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How To Calculate Food Cost Percentage (& SAVE $$) | Cafe Restaurant Management Tips 2022 - YouTube
Channel: Wilson K Lee - How To Open A Restaurant / F&B Shop
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Hey guys, my name is Wilson.
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Today we're going to be talking about how
do you calculate your food cost.
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Now, first and foremost, why is food cost
so important?
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There are basically three types of costs that
would determine whether your business goes
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bankrupt, or whether you would be having a
thriving restaurant business.
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The three types of expenses are your rental
cost, your labor cost, and your food cost.
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So these three things adds up to close to
75% to 90% of your revenue, okay?
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So what that means is that if you can control
one sector and one component of this cost,
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you're going to be able to maximize the amount
of profit that you can bring home.
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Okay?
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And in the food and beverage world nowadays,
the margins are really thin and enough, we're
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talking about 5% to 10%.
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So what that means is, if you learn how to
calculate, and when you'd learn how to calculate
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food cost, you're going to be able to better
control this item.
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And when you can better control this item,
that means that you can have a bigger pie
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and bigger profit, that's in bigger [inaudible
00:01:08], which is the reason why today we're
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going to be talking about how are you going
to be able to calculate your food cost.
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So now that you understand the importance
of why food cost is so important, I also want
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to bring to you the three benefits of actually
understanding it.
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Okay?
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It is because the first benefit is so then
that way you can strategize and engineer a
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new menu.
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There are items on your menu that once you
calculate the food cost, you can understand
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and you would know that does not make sense
because these items, every time you sell one,
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you're losing money, because for example,
if the cost of your burger is like $8, but
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you're selling it for only $12, then that
means that your cost of goods sold is way
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too high to sustain this product.
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That means you're not making money from this
product.
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Aside from cost of goods sold, you also need
to account for your labor, your rent and everything.
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And when your account everything within this
item, it's not making money, then why are
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you selling it?
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Same thing goes with actually creating new
items.
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To give you an example, whenever we create
ice cream flavors, we'd always look at, we
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always start up from how much of a budget
can we work towards?
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How much of a budget do we have to create
this new item?
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So for example, if we sell our ice cream or
a part of a dessert menu item that is you're
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selling for $8, then we know we can't spend
more than $2 whenever we're testing this new
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product, whether it be the toppings, whether
it be the ice cream base, whether it be the
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presentation itself, everything adding up
cannot be more than $2 because now we understand
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our food cost.
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Whereas if you did not understand food cost,
you'd be putting in tons of topping just to
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make this ice cream stand out, make it look
super amazing, yet the cost is $5.
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How can you make any money from that?
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You can't, which is a reason why understanding
food cost is so, so important.
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On the same token, the second benefit of truly
understanding your food cost is that you can
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actually run proper promotions.
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And what I mean by that is if you're running
promotion, so many of us are running promotions,
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but we don't even know if we're making money
or not.
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If you are, every time you sell a product,
every time you sell an item, it's not making
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money, then why are you running that promotion?
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It's a lose-lose game.
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Okay?
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Your clients and your customers are so used
to you running promotions, that they won't
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purchase from you, unless you run a promotion.
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And at the same time, you keep running promotions
that are not generating you any profits, then
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what's the point of a lose-lose scenario?
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On the same token, if you understand food
cost, if you understand, for example, a piece
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of cookie, it costs you around 25 cents to
50 cents to make, and you retail, and you
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sell it all to the public for $5.
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That's a really healthy margin that you have,
and if you want to use your cookie as a promotional
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item where you know what?
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Come and buy a cookie for 50% off, tons of
people will be flooding in.
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You're going to charge them 250, yeah, it
takes you 50 cents to make, and you still
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have a ton of margin to play with.
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You still are able to benefit from that, and
to be able to profit from that, which is a
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reason why you can be very strategical when
you're running these promotions that half-price
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cookies and when people come in for their
cookie, they're going to order a cup of milk,
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which you can charge a full price, and that's
a very, very smart way of any promotions all
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because of the fact that we understand cost
of goods sold.
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Food cost.
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The third and final benefit I'm going to be
sharing with you today is that you can actually
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make more profits by understanding the seasonality
of the cost of the goods that you're buying.
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So for example, produce, fruits.
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Whenever we have any summer promotions, we
usually buy our strawberries or mangoes at
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the peak, at the more supplied at the time
that the produce is being harvested.
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We buy a ton of it, and then we cut it up,
and then we freeze it, so then that way we
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have an ample supply of ingredients.
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Why do we do that?
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It is because mangoes don't always come that
cheap.
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Usually within a month time they become more
and more expensive as the season fades on.
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But because of the fact that we understand
that.
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We understand cost of good sold, we're able
to strategize, buy them in bulk, buy them
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and store them, and then now throughout the
season, we can actually control the cost and
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thus bringing us much more profits at the
end of the day.
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So now that you understand why it's on point,
some of the benefits, and with more advanced
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strategies of how to use food cost.
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We're going to dive right into how are you
going to be able to calculate your food cost
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for your restaurant.
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Before I do that, I'm going to explain to
you a little bit more about food cost.
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Food cost is basically, usually comes in a
percentage form, okay?
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And what I mean by that is usually it's the
cost of making that food item.
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It's the direct cost.
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Okay?
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What I mean by that is inventory, all the
ingredients that it takes to create that item.
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We're talking about, for example, if we're
talking about ice cream, okay?
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We're talking about the cups, we're talking
about the napkins, we're talking about the
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dry ice that we have, we're talking about
the milk, we're talking about the powders,
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the sugar, the topping.
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These are all the ingredients that goes into
making this item, okay?
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And on top of that, we need to add in the
direct cost of preparing the ice cream.
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So what I mean by that is, before we actually
have that ice cream, we need to create a mixed.
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A mix that we can pour into that ice cream
machine that turns out soft stir.
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Now, for us to create, for us to have the
labor to create this box of mix, that itself
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is a direct cost that goes into creating the
item, not just the ingredient cost.
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So for example, I need to have a labor, I
need to find a staff to pour all the ingredients
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in this bucket, blend it up, and then pour
into the machine to make the ice cream.
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For example, if it takes my staff an hour
to create this product, then I would add this
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hour into our food cost as well.
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To give you a better example with numbers
to just to simplify.
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Okay?
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In an ideal world, the ideal food cost of
how much it takes.
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50 cents for the cone.
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Okay?
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50 cents for the milk.
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50 cents for making all the toppings.
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And another 50 cents for the person that creates
that bucket of mix.
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Okay?
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And how do we get down 50 cents for the person
that creates that mix?
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Well, if it takes that person an hour to create
the mix, and if the mix can create let's say
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30 cups of ice cream, then we can just divide
30 with that person's hourly wage.
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So for example, if he gets paid $10 an hour,
then we use 10 divided by 30, which comes
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up to be 30 cents, then we would add that
to the cost of good sold.
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So for the sake of this example, we said that
that is 50 cents.
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So if you add everything up, that is $2 for
making that cup of ice cream, that becomes
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your cost of goods sold.
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That becomes how much it cost.
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Now use that number divided by how much you
actually sell the product for.
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So for example, if we sell the ice cream for
$5 to the public, then we use $2 divided by
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$5 to get our cost of goods sold.
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Typically speaking, cost of goods sold should
range from, I would say 15% to 30%.
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30% is the maximum that we would want for
cost of good sold.
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And at the end of the day, the higher the
cost of goods sold, the less profit that we
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can make, the less profit that we put into
our pockets.
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So now that you understand, in an ideal world
how much cost of goods sold are for that ice
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cream.
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20% is what we're talking about.
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But in reality, we have not taken into two
big concerns.
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Number one is wastage.
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And the second one is theft.
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In an ideal world, this we don't, we take
out.
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But in reality, this happens all the time.
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These two components, food wastage and theft
is always something that's going to happen.
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And what I mean by that is, for example, if
we created a batch of ice cream, and that
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whole batch is $20.
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If we retail it for $5, how much can we make?
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In theory, we're going to be able to make
$100 in revenue.
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That equates to 20%.
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But because of the fact that, you know what?
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When we were cleaning the machine, we ended
up wasting a batch of ice cream.
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Then in turn, those ice cream that we wasted
cannot be sold as revenue.
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So what that means is maybe our revenue becomes
$90.
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On the same token, if I'm the staff, and my
friend comes in and then I am like, "Hey,
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you know what?
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Jason, thanks for coming in.
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I'm going to give you a free cup of ice cream.
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Here you go."
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But we never charged him.
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That means that for the same amount of ingredient,
which is $20 of ingredient, I did not receive
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one order, which is $5.
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So that brings down the revenue in addition
to all the wastage.
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So you can now imagine in reality that maybe
the revenue that we bring in is only $80 instead
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of $100.
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With this calculation, we use $20 divided
by $80 to get the real actual cost of goods
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sold, which becomes 25% versus in an ideal
world, to a 20% cost of goods sold.
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The reason why I'm explaining the ideal food
cost and the actual food cost to you is because
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we need to understand in theory everything
is perfect.
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However, our job as owners, we need to understand
what is realistic.
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What is it, and how we can control the cost
of good sold.
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So now that we understand the two biggest
components, food wastage and theft, we're
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going to have to keep a lot of close eyes
to maintain and to take this element and to
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prevent these things from happening to ensure
that our cost of goods sold isn't an optimal
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percentage.
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Now, how can we do that?
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Then we can have better processes, for example,
cleaning, better processes of optimizing the
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food ingredients that we use, better processes
to understand and to prevent people from stealing,
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and giving away and copying different meals.
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This all adds up to your profits.
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So at the end of the day, you need to make
sure and why are we even calculating food
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cost?
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The reason why we're calculating food cost
is for us to be aware of how much we're actually
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spending.
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Now, how do you calculate actual food cost?
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All you have to do is, in the beginning of
the month, check your inventory.
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At the end of the month, check your inventory
again.
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Take the difference, then that's the amount
of ingredients that you've used throughout
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the month, and you're going to be able to
use that to benchmark it against the revenue
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you generate for each food item, and then
you're going to have a better understanding
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of the actual food cost.
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And for you to understand it, now you can
manage it properly, so then that way you can
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gain more profits into your pockets.
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So there you go.
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We just talked about the importance of understanding
your food cost.
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We just talked about how do you calculate
your ideal food cost versus your actual food
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cost.
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As a rule of thumb, we want to be able to
aim for maximum 30% of an actual food cost
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because anything higher, you're going to be
left with no margin to play with.
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So many times where we're actually looking
at our bank account, we're like, "Wow, we're
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making tons of money on paper, but in our
bank account, money's not showing up."
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It is because of our expenses out beats the
revenue that we bring in.
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Just because we make $10,000 doesn't mean
that all goes into our pocket.
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We need to pay for tons of money for rent,
tons of money for labor, tons of money for
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cost of good sold.
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So our job as owners, as restaurateurs is
to control this cost, minimize it, the below
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30, so then that way we can have a healthy
margins for us to take home.
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So I really hope you've enjoyed this video.
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The only thing I really ask for is for you
to smash the like button.
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That's the only thing that really helps me
along this whole YouTube journey.
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If you guys have any questions, leave it in
the comment section below.
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And if you want to learn more about how do
you understand building a restaurant, how
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do you engineer a better menu, so then that
way you can profit up ton.
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How do you have like more than a thousand
loyal fans, so then that way you don't need
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to worry about the competitors around the
block, or just understand my journey on building
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an Ice Cream Empire.
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Then definitely, check out in the link below.
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I created this course of something that I've
done for the last 10 years.
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So definitely check out in the link below.
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Otherwise, follow along this whole journey.
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I'll see you guys in the next video.
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