Planning Pod Blog

 

Fresh insights and best practices for event professionals

Culinary Finance 101: Food Costs for Restaurant Owners

by | Nov 28, 2023 | Best Practices, Business Management, Catering, Industry Intelligence and Research, Venues

Many restaurant owners today are struggling to avoid rising food costs eating into profits and hindering their overall growth. At Planning Pod, we’ve noticed an uptick in business owners asking for tips on lowering food costs while maximizing profits. Previous to writing for our blog, I worked with hundreds of restaurant owners to stay on top of their budgets and reduce food costs while increasing restaurant profits on our Customer Success Team. Since this is a frequent question, I wanted to provide a guide for anyone looking to improve their food cost management.

Here you’ll find common pain points I’ve seen and how I’ve helped businesses get around them!

1. Complicated menus with too many ingredients

Before we met, one of my clients hired a head chef who completely redeveloped their menu design upon arrival. On top of adding new dishes, he added new ingredients to existing recipes, and management didn’t stop him. When he quit a few years later, they discovered food costs took up 45% of their revenue! For reference, the industry average is between 25-35%. Without a replacement chef lined up, they spent months working to simplify the menu. Although they eventually managed to reduce their costs to 30%, it will undoubtedly take years to financially recover. How did this happen?

Their chef allowed his desire for artistry to overshadow the business’ need for practicality. This mistake is detrimental to your business, in the long and short term. The key is to keep your recipes simple, exclude high-cost ingredients where you can, and be mindful of adding dishes that require ingredients that aren’t regularly in your kitchen. How do you know if you have too many items on your menu? Our general rule of thumb is to keep your menu between 1 to 2 pages in length.

Not sure how to calculate your food cost percentage for a specific dish? Here’s the food cost percentage formula:

Food Cost Percentage = (Beginning Inventory + Purchases – Ending Inventory) / Food Sales

You may have seen a different formula be used: Food Cost Percentage = (Cost of Goods Sold/Revenue) x 100, but this includes the price of any non-food inventory that’s used for the dish as well, including flatware and plates. Since this includes more than ingredients, we recommend using the Food Cost Percentage formula to get the most accurate percentage.

Looking for tailored tools & guidance for your restaurant or catering business? Click here to get started.

Catering team smiling

2. Unsustainable business practices

Reducing food waste is one of the most effective ways to lower food costs. A recent case study indicates that restaurants throw away $162 billion in food waste per year, but how can you find out how much you’re spending? We recommend conducting a Food Waste Audit, which means having your staff track food waste coming from the kitchen and dining areas for a period of time. If you’re using an event CRM or restaurant POS system (point of sale), you can line your sales or inventory reports up with this data to locate the source.

We’ve found that most restaurant food waste comes from errors in the kitchen or dine-in guests leaving uneaten leftovers, so don’t beat yourself up if you discover this during your audit. If you find most of your food waste is coming from the back of house, you can begin analyzing your processes. Are you over-ordering inventory or improperly storing food? If not, this may uncover an opportunity to train your team. If you’re wasting a ton of steaks because your line cooks aren’t properly trained in cooking them, you know where to start. If most of your food waste is coming from uneaten leftovers that guests aren’t taking home, it’s probably time to shrink your portions.

Pro tip: Build sustainability into your brand by advertising your sustainable practices on your website and social media. 57% of consumers are willing to change their purchasing decisions to support a business with sustainable practices.

3. Skipping menu engineering in their food strategy

You may want to offer a diverse menu that caters to your target customer’s tastes, but you can be strategic about what’s included. It’s important to strike a balance between higher and lower-profit margin food items, and to showcase them accordingly. We recommend using catering software to track the popularity of menu items and let you know which are underperforming. Event management platforms like Planning Pod offer customizable reports that you can save and regularly pull to review your most popular items and remove underperformers from your menu.

We also recommend offering specials or monthly showcases of dishes with low-food costs. This makes it especially easy to pivot if you notice your food cost is running high one month and need to keep your bottom line on target.

Whether you’re operating in fast food or full-service fine dining, staying on top of your food costs is key to operating a thriving restaurant or catering business. We hope these tips were helpful, but if you have more questions about effectively managing your restaurant or catering business, don’t hesitate to reach out!