How to Calculate Cost of Goods Sold (COGS) for Restaurants

For restaurants, Cost of Goods Sold (COGS) is one of the most important things to understand. Put simply, it’s how much it costs you to produce a menu item. 

COGS is important because it’s tied directly to your profit margins, revenue and inventory management. Restaurants who don’t have a firm grasp of their COGS and monitor it regularly put their business at financial risk. 

But the good news is that you have control over your COGS. All it takes is a little number-crunching. In this post, you’ll learn the following:

• What is Cost of Goods Sold (COGS)?
• What is COGS in the restaurant industry?
• What is included in COGS for a restaurant?
• How to calculate Cost of Goods Sold
• What is the COGS ratio?
• What is a good restaurant COGS average?
• 10 ways to lower your restaurant COGS percentage

Let’s get started! 

What is Cost of Goods Sold?

Cost of Goods Sold (COGS) is the direct cost of making a product (or products). COGS includes costs such as raw materials that vary depending on the amount of product you produce. It doesn’t include indirect costs that the business incurs regardless of how much is produced such as rent or marketing costs.

What is COGS in the restaurant industry?

In the restaurant industry, COGS refers to the total cost of all the ingredients and food items that a restaurant purchases and uses to prepare and serve meals to its customers. Unlike ideal food cost, COGS takes factors like waste and spoilage into account so that you can understand the actual cost of the goods you sell. COGS is a critical financial metric used to determine a restaurant’s profitability and efficiency.

Since the cost of produce fluctuates from one season to another, so will your COGS. Your COGS for the same item is likely to fluctuate from week-to-week, month-to-month and year-to-year, that’s why it’s important to routinely monitor it and assure that the price you charge for that menu item leaves you with enough profit, or whether you need to increase it’s menu price to compensate for fluctuations in COGS. 

What is included in COGS for a restaurant?

COGS for a restaurant typically includes:

• Food costs: The cost of ingredients used in menu items, including perishables like vegetables, fruits, meat, and dairy products.
• Beverage costs: Costs associated with alcoholic and non-alcoholic beverages.
• Condiments and spices: Smaller items, though less expensive individually, can add up over time.
• Packaging for takeaway orders: If the restaurant offers takeaway services, the cost of packaging materials is also included.

Roughly one-third of a restaurant’s gross revenue goes towards paying for COGS. Your COGS, along with other restaurant expenses like labor, utility bills and other overhead expenses, is subtracted from your gross revenue to determine your net profit. 

How to calculate cost of goods sold for restaurants

To calculate COGS, you need the following three values for a given time period: 

1. Beginning inventory: This is the monetary value of the inventory you have leftover from the previous period (day, week, month or year).
2. Purchased inventory: This is the monetary value of the inventory purchases you make for the upcoming time period. 
3. Ending inventory: Once you get to the end of your time period, you calculate the monetary value of the inventory you have leftover. 

Once you have those three values, you can calculate COGS. 

Cost of Goods Sold formula

To find your COGS for a given time period, add the value of your beginning inventory and purchased inventory and subtract the value of your ending inventory from the result. 

Let’s say Johnny’s Burger Bar wants to find their COGS for the month of February. They had $3,000 of leftover inventory from January (this is beginning inventory since they’re starting the new time period with it). That leftover inventory included ground beef, drinks, buns, garnishes and vegetables (any ingredients needed to make the food they serve). 

During the month of February, they had to restock and buy $2,000 worth of food inventory. They ended February with $500 worth of food inventory.

Johnny’s Burger Bar’s COGS for the month of February—the amount of money they spent on the food and drink that they served during that month—was $4,500. Now that you have your COGS for February, you can work out your COGS ratio for February.

What is the COGS ratio?

The COGS ratio is your restaurant COGS as a percentage of total sales. To calculate the COGS ratio, divide your total food and beverage costs by your total revenue. 

So, Johnny’s Burger Bar knows that their COGS for February was $4,500. Now they need to find out what their total revenue for February was. Using a modern restaurant POS, they can go to their sales dashboard, choose the desired date range and get their total revenue in seconds. Let’s say their total revenue for February was $15,000. 

Johnny’s Burger Bar’s COGS ratio for February was 30%. A typical restaurant COGS average will make up around one-third of total profits, or a COGS ratio of 30-40%.

What is a good restaurant COGS average?

A good restaurant COGS average to aim for is between 30-35%. 

However, keep in mind that it’s possible for some menu items to have a higher COGS percentage but bank more money, so it’s important to also look at the dollar amount each item is bringing in. Selling a dish that cost you $5 to make that you charge $15 for (33.3% COGS) will bring in $10, but a higher end dish that costs you $25 in inventory but you can charge $50 for (50% COGS) will still bring in more money at the end of the day. 

Consistently maintaining a healthy COGS ratio is a balancing act between controlling food costs and establishing good pricing—without compromising quality and without gouging your customers. No easy task.

10 ways to lower your restaurant COGS percentage

The lower your Cost of Goods Sold, the higher your restaurant’s profit margins will be. No matter what type of establishment you operate, it’s in your best interest to find ways to lower your restaurant COGS average without sacrificing food quality and jeopardizing customer satisfaction.

Here are 10 actionable ways to lower your Cost of Goods Sold: 

1. Keep a close eye on inventory
2. Buy in bulk whenever possible
3. Compare vendors
4. Reduce food waste
5. Use seasonal ingredients when possible
6. Reevaluate portion sizes
7. Prep for success
8. Redesign your menu
9. Explore less expensive ingredients
10. Take advantage of technology

1. Keep a close eye on inventory

You don’t know how much inventory and food supplies you need unless you closely monitor each menu item’s sell-through. Assure that you’re only purchasing the food supplies that you know you can sell over a given time period. 

Look at sales reports and calculate how much food supplies you need to meet demand. Only purchase what you know you’re going to sell to avoid wasting money on ingredients that will ultimately spoil. 

2. Buy in bulk whenever possible

Some suppliers offer special pricing to restaurants who purchase in bulk. When purchasing non-perishables (food with a long shelf life) or food that your restaurant sells quickly (food with a fast turnover), purchasing in bulk is an effective way to get discounted pricing and lower your COGS. 

For example, let’s say Johnny’s Burger Bar works with a supplier who gives him a 75 cent discount per pound of ground beef he purchases, and each of his burgers contains a quarter pound of beef. Per month, Johnny’s Burger Bar usually goes through 1,000 pounds of ground beef (4,000 burger patties). By purchasing in bulk, Johnny’s Burger Bar lowers the COGS per burger by 18 cents and saves $750 per month.

One common concern for purchasing in bulk is that it may compromise the food’s freshness, as well as storage space. Not every restaurant has enough space to store 1,000 pounds of ground beef or a fast enough turnover to avoid waste or spoilage. Assure that you only purchase what you know you can sell before it will spoil.

3. Compare vendors

When working with suppliers, it’s important to see how one’s quality and pricing stacks up against another. It’s in your best interest to compare the pricing of multiple vendors. If one is cheaper than another and has similar food quality, consider seeing whether or not the other supplier is willing to offer more competitive pricing. 

For example, let’s say Johnny’s Burger Bar finds another similar supplier for ground beef, who’s offering an 85 cent discount per pound of ground beef he purchases. That lowers his burger’s COGS by 21 cents and saves him $850 per month—$100 more than his current supplier. 

Maintaining healthy relationships with suppliers is important for any business, not just restaurants. Before starting a price war, consider how much you value your existing suppliers. Your goal isn’t to extort them, just to have an open conversation about pricing. 

4. Reduce food waste

Regardless of how accurate you are when taking inventory, restaurant food waste is a big contributor to a high COGS. But the good news is that a lot of food waste is preventable. If you have ingredients that are still good but a little less than fresh, have your chefs find creative ways to use them up. For example, include them in a daily special or soup of the day. 

That bread that’s going a little stale? Perfect for topping a french onion soup. Vegetables looking a little droopy? They’ll be great in a homemade bouillon.

5. Use seasonal ingredients

Focusing on produce that is fresh and in season gives you the best chance of saving money. Not only does this contribute to a fresher and more appealing menu, but it can also lead to cost savings through seasonal pricing fluctuations and reduced transportation costs. Local seasonal ingredients are usually better for the environment, too. 

For example, offer blueberry desserts if and when blueberries are in season in your region. After blueberry season is over, instead of importing them from elsewhere to keep blueberry desserts on the menu, why not change up your dessert menu to feature the best your local apple orchards have to offer?

Need inspiration for your seasonal initiatives? Look no further than Tuck Shop, a fine dining restaurant with a strong focus on seasonality. With a menu that changes frequently, Tuck Shop’s dishes offered are closely tied to the ingredients that are in season—an approach ensures that the food is fresh and of high quality.

 

View this post on Instagram

 

A post shared by Tuck Shop (@tuckshopmtl)

We’re not necessarily talking about shrinkflation, where you charge your customers more for less. (Though if you are going to adjust portion sizes on all your menu items to reduce your COGS, be sure to do it strategically and gradually so you don’t compromise customer satisfaction.) But it’s a good idea to pay attention to what’s being left on the plate—and ultimately ending up in the trash—because the portion size is simply more than necessary.

A good way to find out if you’re giving diners more than they can swallow—ask your wait staff or bussers. They’re clearing the plates, and if they’re regularly scraping 50% of a dish into the compost because it “conquered” the guest, they’ll be able to tell you and you can take action. 

7. Prep for success

Restaurants risk losing considerable amounts of profit when food-prep workers don’t properly measure ingredients. For example, if the prep cook at Johnny’s Burger Barn “just eyeballs it” instead of weighing the patties properly, burgers may end up containing one third of a pound of beef instead of a quarter pound. That’s not a big deal for a few one-offs, but for a whole service, that adds up fast. 

By being aware of how much food you’re serving, you can avoid wasting ingredients and save money in the process.

8. Give your menu a new look

Your menu’s design has a huge impact on what menu items guests order. Anything from which layout you choose to its colors and descriptions will affect which dishes they choose. 

Menu engineering is the art of deliberately and strategically designing a menu to encourage guests to purchase high-profit margin menu items. Creating a menu using menu engineering tricks, restaurants can indirectly influence which items customers are naturally drawn to, increasing sales of the menu items that are best for their bottom line.

9. Explore less expensive ingredients 

For all intents and purposes, this should be a restaurant’s last resort. If you start serving customers lesser-quality food while charging prices, customers will notice and it may put your restaurant’s reputation at risk. 

One way to spend less on food supplies without compromising on quality is to explore working with different suppliers for different products. 

For example, let’s say Johnny’s Burger Bar wants to introduce chicken burgers to their menu. While their current meat vendor’s pricing for ground beef is great, it’s less desirable for chicken. For 500 pounds of chicken, it would cost Johnny’s Burger Bar $1.00 per pound for a total of $500. Another supplier who specializes in poultry, however, is offering 500 pounds of chicken at 50 cents per pound, for a total of $250. By working with two suppliers, one for beef and one for poultry, Johnny’s Burger Bar is saving an additional $250 per month on COGS.

Another way to spend less on food supplies is to get creative with less expensive cuts of meat. There are tons of delicious recipes that feature the cheapest cuts of meat. The key is in the preparation. 

10. Take advantage of technology

There are a lot of great technology solutions for inventory tracking and ordering. Automating the more cumbersome elements of inventory management can help you streamline operations, reduce errors and provide real-time insights into inventory levels, helping you make informed decisions that help lower your COGS. 

For example, an automated inventory management system built-in to your restaurant POS will tell you exactly how much food you went through, how much you have on hand, and how much you need, helping reduce or eliminate food waste caused by over-ordering, spoilage and poor portion control.

James Graham-Simpkins, General Manager for the celebrated Joe Beef group of restaurants in Montreal, turned to Lightspeed to get a handle on proper food costing and pricing when it became clear their old-school systems were causing “hours and hours of administrative drudgery.”

Lightspeed really helps us to analyze quickly, effectively, and extract all the numbers we need to make the right analysis and to plan, to forecast, to schedule, to know what last year was like, and to try to figure out what next year holds. And to be able to just move forward logically and easily.” — James Graham-Simpkins

Restaurant COGS and pricing: a delicate balance

No matter what type of restaurant you run, achieving the optimal balance between food quality and COGS is vital for your restaurant’s long-term profitability.

 The good news is that optimizing your restaurant COGS average isn’t a matter of chance, it’s well within your control. Whether you work with cheaper suppliers, buy in bulk to obtain beneficial pricing, increase menu prices to maintain a healthy COGS ratio, there are plenty of ways to reduce your food costs and increase profits. 

With some number-crunching, careful planning and paying attention to the details, you can set your restaurant up for success. And with the right technology, you can leave the number crunching to your restaurant POS—so you can focus on growing your business.

Ready to learn how restaurant technology can simplify inventory management and help you lower your COGS? Talk to one of our experts today to find out how Lightspeed can help.