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3 Mistakes You Make When Using Food Cost Formula

food cost formula Jul 13, 2021

With food costs rising every day, you've got to learn how to control and bring your food costs down. Here's the challenge. What is your food cost today? Do you even know it? I've been coaching restaurant owners since 2003, and I can tell you the vast majority of restaurants are coming up with their food cost percentages all wrong. If you want to avoid being one of them, watch this video or keep scrolling to learn the three mistakes restaurant owners make when using the food cost formula.

With food costs rising every day, you've got to learn how to control and bring your food costs down. Here's the challenge. What is your food cost today? Do you even know it? I've been coaching restaurant owners since 2003, and I can tell you the vast majority of restaurants are coming up with their food cost percentages all wrong. If you want to avoid being one of them, watch this video or keep scrolling to learn the three mistakes restaurant owners make when using the food cost formula.

Mistake number one is most restaurant owners are using the wrong formula. What most restaurants do is take their purchases divided by sales. So whatever food they bought from all their vendors they divide it by their food sales. But here's the problem. It doesn't take inventories into effect. One month you could have purchased a lot of products and then your sales were lower than expected. When you take what you purchased and divide it by your sales, it falsely says you used more product because it's still on the shelf, giving you a higher food cost. Then the next month's sales go through the roof, but you order very little because you're using up your inventory. In this situation, it will look like you have a really low food cost, which is wrong. When you use the wrong formula, you have no idea what your food cost should be.

Mistake number two is making sure even when you're using the right formula, that you use net sales and not gross sales. Net sales are the ring at the register after discounts, not including sales tax. If you sell a $10 burger and comp $5, your net sales is $5. If you use gross sales, that $10 burger, comped for $5, is before the comp has been removed. This makes it so the chef or kitchen manager gets credit for $10 and everything is measured properly. For instance, if you asked your chef or kitchen manager to use $3 in product and sell that burger for $10, use divided by sales is a 30 percent food cost.

If you use net sales and it was $5, you now take this 30 percent, make it 60 percent. Is that your chef's fault? No. You want to know if chef is running a well-oiled machine, a good kitchen. You need to use gross sales.

Mistake number three is using bad numbers, even if you're using the actual food cost formula. So what is the right formula? It's beginning inventory plus purchases, minus ending inventory gives you use. What left the shelves. Use divided by sales is a food cost percentage. Whether you sold it, it was stolen, spoiled, wasted. It doesn't matter if you took it home, it’s anything that left the shelves. This makes the formula blind, which is why you need a whole bunch of other systems to control it. But let's talk about calculating it.

Well, again, often, even if you're using the right formula, too many restaurants are using net sales, not gross sales. They also have bad inventories. Beginning inventory plus purchases, minus ending inventory gives use. You have two inventories and when they're bad, you get bad numbers.

One of the major things that happens is restaurants don't have batch recipe cards. What's a batch recipe? Any component in a dish, diced onions and cut carrots and celery, desserts, soups, sauces, anything that you manufacture yourself. If you get it from a vendor, put it in a pot and make something new. When it sits on a shelf or in the walk-in, it has value. If you don't count it, your calculations think it's gone and give you a falsely high food cost. As an example, say you have a tenderloin and you butcher it into filets and store it in the walk-in. Between prep and being sold on the line, it's in the walk-in cooler holding value. If you don't count these valuable filets, the equation thinks you used it and your food cost is falsely high. Garbage numbers in equals garbage numbers out.

A bonus mistake is when taking inventory, not counting everything. If you want to know where your money is, count everything on the shelves.

If you follow my shelf-to-sheet inventory system, no matter what size restaurant you have, you can take inventory every Sunday in under an hour.

Another bonus mistake is taking inventory at the wrong time. If you’re really calculating your cost of goods sold properly, inventory should be done at the end of the period. A typical restaurant often takes an inventory at the end of the month if they take it at all. If you want to control, proactively manage your business, and know where your food cost is so you can make adjustments, you need weekly inventories done following a Monday through Sunday work week. That means inventory is done at the end of business on Sunday or before you open on Monday.

That way you should have the least amount of product on the shelves and have the most accurate number because you’re at the tail end of a week. This also allows you to measure when you have your budget variance report for prime cost and can make adjustments.

If you truly want to know what your food cost is, you need to use the proper formula and make sure you're taking inventories.

If you would like to learn how to own a restaurant that doesn't depend on you to be successful, watch this free video course that teaches you three key principles to running a successful restaurant. If you're ready right now to make some serious changes in your restaurant, you can also book a 60-minute call with me where we talk about your challenges and figure out exactly what is holding you back from having a restaurant that doesn’t depend on you being in it to be successful. 

Be sure to visit my YouTube channel for more helpful restaurant management video tips.

 

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David Scott Peters understands what is required to build the restaurant of your dreams.  Schedule a Discovery Call with David to tell him about you and the specific challenges you are facing as a restaurant operator.  You'll learn how his Restaurant Transformation Intensive program puts you on the path to making the money you deserve, having freedom from your restaurant and having a trained management team do the heavy lifting.

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