Restaurants tend to shift their focus to the initial obligations, such as purchasing ingredients, instead of considering how the cost of goods sold impacts their net profit. Businesses need to appropriately price their menu to supplement more than just the cost of inventory to produce enough income for other services.
By understanding how to calculate the cost of goods sold, restaurants can determine their profits to improve inventory management and ordering strategies.
What is the Cost of Goods Sold?
The cost of goods sold (COGS) is the direct production costs necessary to manufacture the goods sold.
In the restaurant industry, COGS includes the cost of all ingredients used to make a menu item. This includes not only the ingredients to make the dish but also the condiments, beverages, and garnishes.
However, restaurants usually calculate the COGS per reporting period rather than per dish. Therefore, at the end of the accounting cycle, managers must total all of the materials used to produce the sales for that month or quarter.
Typically, COGS occupies one-third of the average restaurant's gross revenue and is subtracted, along with other overhead expenses, to determine the net profit.
Restaurants can expect their COGS to fluctuate alongside customer demand on a weekly, monthly, and seasonal basis. It will also change whenever the cost of produce and other ingredients fluctuate. Management must continuously cross-examine their COGS and menu prices to ensure they can still generate profit when supplier costs increase.
How to Calculate the Cost of Goods Sold
In order to calculate the COGS, restaurants need to quantify three values for the given timeframe-
- Beginning Inventory is the monetary value of the stock left over from the previous accounting period.
- Purchased Inventory is the value of the purchase orders made within the same cycle.
- Ending Inventory is the value of the remaining stock leftover at the end of the accounting period.
Once these values are configured, restaurants can calculate their COGS- (Beginning Inventory + Purchased Inventory) Ending Inventory = COGS
For example, a restaurant begins their reporting period with $4,000 worth of inventory left over from the previous cycle. Throughout the timeframe, management purchased $6,000 worth of additional inventory. By the end of the period, the business had only $2,000 left of stock, making the COGS $8,000- ($4,000 + $6,000) - $2,000 = $8,000
This means that the establishment spent $8,000 on the food and beverages sold during this particular timeframe.
How to Lower the Cost of Goods Sold
While the COGS is generally around 30%, there are several ways restaurants can reduce their expenses, including-
Buying in Bulk
Many suppliers offer lower rates to businesses that buy products in bulk, as it reduces their packaging and shipping costs. Therefore, restaurants should consider increasing their purchase orders for non-perishable goods and products that have a long shelf life, such as-
- Canned foods and beverages
- Frozen foods
While restaurants can also buy perishable goods in bulk, there is a concern for food spoilage and waste. Even frozen foods face the risk of going bad from freezer burn.
Establishments must also consider the storage needs for housing large volumes of product. Depending on the type of inventory
, items may need to be stored separately to avoid cross-contamination. Therefore, restaurants need ample space in their-
- Dry storage
- Shelving units
Finding Cost-Efficient Products
While this option may seem obvious, many restaurants will only source cheaper ingredients as a final attempt to lower COGS, as it can significantly impact the quality of goods. If customers notice that meals lack quality but still remain at the same price point, restaurants may lose their integrity and good reputation. It can also decrease customer satisfaction, retention, and advocacy.
One way to safely source cost-efficient ingredients is to price shop by comparing several suppliers. Some vendors are open to negotiating contracts and prices to guarantee steady business.
Without adequate inventory management, restaurants can experience increased expenses from food waste. Therefore, businesses should implement standardized guidelines and procedures to regulate stock, from portioning to ordering strategies.
By utilizing inventory ordering software, restaurants can maintain healthy stock levels by establishing accurate reorder points. Optimized reorder points can boost sales and minimize the threat of food spoilage from overstocking.
By keeping space on the menu for seasonal dishes and specials, restaurants can quickly use ingredients that are about to expire. This enables businesses to increase inventory turnover rate to clear shelves of excess products and improve ordering strategies.
However, if customers enjoy a particular seasonal dish and restaurants experience increased demand, they should consider making it a recurring item rather than just a way to use excess ingredients.
Reducing Food Waste
Aside from utilizing seasonal menus, restaurants should discover creative ways to reduce their food waste.
For example, chefs can use stale bread to make breadcrumbs or croutons and vegetable scraps to make stock. This not only minimizes spoilage but saves restaurants the cost of purchasing these items as well.