Restaurant Accounting: For Profit's Sake, Inventory Your Food Cost!

by Ron Gorodesky and Kate Lange

The food is great, the service fabulous and the restaurant is busier than ever - but are
you wondering why the bottom line isn't all it should be? Check your FOOD COST. A vital ratio - key to the success of any restaurant as it directly impacts profitability. A profitable restaurant typically generates a 28%-35% food cost. Coupled with labor costs, these expenses consume 50%-75% of total sales. Because of the impact food cost makes on an operation, food cost is one of the first things we examine at a troubled property. Beyond the bottom line, food cost also reflects an operation's food quality, value provided to the customer, and management skill level. Despite its importance, we find many restaurant managers do not calculate food cost correctly, or if they do, they do not fully understand the process. To be useful, food cost percentages must be determined accurately. Then the ratio can be compared to industry averages and previous performance. With an accurate food cost, steps can be taken to improve the operation and ultimately improve the bottom line. The following is a step-by-step method for calculating food cost including an example and a worksheet to figure your own food cost.

CALCULATING FOOD COST

Keeping in mind you want to eventually compare your food cost with industry averages, how you determine the numbers must be consistent with industry practices. The industry standard is based on the Uniform System of Accounts for Restaurants (a handbook available from the National Restaurant Association). This system clearly identifies what items are included in each part of the food cost formula and IS briefly outlined below. Food Cost = Cost of Food Sales / Food Sales

GENERAL GUIDELINES

Establish a specific time period for analysis. The food sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days.

Juices, coffee, soda supplies and other non-alcoholic beverage sales are included in food cost calculations.

STEP BY STEP - CALCULATING FOOD COST

1. TIME FRAME Working with your accountant and managers, set up a regular time frame to analyze food cost. It is critical that the elements of the food cost calculation (sales, inventories and purchases) are representative of this time period. 2. FOOD SALES This is the relatively easy part - total the customer checks or reports from pointof-sale registers making sure to only include sales generated from food sources (sources other than food should be allocated to a "beverage" or "other income" account). Remember to use sales generated only within the allotted time frame. Example: Food Sales (+ Juice, Soda, etc.) $1,850 3. COST OF FOOD SALES The costs associated with food sales are comprised of purchases and inventory level adjustments. In our experience, this part of the calculation is often computed incorrectly. Determining the amount of purchases for the time period is straight-forward: Total all food purchases (include delivery charges and non-alcoholic beverages). Example: Food Purchases in past 28 days $500 Equally important, and often not included in determining cost of food sales, is the inventory adjustment. Many restaurants consider only purchases in determining food cost. This does not create an accurate food cost percentage - depending on the day purchases are made and what the cut-off date is for including sales in the food cost calculation, your food cost could appear 5 to 6 points higher or lower than it is. Additionally, this discrepancy makes it difficult to compare and track food costs. For example, suppose you receive (purchase) all your dairy and meat products on Thursday to prepare for the weekend. The time period for determining food cost ends on Friday (the next day). In calculating your food cost, it appears much higher than last month. While the increase may be due to theft or another operational issue, most likely it is due to calculating your food cost inconsistently and incorrectly. Your purchases reflect a large Thursday delivery, however, you do not log the sales from the weekend to offset these purchases, making your food cost appear out of line. Additionally, you have not factored in the inventory adjustment.

Determine Inventory Adjustment

Realizing the time and energy that counting inventory on the line (in "production")

is prohibitive to including inventory in food cost calculations, we recommend estimating a production inventory level. Conduct the inventory of the dining room, service and production areas a few times, average the inventory levels and use that constant figure each time period. Add the estimated figure to the physically counted storeroom inventories each period for your ending inventory. It is important to update the production inventory level at least once a year. Now that you have your ending period inventory level, look at the change from your beginning (start of time period) inventories (kitchen and storerooms). The key to accurate cost determination is understanding the role inventory levels play. For example, if the beginning inventory level is valued at $100 and four weeks later the ending inventory for the period is valued at $75, the inventory adjustment is the $25 difference - an increase in cost of food sales because you used $25 worth of inventory and did not replace it with new purchases. Considering this change and its effect on cost of food sales, apply the difference to the total purchases for the time period, giving you the total cost of food sales. Cost of Food Sales = Purchases +/- Inventory Adjustment (ADD if Beginning Inventory > Ending Inventory, SUBTRACT if Beginning Inventory < Ending Inventory) Example: Purchases $500 Beginning Inventory $750 Ending Inventory $625 = $500 + $125 = $625 Cost of Food Sales 4. FOOD COST PERCENTAGE The final step - putting the numbers together! Food Cost = Cost of Food Sales / Food Sales Example Food Cost = $625 /$1,850 = 33.8%

Now you have the basic steps to complete your own food cost accurately and consistently with industry practices. Following is a form to assist you in the calculation.

CALCULATING YOUR RESTAURANT'S FOOD COST

TIME FRAME: Start Date_______End Date_______ FOOD SALES (including coffee, juices and non-alcoholic beverages): A._______

COST OF FOOD SALES: Food Purchases (including non-alcoholic beverages):_______ Inventory Adjustment: Beginning Inventory_______ Ending Inventory_______ Difference_______B._______

Food Cost = Cost of Food Sales / Food Sales FOOD COST = Line B / Line A =_______=_______%

ANALYZING YOUR FOOD COST

WHAT SHOULD BE YOUR FOOD COST PERCENTAGE? Ron Gorodesky, President of RAS, maintains that successful restaurants generate food costs in the low to mid 30's. However, different types of restaurants typically run higher or lower percentages steak houses may run up to 40% whereas Italian restaurants may run about 28%. Comparing your cost percentage to restaurants with similar menus and service levels provides a more accurate perspective. For example, the average food cost is 35.7% for American/Regional menu themed restaurants and 32.0% for a restaurant in a multi-unit organization. HOW CAN YOU USE YOUR FOOD COST PERCENTAGE? The next step requires compiling the sales and costs consistently and regularly, as comparisons to previous performance can prove very helpful, identifying problems and trends - remembering that a decrease in food cost is as important to investigate as an increase. From here, your operation is positioned to tighten their food costs by standardizing recipes, evaluating purchasing systems and taking other steps to create a target food cost for your particular restaurant - with the ultimate goal of positively impacting your bottom line. So, For Profit's Sake, Inventory Your Food Cost!