance. Using accounting systems like Foodics links POS data with financial information, resulting in comprehensive reports that support effective operational decisions.
Managing waste and reducing shrinkage
Waste and theft can eat up between 20% and 30% of your restaurant’s profits. That’s why it’s important to figure out where your waste is coming from.
Usually, the main source of waste is from food preparation practices, leaving ingredients outside of refrigerators or through improper storage for extended periods. This leads to spoilage. So does failing to conduct regular inventory checks.
To combat this, we recommend implementing effective inventory control through management systems that integrate with your POS, along with using surveillance systems to mitigate theft.
Employee training
Conducting regular training sessions for your staff helps raise awareness about the importance of reducing waste and its impact on restaurant performance. Additionally, you should train your employees to effectively use various systems within the restaurant and improve food preparation and storage procedures.
We also recommend using modern equipment, such as a kitchen display system, self-service kiosks, and other tools to reduce errors and waste.
Supplier management and procurement
Supplier management and procurement are essential for reducing restaurant operating costs while maintaining quality standards. This requires careful analysis of supplier data and negotiation strategies to foster long-term relationships.
Regularly comparing historical supplier prices allows restaurants to track the cost of raw materials and ensure they get the best value. Modern inventory management tools can streamline this process.
Upon receiving shipments, the warehouse manager should immediately audit them for quantity and quality. Any shortages or damaged goods need to be documented and promptly reported to the supplier for compensation or replacement.
Supporting tools and tech
There are various systems and technologies available to help you manage your restaurant, streamline accounting operations, and control costs. These tools are designed to speed up and simplify the management process.
One of the top accounting solutions for restaurants is Foodics. This software integrates seamlessly with other restaurant systems, such as inventory management, allowing you to access detailed data and reports from a single dashboard.
Foodics helps restaurant owners track consumption and monitor inventory levels in real time, providing comprehensive and accurate financial reports. Additionally, the system can automate alerts to notify you when inventory levels drop below a specific threshold or when certain ingredients are nearing expiration.
By automating these processes, you can minimize errors associated with manual entries. Furthermore, you can set up automated reports tailored to your needs, whether you prefer to receive updates daily, weekly, or monthly.
Conclusion
Effectively managing and controlling food costs ensures optimized spending and higher profits. However, it’s not solely about cutting costs.
It also involves considering quality and identifying the areas with the highest expenditures, along with understanding the reasons behind those increases.
By implementing best practices in cost management, you can enhance the financial performance of your restaurant or coffee shop while ensuring quality and maintaining customer satisfaction.
Discover how Foodics’ restaurant accounting system can help you manage your restaurant and control costs.
