Rising food costs can crush a restaurant’s profitability. The crazy part about this is many restaurants are getting worked up and, in a panic, looking at the incorrect number. When it comes to the food cost formula, there’s only one way to do it correctly, and I mean one way. 

Before I share with you how to calculate your food costs the right way, let me tell you where most restaurants go wrong. 

One, calculating it with purchases divided by sales. They just take all their invoices, whatever that total is and divide it into the sales that came in that month for food. Well, it’s an incorrect number because in one month, you might have ordered more product than you needed, and your sales were slightly lower than forecasted. The next thing you know, your food cost looks falsely high the next month, you don’t order as much product because you had some from the last month. It was still good, still usable, and your sales were astronomical. With your purchases low, and your sales much higher, your food costs go low. It doesn’t work that way. That is an incorrect number. 

Two, not counting everything. If you’re not taking inventories, or you are taking inventories, but you’re not counting all the things that you prep on the shelf, the components of dishes like diced onions and peppers, things like sauces, soups, side dishes, desserts, things you make from scratch, then your food cost won’t be right. When you don’t count all your inventory, you will have a false reading on a high food cost. 

Three, inflating your purchases. When your broadband distributor invoice comes in and there’s paper, janitorial, smallwares and equipment on there, those aren’t food. You don’t sell those things. So, unless you remove those and only focus on what the food purchases were, you’re going to have a high number. 

Four, using a spreadsheet. I’m telling you right now, you can’t use a spreadsheet anymore. Yes, you could set it up, and it will work for a little bit, but it’s going to be hard to maintain, which leads to inaccuracy. Plus, it’s difficult to add brand new products and put them in shelf-to-sheet order that you often don’t. This leads to missing complete items that came in just that week. In a perfect world you’re counting everything using software and separating your purchases on each and every invoice.

To get your food cost, there is a basic, simple calculation: beginning inventory plus purchases gives you what your total available is, or how much food you could sell. For example, if you had $5,000 on the shelf in food product when you started the week, and you purchased $10,000 in product and didn’t open the doors at all, you would have $15,000 in product on the shelf. That’s the total available. 

Next take an ending inventory at the end of the period—preferably a week, could be a month—and subtract it from that total available to get use.

What is use? It’s the product you sold, what spoiled or was wasted, or even what was stolen. It’s whatever is not on the shelves for the ending inventory. It doesn’t really matter how the product leaves because the equation is math. It’s blind to reason. (That’s why we need other systems in our business to track and control how we use our product).

But that use is the cost of goods sold, the amount of product you used for the money you brought in. Now take that use divided by gross sales—food sales alone, since we’re talking about food cost. And that gives you your food cost percentage. If you come up with a 30% number, that means for every dollar that comes in in food sales, you used $0.30 in product. 

Now, that is the only way, and it is the right way, to give you the right number.

Here it is in summary:

Beginning inventory + purchases—ending inventory gives you use. Divide use by sales and that’s your food cost percentage. That’s it. 

With the right number, you can make proactive changes back on your budget. To get back on budget, if your food cost is high, you can look at recipe costing cards, re-engineer your menu, look at waste sheets to stop mistakes, use your key item tracker to prevent theft, or even change your menu. You can do so many different things from portion controls to tracking properly.

Budgeting is the key word. Knowing your food cost is one thing. Knowing where it should be for you to make money is a totally different story.

David Scott Peters is a restaurant expert who teaches restaurant operators how to cut costs and increase profits with his trademark Restaurant Prosperity Formula. He’s taught thousands of restaurants how to use operational systems and create a hospitality-based company culture to skyrocket their profits.