As a restaurant manager, understanding the cost of goods is essential to running a business. By learning more about your COGS, you can make informed decisions on menu pricing, inventory management, and purchasing decisions. In this blog post, we'll discuss how to calculate COGS for your restaurant and the key takeaways to implement today.
Engineer Your Menu for Profitability
What's the Cost of Goods Sold?
Let's jump into what the cost of goods actually means, the cost of goods sold, or COGS, is the cost associated with creating and serving your menu items, including ingredients, labor, and other expenses. Understanding your cost of goods can help you make data-driven inventory management, purchasing, and menu pricing decisions.
How To Calculate Cost of Goods Sold for Your Restaurant
Calculating COGS for your restaurant involves gathering data on all of the costs associated with creating and serving your menu items.
Due to spills and food spoilage, research shows 4-10% is wasted in the restaurant industry and never makes it to the table.
Ingredients, labor costs, preparation, and seasonal items can add up quickly. Labor costs are tied to preparing and serving those items. Other costs that should be included in COGS calculations include packaging and supplies, such as napkins, menus, and to-go containers.
Once you have your data, you can calculate your COGS by dividing the total cost of goods sold by your total sales for a given period. The result will provide you with a percentage representing the portion of your sales revenue used to cover the costs associated with creating and serving your menu items.
Grab the formula here:
(Beginning inventory + Purchases) - Ending Inventory = COGS
The Benefits for Your Restaurant
Knowing your COGS can provide several benefits for your restaurant.
Consider the following:
1. Informed decisions with menu pricing
By understanding exactly how much it costs to create each menu item, you can set prices that ensure profitability while remaining competitive in your community.
2. Optimize your inventory management
By tracking the cost of ingredients over time, you can identify trends in pricing and adjust your ordering practices accordingly. Identifying trends can help you minimize waste and control costs over the long term.
3. Valuable insights on the overall health of your business
When you use data at the core of your business strategy, you can make actionable and forward-thinking decisions for the growth and stability of your restaurant.
By regularly monitoring and tracking your COGS, you can identify areas where costs are increasing and take steps to mitigate those expenses before they become a more significant problem.
Key Takeaways to Implement Today
Here are some key takeaways for implementing COGS for restaurants.
Regularly track and analyze your COGS data:
By regularly tracking and analyzing your COGS data, you can identify trends and opportunities for improvement. For example, suppose you notice that the cost of a particular ingredient is increasing over time. In that case, consider finding a new supplier or adjusting your menu to use less of that ingredient.
Use your COGS data to inform pricing decisions:
Understanding your COGS can help you make informed decisions about menu pricing to ensure profitability. For example, if the cost of a particular dish has increased significantly, you may need to adjust the price to maintain profitability.
Optimize inventory management practices:
You can minimize waste and control costs over the long term by tracking ingredient costs and adjusting ordering practices as needed. For example, suppose you notice that a particular ingredient is frequently going to waste. In that case, you should adapt your ordering practices or consider using them in new menu items to prevent waste.
Identify areas for cost savings:
By regularly analyzing your COGS data, you can identify areas where costs can be reduced without sacrificing quality. For example, suppose you notice that a particular ingredient is consistently more expensive than alternatives. In that case, consider switching suppliers or finding a new ingredient that provides similar quality at a lower cost.
Also, consider partnering with local suppliers or vendors to shift costs and increase community collaboration.
Overall, implementing COGS for restaurants can provide valuable insights into the health of your business and help you make strategic decisions about pricing, inventory management, and purchasing to ensure long-term profitability.
For more on restaurants and the impact of incentivizing your staff, check out this article.
COGS: Business Profits Re-invented
By regularly tracking and analyzing COGS data, restaurant managers can make informed decisions about menu pricing, inventory management, and purchasing decisions. Monitoring and analyzing your COGS data can help minimize waste, control costs, and identify opportunities for cost savings. Ultimately, by optimizing COGS practices, a restaurant can maximize profitability while continuing to provide high-quality products and services to its customers.
For more on restaurants, check out our Restaurant Must-Have: Manager Brainstorm Session Template