You are now taking the second step, and that is establishing “What my Food Cost should be.”
From my previous blog we ascertained what your actual food cost is. Now we need to understand what food cost should be. Let’s digress for a minute. I want to cover some information that will give you a better understanding of what is food cost.
We will get back to the basics, because this blog is geared to people with none or very little experience in the restaurant business. These people have or are thinking to open Restaurant. It is also helpful for students, whether High School, College, or Culinary School, or that person who is just starting a catering company.
Defining Food Cost
What is Food Cost? Essentially Food Cost can be divided into two parts:
1. Food Cost per Menu Item.
2. Food Cost for a given period (A month is typical).
1. Food Cost per Menu Item.
This is the first step in generating your Menu Item Cost.
It is going to take two items, product Item Cost (from an invoice) or a Recipe portion cost (from you recipes) or a combination of both.
Example: Let’s say you have a Plate Cost of $4.00 (Food on a Plate) and based on your knowledge of the competitors’ menus prices you charge $12.00. Plate Cost /Menu Price = Food Cost %, which in this case would be 33.3%.
Tip: If you know your Plate Cost you can do this (Plate Cost / Desired Food Cost=
Proposed Menu Price. $4.00 (4.00 /.33 = $12.00)
Instead of trying to figure out your pricing, use your competitor’s prices. However, you will have to calculate your own food cost dollar. Again, this becomes a starting point. It will give you a foundation to work with. You do not need to play the menu pricing game right now.
What you are trying to do is to build a model to cost out your menu. I would suggest using Excel (Spreadsheets) to start with. If you have a large menu, then I would recommend purchasing Restaurant Menu Costing Software. The menu costing software will allow you to create your recipe file and create an inventory file. It will cost out your menu.
For those who are just starting out and need some helpful information and tools. I would suggest going to http://www.restaurantowner.com . There is a monthly or yearly fee, but it is well worth it.
2. Food Cost for a given time (A month is standard)
The concept is the same as what we did in the first Blog.
The amount of your (Food) purchases (Invoices) and divided by total net sales for
Purchases/Net Sales = Food Cost %
Let’s move on. I am assuming you have caught on to how to obtain a Food Cost %.
You may come across words like “Restaurant Benchmarks.” Basically, it can be a good measure if they are from reputable source. You can Google and read up on it.
How and where do we start? I will be using a Food Cost Range of generally 28% to 33% of total Food Sales.
Based on the Food Cost % number you obtained in the first blog, you can see where you fall within the range.
Note: The range depends on the type of restaurant you have (Ethnic, Fast Food to High End Steak Houses).
You may still ask “What should my food cost be. I am going to answer that by showing you a system I worked with.
You have to realize you will be counting on you food cost sale to generate enough Gross Profit to cover payroll, rent, cost of goods sold and all of your Direct and Administrative Expenses and still have enough money to have a profit.
Here is you answer using this model (Example).
This is when “The Honeymoon is over.”
This should have been included in your business plan. We will go on the assumption you did not create a business or a Pro Forma.
Usually the first question is, “How can I know the sales when I have not opened”?
Again, let me digress for a minute. If you have come this far and you do not have an idea of how to get the numbers above, you should take a minute and evaluate your position.
In many cases, you have invested or you’re going to invest a considerable sum of money, usually from a mortgage on your home or property or borrowed money from a bank or friends. Either way, you are investing your life. People have told you you are a great cook and you should open a restaurant or opening a restaurant has always been a dream of yours.
The first thing you have to realize is running a restaurant is math and you have to know the numbers. I am sure that you are a good cook and your spouse, family and friends will help you. However, if you do not know your numbers, you are destined for failure.
At this time I would advise you to rethink your plan or find someone out there who can help you.
It can be a friend who owns a successful business or restaurant. You can also go to the Small Business Development Centers. Look for one near you. There is wealth of information on the internet.
I would also recommend finding a restaurant consultant.
This is where you have to be careful. It can be like “Swimming with Sharks.” I strongly recommend finding someone local who knows the area. One last thing, do not get hung up with a consultant that is going to come in and give you all of these manuals and procedures to run your restaurant. You are not at that point now. Try to find someone with experience in your type of restaurant.
I hope you have developed a good grasp of Food Cost. I have just given you the :tip of the iceberg.” There is so much more. I started out answering your question on Food Cost and it had to include the numbers.
In summary, I’m going to share a story. A few years back a friend recommended me to talk to a couple of friends of his. I set up an appointment and charged them for my time.
They wanted to open a Yogurt Shoppe. I knew the area that they wanted to open their Shoppe and that was a red flag. I went on listening. They had this company that was going to provide the equipment and the product. It seemed like a good deal to them. I started asking them some questions. They gave me the price of these two deluxe machines.(Another Red Flag). Then I asked how much for the rent and the rest of the equipment. I also asked for the size of the building and the number of seats and what they were going to charge customers. I also got the cost of the product and the cost of the machines.
With this information, I was able to get a good feel to do a quick Performa and Feasibility Study. This meeting took two hours and I went over everything with them.
I asked them to come back the next day and I explained to them that based on the area, the number of seats and customer projection, and my projections of customers they would have to have each day, it was too many. I recommended that they not open the Shoppe. They said with both families working, they felt it would work. They thanked me and left.
About a year later I asked my friend about the people opening the Yogurt Shoppe. He said that is was sad. They had invested both their Railroad Retirement and also lost their houses. I think about this a lot, especially when I do consulting for people with the dream of opening a restaurant. I know that this must sound extreme. However, when you ask me “What my food cost should be,” I have to wonder. That being said, I have seen people with no experience in either cooking or the numbers succeed.
I do not want to be pessimistic. This is an awesome business. When it is good it, is very good and when it is bad, well you figure it out…
Again, I have tried to explain food cost to you the way I see it.
Thank you for taking the time to read my blog. Comments are welcomed.