Understanding the Cost of Goods Sold (COGS) is essential for every restaurant owner aiming to maintain healthy profit margins and sustainable operations.
By accurately calculating and managing COGS, you can control food costs, minimize waste, and optimize your restaurant’s profitability. Read our article further to find out what it is, and how to calculate and improve it.
Key Takeaways
- COGS Overview: The cost of goods sold (COGS) reflects the total cost of food and beverages used to produce menu items, directly impacting restaurant profit margin.
- Calculation Components: COGS is determined using beginning inventory, purchased inventory, and ending inventory, providing insights into operational efficiency.
- Cost Control Strategies: Reducing food waste, managing inventory levels, and controlling food costs are essential for optimizing profitability.
- Technology Benefits: Tools like restaurant management software improve accuracy, automate inventory tracking, and streamline COGS calculations.
- Impact on Profitability: Effective COGS management supports sustainable growth by aligning menu prices with costs and enhancing overall financial performance.
What is COGS in the restaurant industry?
The Cost of Goods Sold (COGS) in a restaurant represents the total cost of the food and beverages used to produce menu items during a specific period. This includes all raw materials, such as purchased inventory, that directly contribute to creating the dishes your restaurant sells.
Understanding and managing the restaurant costs of goods sold is crucial for restaurant owners, as it significantly impacts profit margins and overall financial health.
Why COGS matters for restaurants
COGS is more than just a financial metric; it’s a comprehensive indicator of your restaurant’s efficiency and cost control. High costs of goods sold often signal issues like over-ordering, poor food inventory practices, or excessive food waste.
Conversely, maintaining an optimized COGS ratio enables restaurants to set competitive menu prices, achieve desired profit margins, and improve cash flow.
How COGS differs from other restaurant costs
While the cost of goods sold focuses on food and beverage production costs, it excludes other expenses like direct restaurant labor costs, rent, or utilities. By isolating these raw material costs, restaurant owners can identify specific areas to reduce food costs and save money.
Key components of restaurant COGS
- Beginning Inventory: The monetary value of all food inventory at the start of a period.
- Purchased Inventory: The cost of goods acquired during the same period.
- Ending Inventory: The value of inventory remaining at the end of the period.
Using these components, the formula to calculate COGS is:
COGS Restaurant Formula
COGS = (Beginning Inventory + Purchased Inventory) – Ending Inventory
Let’s look at an example:
Imagine your restaurant starts the month with a beginning inventory of $5,000. During the month, you purchase an additional $10,000 worth of food and beverage supplies (purchased inventory). By the end of the month, your ending inventory is valued at $4,000.
Here’s the example calculation:
COGS = ($5,000 + $10,000) – $4,000
COGS = $15,000 – $4,000
COGS = $11,000
In this example, your restaurant’s cost of goods sold for the month is $11,000, which represents the total cost of food and beverages used to create menu items sold during the period.
This number is critical for determining your restaurant’s profit margins, as it directly affects how much of your revenue is consumed by food costs.
Components break-down of restaurant COGS
To effectively manage the restaurant’s cost of goods sold, it’s essential to understand the core components that contribute to the cost of goods sold. These components include food inventory, labor costs tied to food preparation, and raw materials used to create your menu items.
1. Beginning inventory
The beginning inventory is the monetary value of your restaurant’s food inventory at the start of a given period. This includes all raw materials, such as vegetables, meats, grains, and beverages, that were not used during the previous period. Properly valuing your beginning inventory is crucial to accurately calculate cost of goods sold.
2. Purchased inventory
This refers to the total cost of all food and beverage supplies bought during the period. For instance, if you buy food inventory in bulk to reduce costs, it’s vital to ensure the purchased inventory aligns with demand to avoid over ordering and excessive food waste.
3. Ending inventory
The ending inventory is the value of remaining raw materials and ingredients at the end of the period. Keeping an accurate inventory of these materials ensures you avoid wastage and understand how much inventory contributes to your overall restaurant expenses.
4. Direct labor costs
Although direct labor costs are not always included in traditional COGS calculations, they are a significant factor in food preparation for restaurants. For example, staff time spent on food and beverage production directly influences the overall cost of menu items.
5. Raw materials and food waste
The raw materials used to create menu items must be carefully managed to reduce food waste. Overestimating demand or improperly storing inventory can result in spoilage, which directly impacts your restaurant’s profit margins.
How to calculate COGS for your restaurant
Accurately calculating the cost of goods sold is essential for understanding how much your restaurant spends on producing its menu items. Knowing this figure allows restaurant owners to optimize food inventory, control restaurant expenses, and maintain desired profit margins.
Step-by-Step process to calculate COGS
- Start with Beginning Inventory
This is the total value of your food inventory at the start of a specific period. For example, if your inventory at the beginning of the month is valued at $5,000, this is your starting point. - Add Purchased Inventory
Next, calculate the total cost of all food, beverages, and other raw materials bought during the same period. For example, if your restaurant spends $8,000 on inventory during the month, this figure is added to the beginning inventory. - Subtract Ending Inventory
At the end of the period, calculate the value of any unused inventory. For example, if your ending inventory is valued at $3,000, this amount is subtracted. - Apply the Formula
Use the standard COGS formula:
COGS = (Beginning Inventory + Purchased Inventory) – Ending Inventory
Example Calculation:
- Beginning Inventory: $5,000
- Purchased Inventory: $8,000
- Ending Inventory: $3,000
COGS = ($5,000 + $8,000) – $3,000 = $10,000
In this example, your cost of goods sold is $10,000 for the period.
Why COGS accuracy is critical
Accurate calculations of COGS restaurant operations ensure proper cost tracking and help identify areas of inefficiency, such as over ordering or unnecessary waste.
- Improved Profit Margins: A clear understanding of COGS helps optimize menu prices and improve your restaurant’s profitability.
- Inventory Levels: Regular updates on inventory help prevent spoilage and maintain just as much food inventory as needed.
Tools to simplify COGS calculations
Using management software can make tracking inventory levels, monitoring inventory counts, and managing cost control easier. These tools can automate the process, ensuring accurate data and reducing manual errors.
By following these steps, you can better control your total cost of operations and achieve long-term sustainability in the competitive market.
How to improve restaurant COGS: 5 practical strategies
Effectively managing a restaurant’s cost of goods sold is critical to maintaining a sustainable restaurant business.
By optimizing restaurant inventory management, controlling food costs, and reducing food waste, restaurant owners can achieve their desired profit margins while maintaining excellent food quality.
1. Optimize food inventory management
Efficient restaurant inventory management is the cornerstone of COGS optimization. Regularly tracking your beginning inventory, purchased inventory, and ending inventory helps identify patterns in usage and avoid over ordering.
- Use Restaurant Management Software: Tools like inventory tracking systems provide accurate insights into how much food is on hand, minimizing waste and ensuring as much food inventory as possible is utilized effectively.
- Perform Regular Inventory Counts: Conducting periodic inventory counts ensures you maintain the right balance of raw materials and avoid unnecessary costs.
Learn more: How to Reduce Food Costs.
2. Reduce food waste
Reducing food waste not only lowers your total cost but also contributes to restaurant sustainability efforts. Key strategies include:
- Portion Control: Train staff to maintain consistent portion sizes to prevent overuse of ingredients.
- Repurpose Leftovers: Incorporate unused items into other menu items to reduce food waste.
- Monitor Seasonal Ingredients: Using seasonal ingredients with a long shelf life can prevent spoilage and save money.
3. Control food costs
Balancing menu prices with ingredient costs is a key component of cost control. Restaurants should:
- Adjust menu prices based on changes in ingredient costs to maintain profitability.
- Utilize bulk purchases where feasible to lower per-unit costs without overstocking.
4. Streamline labor costs in food preparation
Direct labor costs tied to food and beverage production are another significant factor in cost of goods sold. Proper scheduling and staff training can reduce preparation time and improve efficiency.
5. Focus on profit margins and cash flow
Improving profit margins starts with calculating and managing your COGS ratio. This helps restaurant owners set realistic goals for growth while maintaining consistent cash flow.
By implementing these strategies, you can save money, control the overall cost, and improve your restaurant’s profit margins without compromising on customer satisfaction or food quality.
Why is accurate inventory management key to COGS optimization?
Accurate inventory management is critical for maintaining control over food and beverage costs and optimizing the cost of goods sold. By effectively tracking food inventory, restaurant owners can balance supply with demand, reduce food waste, and improve their profit margins.
The role of inventory counts in COGS calculation
Performing regular inventory counts ensures that your beginning inventory, purchased inventory, and ending inventory values are precise. This data is essential to accurately calculate cost of goods sold, which in turn helps in identifying areas for cost control.
- Inventory Levels: Keeping track of inventory levels allows restaurants to avoid both shortages and overstocking. Too much inventory can lead to spoilage and unnecessary restaurant expenses.
- As Much Food Inventory as Needed: Focusing on stocking just enough inventory to meet customer demand helps reduce operational costs.
Tools for streamlining inventory management
Modern restaurant management software is an indispensable tool for simplifying inventory tracking. These tools allow restaurant owners to:
- Automate inventory tracking to ensure accurate inventory counts.
- Monitor usage patterns to prevent over ordering.
- Forecast demand based on previous sales data, ensuring optimal use of raw materials.
Reducing food waste through inventory practices
A significant portion of restaurant cogs can be attributed to food waste. To mitigate this:
- Rotate Stock: Implement the First-In-First-Out (FIFO) method to ensure older stock is used first.
- Monitor Seasonal Ingredients: Use seasonal ingredients efficiently to capitalize on their long shelf life and reduce wastage.
- Track Expiry Dates: Regular checks on perishable items prevent spoilage and waste.
Tools to simplify COGS management
Managing the cost of goods sold effectively requires precision, especially in tracking food inventory and minimizing food waste. Using the right tools can help restaurant owners optimize inventory management, save time, and ensure accurate calculations.
1. Restaurant management software
Modern restaurant management software integrates seamlessly into daily operations, providing solutions for tracking inventory levels and automating calculations for COGS restaurant workflows. These tools can:
- Generate real-time reports on purchased inventory, ending inventory, and usage patterns.
- Monitor stock levels to ensure as much food inventory as needed without over-ordering.
- Predict trends based on past sales, helping restaurants meet customer demand effectively.
2. Inventory tracking systems
Dedicated restaurant inventory management software simplifies tasks such as periodic inventory counts and monitoring expiration dates. By focusing on accurate inventory management, restaurants can:
- Avoid waste caused by overstocking or poor handling.
- Track raw materials closely to maintain consistency in menu items.
- Use insights to optimize menu prices and manage overall costs.
3. POS system integration
Integrating COGS calculations into your Point of Sale (POS) system ensures every sale and its associated costs are logged in real time. This allows restaurant owners to track how each menu item contributes to their profit margins and total cost.
4. Automation for cost control
Automation tools can streamline complex processes, reducing manual errors. These tools:
- Enable fast and accurate calculations to calculate COGS.
- Provide insights into labor costs and direct costs related to production.
- Simplify the balancing act between cost savings and quality.
Mastering the cost of goods sold is critical for running a profitable restaurant.
By leveraging tools like restaurant management software, automating inventory counts, and streamlining cost tracking, restaurant owners can improve their profit margins while maintaining high food quality.
Accurate data and efficient processes allow you to minimize waste, manage costs, and focus on what matters most: delivering exceptional dining experiences and growing your business.
Frequently Asked Questions (FAQ)
What is the COGS ratio?
The COGS ratio is the percentage of a restaurant’s revenue spent on the cost of goods sold. It is calculated using the formula:
COGS Ratio = (Cost of Goods Sold ÷ Total Revenue) × 100.
This ratio helps determine how efficiently a restaurant manages its food and beverage costs.
What is a good restaurant COGS on average?
A good restaurant COGS average typically falls between 25% to 35% of total revenue. The exact percentage may vary depending on the restaurant type, with fine dining often having higher COGS due to premium ingredients.
