Food Cost as a Percentage of Sales
Like using locks on your coolers and storerooms as a means of protecting your investments (products are your investment), calculating and understanding how food cost as a percentage of sales impacts the bottom-line is another tool to evaluate how well the investment has been managed. Having a low food cost percentage in a selling price is only the first step to turning a profit. Additionally, top-line sales are only impressive if there is a high level of flow through to the bottom-line.
This is another use of the term, food cost, which is often misunderstood and used incorrectly. Too often, when discussing food costs as a percentage of sales, it is believed this number is driven by purchasing. Typically, the first reaction when there is a food cost problem as a percentage of sales is to take money off the plate or stop ordering products. This is may help the situation to a degree since over ordering most often leads to over-usage, spoilage, and theft, but it may also put the operation at risk of running out of product creating dissatisfied customers.
As Chefs and operators, our goal is to control every product and utilize it as much as possible in a profitable manner. Every piece of every product that is purchased and brought into the operation has a value. It is our job to account for and maximize every ounce of the products that are purchased. Food cost as a percentage of sales is an operational measurement that identifies how efficiently products were managed and controlled for a specific period of time and has a direct correlation with revenue. This can be a meal, day week or month, but will typically be calculated for a week or month. It represents the relationship between food usage and revenue, showing the percentage of the cost of food products used compared to revenue earned for the same period.
Meaning: If food sales for the day totaled $8,500 and the cost of the food used to generate those sales totaled $2,850, the food cost % for the day would be a 33.5% Food Cost.
Cost of Product Used ÷ Food Sales = Food Cost % of Sales
Money on the Shelves
Food cost as a percentage of sales is based on the relationship between product usage and revenue, not purchases. It is possible to have high weekly purchases while running a low food cost percentage, just as it is possible to have low weekly purchases or even no weekly purchases and have food cost spin out of control. It simply comes down to how much food product was used, wasted, not accounted for and how appropriately you priced your menu.
Calculating food cost as a percentage of sales requires a physical inventory to be taken to determine how much product dollar value is
on-hand. For this reason, it is typically calculated on a weekly basis. There are instances where operations may take daily inventories, but for the purpose of defining food cost as a percentage of sales, a one-week period will be used.
As stated, food cost as a percentage of sales is an indicator of how well product was utilized and controlled and how effective you were in costing out menu items. Maintaining a low food cost is desired. As with food cost percentage in a selling price; the lower the percentage of food cost, the higher the return on your investment. Meaning, higher revenues and lower usage will equate to a lower food cost percentage and will provide greater profit flow through. Remember that term Flow Through
So why is an inventory needed to calculate food cost? Inventory is required because it is part of the investment and becomes part of the weekly usage number. Unless starting with an empty kitchen each week, the inventory on-hand has a monetary value that is part of the investment and needs to be accounted for. It is possible to not order any product and only use what is on-hand and still have a food cost problem.