How to Compute Cost of Goods Sold for Restaurants
The cost of goods sold for restaurants is one important thing to measure if you’re in this business industry. The cost of goods sold (COGS) tells you how much a menu item costs for your restaurant to produce.
It’s tied to a restaurant’s revenue, inventory management, and profit margins. Restaurants that don’t monitor COGS regularly put their business at financial risk.
What Is the Cost of Goods Sold?
What is included in COGS for a restaurant? This consists of all ingredients and even garnishes. For restaurants, the cost of goods sold is everything that makes menu items.
The general rule is that one-third of a restaurant’s gross revenue goes towards paying for COGS. Click To Tweet
This means your total expenses, including labor and utility bills, are subtracted from the gross revenue to determine net profit.
The production cost fluctuates from season to season, so the COGS for your menu items will also change. Your COGS is likely to be different each week or month, and over time, that’s why it’s essential to routinely monitor them in order not to get into trouble with low profits or to have too high a price.
How to Compute Cost of Goods Sold for Restaurants
To calculate COGS, you need to know the three values below for a given period:
- Beginning inventory: the monetary value of stock leftover from the previous period
- Purchased inventory: the economic value of inventory purchases for the upcoming period
- Ending list: the monetary value of inventory leftover at the end of the period
Cost of goods sold formula
The cost of goods sold for restaurants is calculated by adding the value of beginning inventory, purchased inventory, and subtracting the ending list.
COGS = (Beginning Inventory + Purchased Inventory) – Ending Inventory
Understanding cost of goods sold
Let’s say a burger bar wants to determine COGS for February. They had $3,000 worth of leftover inventory from January. The excess inventory included ground beef, buns, drinks, vegetables, and garnishes.
The restaurant had to restock during February and bought $2,000 worth of food inventory. They then ended February with a $500 cost of the merchandise.
COGS = ($3,000 + $2,000) – $500
COGS = ($5,000) – $500
COGS = $4,500
The restaurant’s COGS for February was $4,500..
6 Ways to Lower the Cost of Goods Sold
Every restaurant wants to provide the best food possible, but they need a way of doing so without sacrificing their profit margins. For this goal to happen, restaurants should find ways to lower COGS and still maintain quality.
Here are six ways to lower COGS:
1. Keep a close eye on inventory
Make sure you monitor what items are selling and adjust your inventory accordingly. This will help ensure that there is not an excess of food, which can be costly.
Be mindful of your inventory, and only purchase what you know will sell. There is no point in buying food that won’t be sold to avoid wasting money on COGS. It’s important not to buy too much or too little because the costs are totaled either way.
2. Buy in bulk whenever possible.
Some suppliers offer special pricing to restaurants that purchase in bulk; when buying non-perishables (food with a long shelf life) or food that your restaurant sells quickly (food with a fast turnover), buying in bulk is an effective way to get discounted pricing and lower your COGS.
One way to save money on food is by purchasing in bulk. However, if you buy large quantities of food, make sure that the expiration date is not compromised.
If your restaurant does not have enough storage space or turnover to avoid spoilage and waste, don’t buy more than what can be sold before it spoils.
3. Compare vendors
When buying from suppliers, it’s essential to see how your quality and pricing compare with the competition. If you find a cheaper supplier with similar food quality, consider negotiating for better prices or finding an alternative vendor.
A restaurant owner should never start a price war with their suppliers. Instead, they need to have an open conversation about pricing.
Maintaining healthy relationships with suppliers is essential for any business, not just restaurants.
4. Reduce food waste
Even if you are taking inventory accurately, food waste is a significant contributor to your COGS. Fortunately, it can be prevented by properly storing and rotating stock.
Your chefs should think of creative ways on how to do it. Use ingredients that are going to turn soon and put them in dishes. This way, items such as meat or bread will not be wasted and thrown away.
5. Consider redesigning your menu.
The menu design has a massive impact on what dishes customers order. From the layout to colors and descriptions, it all matters.
Menu engineering is the art of strategically designing a menu to maximize sales. This includes influencing customers by making them naturally drawn to higher-profit margin items, raising the bottom line in the process.
6. Purchase less expensive products
If you start to serve customers lower quality food and charge the same prices, they will notice. This could put your restaurant’s reputation at risk.
If you want to keep food costs down, one way is by exploring the different prices from vendors and finding out which ones have a better price. Another option would be to work with suppliers for particular products instead of others.
Final Thoughts on Cost of Goods Sold for Restaurants
All restaurants need to find the right balance between food quality and COGS to succeed.
The good news is that, when it comes to lowering the cost of goods sold for restaurants, you have plenty of options.
Whether you work with cheaper suppliers or buy in bulk for better pricing deals on inventory items, there are many ways to maximize your profits and minimize expenses. Click To Tweet
When you are looking to set up a restaurant, you must do your research and patience for detail.