What is restaurant cost of goods sold and how can you reduce it?
In this #snack, we run through exactly what restaurant cost of goods sold is and look at some tips to help you lower it.
Restaurant cost of goods sold (COGS) is one of the most important metrics you need to track for your restaurant business.
By calculating your restaurant’s cost of goods sold you get an accurate picture of what exactly you’re spending on each menu item. Tracking this metric will give you greater control over your restaurant costs and help you make better decisions on menu creation, vendor selection and overall inventory management.
Let’s dive in.
What is a restaurant’s cost of goods sold?
COGS is basically the total cost of the ingredients and materials used to make a menu item. This includes everything that goes into producing the item.
For example, for a cheese burger, this would include the bun, the burger patty, the cheese, the sauce and so on. If the burger is for delivery, the packaging would be included also.
It’s an important metric for calculating your gross profit. For gross profit, the COGS is taken away from total sales. To calculate your net profit, you deduct payroll, rent, bills and equipment costs.
But let’s get back to COGS for now.
It can be basically broken down into this formula:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of goods sold
Here’s what each one of these parts of the formula means.
- Beginning inventory: The amount of inventory you have left over when you begin – say you have £2000 of inventory from the week before on a Monday when you begin counting, that’s your beginning inventory.
- Purchased inventory: This is the inventory that comes in during the week – £1000 of orders could come in during the week
- Ending inventory: This is the inventory you have at the end of the week – for example, you could have £500 of inventory left on your shelves at the end of the week.
Using the formula this would mean:
Beginning Inventory(£2000) + Purchased Inventory(£1000) – Ending Inventory(£500) = Cost of goods sold: (£2500)
Why this metric is important for your restaurant business
The reason this metric is so important for your restaurant business as it gives you an accurate insight into what your menu items actually cost.
With profit margins quite tight across the industry at the moment, you need to be able to get as much value as you can from everything you sell.
Ideally, your COGS should account for no more than 31% of your sales. However, if you feel your COGS is a bit on the high side, we will have a number of different tips we can use lower this number in the next part of this article.
6 ways to lower your restaurant cost of goods sold
Your COGS ratio is the number you get by dividing the COGS by net sales. A low COGS ratio number is a sign that you’re in a good position financially.
But if this number is high there are a couple of things you can tweak in your business to help bring this number down.
Get the best value from your vendors
One way to lower your COGS is to buy ingredients from your suppliers at a lower price point – but you want to do this without sacrificing the quality of the products you are buying.
Even if you have a number of established suppliers that you’ve built relationships with, it’s a good idea to shop around and see if you can find a better deal.
It might be a tough conversation to have with an established supplier to break the relationship and go for a better deal – however they may offer you a better price so they don’t lose you as a customer.
There are other ways to get better deals with suppliers – one of these is to buy in bulk. Suppliers usually give a discount on ingredients when they are bought in greater volume.
The only thing about this strategy is that you need to be careful about what food you buy in bulk. For example, you may not want to buy meat or vegetables in bulk if you aren’t sure you will sell it all – the danger is that it could spoil.
We reccomend buying non-perishable items or items you know you are going to sell out quickly. Also consider if you have the proper storage space for excessive items as it could start getting in the way!
Track and reduce your food waste
High rates of food waste contribute to a high COGS. Food waste is a key issue in the industry in general and is a silent killer that eats away at your restuarants bottom line.
The bedrock of any food waste reduction plan is tracking your waste – however, this is where a lot of restaurants are falling short. Conduct an analysis of food waste – this will allow you to monitor over time where you’re wasting food.
Doing this should help save on costs. In fact, a recent study found that for $1 invested in reducing food waste, they saved $7. Check out our article on reducing food waste for more information.
Create a lean, optimised menu
A lean, optimised menu is the cornerstone of any successful restauran and provides a better experience for your customers – hopefully bumping up the sale of each menu item.
Kitchen staff will be well practised in making each menu item and will know exactly what amount of ingredients is needed which will re
You also know what you need from suppliers week in, week out – adjusting only for busier and quieter periods during the year. This can help with supplier negotiations if you are buying regularly.
Monitor your sell through rate
Tracking your inventory is a non-negotiable in a restaurant. And, when tracking your inventory it is important to keep a close eye on your sell through rate. This means looking at the amount of food you sell to meet demand over a certain period of time.
Use your sales report from your POS system to see exactly how much of each menu item you’ve sold over that period of time. This will help you predict exactly how much you need the next time a similar time comes around.
Think about seasonality
This strategy may not suit everyone as it depends on the type of food you sell. Refreshing your menu every couple of months based on seasonality could be a good way of saving on costs.
This is because locally sourced ingredients are usually cheaper than imported goods. It keeps you menu fresh and interesting and showcases a willingness to support your local commuity.
This is fresh produce so make sure you only purchase what you can sell – keeping an eye on sell through rate it key here.
Keeping on top of your COGS is crucial to lowering costs and bumping up your profit margin. The key is to not wait until things are too late to take action on a rising COGS number – once you feel its getting high start looking into the areas we’ve laid out.