How to Calculate Your Food Cost Percentage

The motivation to make food is driven by passion. But the sad truth is that even beloved, critically acclaimed, and seemingly always busy restaurants can be forced to shut down if proprietors aren’t diligent about keeping costs down.

One of the best ways to rein in your restaurant’s budget is to ensure that you’re keeping food costs down. That’s why it’s critical to know how to calculate your food cost percentage.

Why you should calculate your food cost percentage

The average restaurant’s profit margins are around 7.44 percent, though for many, “razor-thin” might be a more accurate description. There are multiple reasons why restaurant profits are so low, but the big three are the cost of goods sold, labour, overhead.

For example, renowned Australian chef and restaurateur George Calombaris has noted the surprise he encounters when people learn how low restaurant profit margins are. When he tells people that 85 percent of restaurants turn a profit of 2.5 percent, they are “stunned”. You have to calculate food cost of course, but he also says that his labour costs amount to 42 percent of his total costs.

Just how much of the average restaurant budget goes toward food costs? Full-service restaurants spend roughly one-third of each dollar on food and beverage costs, according to the Restaurant and Catering Association. So, calculating (and closely monitoring) your food cost percentage and finding the right food cost formula is vital and could be a matter of staying in business or closing your doors.

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The basic food cost formula

If you want to know how to calculate food cost at your restaurant, just follow this simple food cost formula:

basic food cost formula

Once you’ve calculated your food cost percentage (or tracked it over several months), you should be in a better position to develop strategies that help save on food and increase margins.

How to save on food costs at your restaurant

With the help of analytics (and probably a calculator), you can learn how to calculate food cost, get a handle on your food cost percentage, and make the changes necessary to improve your bottom line. Here’s how to get started:

  • Evaluate every item on the menu.
    Using the food cost percentage formula above, determine the cost of each menu item by calculating the price of each ingredient. Then ask yourself whether your menu prices are comparable to the true cost of the item, or whether you need to make some adjustments to both the ingredients and the price.
  • Remove low-performing items.
    Employ analytics from your Restaurant Point of Sale and let it act as a food cost percentage calculator to find out what’s selling, and what’s not. Consider removing the items that don’t sell well or substituting meats or bases that are commonly used in other menu items.
  • Keep your menu seasonal.
    Not only are in-season fruits and vegetables tastier, they’re also cheaper. So, for example, remove seasonal items from the menu at the end of the summer to keep costs down and quality up, and replace them with newly in-season items. Advertising new seasonal menus and dishes is also a great way to bring back customers who haven’t visited in a while.

Another issue to consider is staffing. Staffing choices won’t change food costs, but they can make a big difference in your sales. Check Square Analytics to determine your highest-earning servers and make sure to staff them during your busiest times, perhaps even incentivising them for upselling.

By the same token, staff your lower-selling servers during slower times, and engage in training programs to help them improve their performance. The right staffing combined with smart food cost choices will benefit your food cost percentage and could translate into a significant financial boost for your restaurant.

Running a business is no easy feat, but Square is here to help. We have all the tools you need to start, run, and grow your business, whether you’re selling in person, online, or both. And we’ve made all our tools to work together as one system, saving you time and money—and making decisions easier. So you can get back to doing the work you love and focusing on whatever’s next. See how Square works.