Business
September 22, 2020

The Definitive Food Costing Guide: Template + Formula

Business
September 22, 2020

The Definitive Food Costing Guide: Template + Formula

There are few things in a food business as critical as food costing. If you master hiring, create great dishes, and generate more orders than you can keep up with—but you don’t have a handle on food costs and recipe margins—you’re leaving the most powerful lever you can pull in your business untouched.

In the Food 2.0 era, there’s plenty of room to grow and thrive, even in the midst of Covid-19. But that opportunity is reserved for businesses that rely on precise data to make business decisions.

We’re going to show you everything you need to know to cost your food—formulas, templates, and beyond—so you can better control food costs, discover more profitable menu items, and create a sustainable business.

By the end of this food costing guide, you’ll be equipped to take control of your food costs and margins with confidence and clarity.

We created a simple Food Costing Framework that makes costing fast with a checklist + straightforward formulas + an easy-to-use template.

GET THE FRAMEWORK

What is Food Costing? A Brief Explanation

Food costing is the process of comparing how much you’re spending on ingredients (cost of goods sold) and the revenue (food sales) you’re generating in a food business. The result is clarity about your profitability, as well as insight into how to make better business decisions.

Food costing has traditionally been time-consuming, challenging, and often conducted just once per week or month, looking backward at the previous period. This means that the business owner is able to calculate the restaurant food costs and profit margins for last month, but goes into next month blind.

Ideally, food costing can happen at a moment’s notice so you’re always aware of your profit margins on a per-recipe level, even as ingredient prices fluctuate from week to week.

Why Frequent Food Costing is Essential

Businesses that don’t cost their food regularly are running on outdated assumptions. Ingredient prices change, shipping rates change, and recipes evolve.

Using calculations from a few months ago—or even a couple of weeks—means you’re making business decisions based on a profit margin that’s no longer accurate.

Frequent food costing, however, allows you to pull powerful levers:

  • Audit the profitability health of your menu. Menu costing gives you a birds-eye-view of your entire menu, so you can quickly get a sense for ballpark profitability.
  • Identify your most profitable dishes. Recipe costing offers precise insights into each dish and menu item, allowing you to put more energy into selling high-margin items.
  • Optimize low-margin recipes. When you know the cost and margin of each item, you can make adjustments to the recipe, re-calculate your margin, and optimize your menu for greater profitability.
  • Price your menu easily. Pricing is often a blend of gut intuition and ingredient cost estimations. When you can compare your actual food costs to your target margin, you can set prices objectively.
  • Run your business confidently. When you have complete clarity around your costs and margins, you’re capable of making data-driven decisions that shine a light on the best way to move forward.

No other business process—hiring, inventory, marketing, delivery—can offer this much clarity and power when it comes to creating a sustainable and profitable business.

Don’t Rely On Time-Based Food Cost Percentages

Restaurant 101 courses tend to suggest using a fairly simple formula for calculating your food costs. At first glance, it’s straightforward and easy. Upon further inspection, however, it’s not as helpful as more precise food costing formulas.

Here’s how it works:

Starting Inventory + Purchasing Inventory - Ending Inventory = Food Cost
11,000 + $7,000 - $15,000 = $3,000 food cost

Food Cost / Total Food Sales = Food Cost Percentage
($3,000 / $8,000) * 100 = 37.5% food cost percentage

This is a 3,000-foot view of your total food costs and sales across a period of time (month, week, year). It can reveal your costs overall, across your entire menu, but it’s not granular enough to demonstrate why your costs are what they are.

This means you cannot proactively identify high and low-margin recipes, make improvements at the recipe level, and create a stronger menu mix.

It also means, if your food costs shoot up unexpectedly, you don’t have a precise enough view to see why.

You can try to make menu changes that lower costs, but you won’t be able to measure if they work for a couple of weeks, and without a more granular view into each recipe’s margins, it’ll be almost impossible to know if those changes worked the way you expected them to.

That’s why we strongly suggest costing your food on a per-recipe level to unlock the most actionable food costing insights.

A Note About Average Food Cost Percentages for Restaurants

Looking at averages generally isn’t very practical. Your operation is wildly different compared to every other food business’s out there—even among similar restaurant types and menus. There are too many unique factors to say what your food costs or margins should be from afar. Only you can determine that.

On average, restaurant food costs sit between 25 and 32 percent.

The best use of looking at these averages is just a quick check-in to assess your menu’s health and ensure you can catch high costs before they do serious damage. 

We suggest not worrying too much about this comparison though—it’s more important to compare your food cost percentage with your own revenue, rather someone else’s.

Checklist: 7 Things You Need for Successful Food Costing

Every menu item has its own food cost percentage based on a few factors, like ingredients used and vendor pricing. The more precise you can be at the per-recipe level, the more empowered you are to optimize individual recipes and measure their impact on your greater menu.

Here are the seven items of food data you need for precise costing:

  1. Ingredient — Name the ingredient
  2. Unit — The metric used to measure the ingredient
  3. Quantity — The number of units used in a recipe
  4. Pack Size — The number of units that come in an ingredient pack
  5. Pack Price — The cost of an ingredient pack
  6. Cost per Unit — The cost of an individual ingredient unit
  7. Trim Yield — Wasted or unused portion of an ingredient during preparation

This information should be quick to collect. Ingredients, units, and quantity should be in your recipe information.  Pack size and price can be gathered from vendors. And cost per unit can be found by dividing the pack price by the size.

Pack Price / Pack Size = Cost per Unit
$96 pack of mushrooms / 32 ounces = $3 per oz of mushrooms

Trim yield is where things start to get tricky, however. We’ll show you how it works.

The 3 Essential Food Costing Formulas

Here’s a quick reminder that our Food Costing Framework demonstrates how to use these formulas quickly and simply. It’s perfect for printing and keeping on-hand.

GET THE FRAMEWORK

Formula 1: How to Calculate Trim Yield

Most ingredients contain elements that are not used in your recipes, like potato skins or tomato vine. Since most ingredients are purchased by weight, you have to calculate the cost of that unused portion, even though it’s not making it onto the plate.

We’ll use mushrooms as an example. Even though a recipe calls for 3 oz of mushrooms, you’re not going to use the hardened lower portion of the stem (if your supplier ships them that way). That means you have to order more to make sure you don’t actually end up with only 2.7 oz of mushroom after you’ve trimmed the unusable part.

Next time you create a recipe, set all your trimmings aside and measure them later. Then use this formula: 

(Used Ingredient / Total Ingredient) * 100 = Yield %a
(3 oz mushroom / 3.3 oz mushroom) * 100 = 90% yield (10% trim yield)

This means for every 3 oz of mushrooms you need in a recipe, you actually need to purchase 3.3 oz to account for a 10% trim yield. This is important. Without it, your food costing will be inaccurate.

Note: Your trim yield may be different between different styles of preparation (chopping, peeling, julienning). Make sure to test various preparation methods to ensure your calculations are accurate.

Formula 2: How to Calculate Food Costs

Getting your per-recipe costs, now that you have all the building blocks ready to go, isn’t challenging. Just plug your data in.

Here’s how:

Add (Cost per Unit * Units) for all ingredients + (Cost per Unit * Trim Yield %) for all ingredients = Food Cost
($3.00 per oz mushroom * 3 oz) + ($3.00 per oz mushroom * 10%)
= $9.90 food cost

Your ingredient list will be longer, of course, so be careful that each element is accounted for both in the standard recipe units and trim yield.
Notice how much the trim yield changes the equation result. If you only look at the mushroom units, you’d think the food cost was only $9.00. But when you account for that 10% trim yield, the true food costs ends up at $9.90. 

When you extrapolate this across a dozen ingredients, it’s easy to see how forgetting to include trim yield (like most food costing calculators and template do) creates inaccurate results. And it’s hard to make precise business decisions across months and years when all your food costing calculations are off by a margin of 5-10%.

Formula 3: How to Calculate Food Cost Percentage

Now that you know your per-recipe food costs, you’re able to easily calculate your food cost percentage by dividing it by the recipe revenue.

Here’s the formula:

(Food Cost / Recipe Revenue) * 100 = FoodCost Percentage
($9.30 / $17.95) * 100 = 51.8% food cost percentage

Yikes! That food cost percentage is high. And we haven’t even accounted for taxes, labor, lightbulbs, and a hundred other expenses. We’ve got to do something about that.
This is the power of costing food at the recipe-level. You’re able to diagnose individual recipes in real-time—then make adjustments.

How to Optimize Recipes for Profitability After Food Costing

In our mushroom example, it’s clear that the dish isn’t sustainable. After all the other expenses of running a restaurant, it’s not likely a profitable item—something’s gotta change.

There are a few ways forward.

  • Change the recipe. Compare suppliers, pick a different mushroom type that had a better yield this season, or consider supplementing a portion of the high-end mushroom with a lower-cost variety.
  • Change the price. By charging more, you can lower the cost percentage without altering the recipe to ensure you’re hitting sustainable margins.

Changing the recipe is almost always the better option.

Here’s why: as you make recipe adjustments, you can add them into the formula and re-calculate the food cost percentage. This shows immediately whether that recipe change will lower costs as much as you need it to.

Imagine giving this all-star treatment to each of your recipes every couple of weeks.

  • You could increase your profit margins for each recipe with data-driven confidence
  • You’d see profit margins for today, not calculating what happened last month
  • You’d be equipped with ultra-precise data that helps you make better decisions

The only thing is, to work, you have to be able to run your recipes through these formulas fast.

That’s why we created Galley: to give food businesses complete, real-time clarity over your food costs.

Galley calculates food costs in seconds by connecting with your vendors for instant pricing data. You can see exactly where your money goes, develop high-margin recipes, and increase the profitability of your menu. We even track trim yields so they’re never left out.

We’re offering a No-Cost Starter Package so you can experience the feeling of costing your recipes in real-time—a huge time-saver.

We’ll even input your recipes for you, so don’t sweat over hours of data entry. It’s covered.
Sign up today and discover the power of real-time, no-hassle food costing.

Cover photo by chuttersnap on Unsplash

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