Are you a restaurant owner struggling to manage the rising cost of fancy ingredients like caviar and saffron and even simple ingredients because of inflation? Worrying how you’ll continue being profitable in this scene?
Calculating your Cost of Goods Sold (COGS) is the answer. It’ll give you a good idea of how much each item you put on the plate is costing you and affecting your overall gross profit margins. Research shows that restaurants can substantially increase their profit by tracking COGS and managing it as they make up 33% of their sales.
Read along to learn what COGS means, a simple way of calculating COGS for restaurants, and how to reduce it to keep your profit rate high.
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COGS or cost of goods sold for restaurants meaning
Cost of goods sold (COGS) in the restaurant industry refers to the direct costs associated with producing the food items you sell. This includes the cost of ingredients, labor directly tied to food preparation, and any other expenses directly related to creating your menu items. For restaurant owners, COGS is a critical metric because it’s a crucial part of restaurant bookkeeping and it directly affects your gross profit.
Understanding COGS isn’t just about tracking expenses, it’s about managing them effectively. When you keep a close eye on your overall costs, you can make informed decisions about pricing and portion sizes.
Now that you understand what COGS means, let’s explore how you can calculate it for restaurants.
How to calculate cost of goods sold
Calculating COGS for your restaurant involves a few straightforward steps. Start with your beginning inventory, the value of food inventory at the start of the period. Next, add any purchases made during that period. Finally, subtract the ending inventory, the value of unsold food items at the end of the period.
For example, let’s say at the beginning of the month, you have $5,000 worth of inventory. Throughout the month, you purchase an additional $3,000 worth of ingredients. At the end of the month, you have $2,000 worth of unsold inventory left over. Your calculation would look like this:
COGS = Beginning Inventory + Purchases – Ending Inventory
COGS = $5,000 + $3,000 – $2,000 = $6,000
This means it costs you $6,000 to produce the dishes sold during that month. Knowing this helps you set menu prices that reflect actual costs.
Why tracking COGS is important for restauranteurs
For restaurants, COGS represents the total cost of the food inventory used during a specific period, be it day, week, month, or year. This figure is crucial because it is subtracted from your gross revenue to determine your gross profit. If you’re using expensive ingredients or larger portion sizes without adjusting your menu prices accordingly, you might find that your COGS ratio creeps up, eating into your profits.
Keeping track of your restaurant’s Cost of Goods Sold (COGS) is essential for maintaining profitability. If the price of a key ingredient spikes due to seasonal availability or supply chain issues, knowing your current COGS will help you adjust menu price or portion sizes accordingly.
For instance, if you sell a burger for $15 but it costs you $8 to make, factoring in ingredients like beef, buns, and toppings, your COGS is $8. If you notice that the cost of beef has risen from $4 to $5 per pound, and you’re using a quarter pound per burger, your COGS for that burger jumps from $8 to $9. This increase means you’re now only making $6 on each burger instead of $7.
Tracking COGS also helps you identify trends over time. Let’s say you notice that the COGS for your pasta dishes has consistently increased over the past few months. If the ingredients cost you $5 per plate last month but have jumped to $6 this month, it’s worth investigating why. Perhaps the price of tomatoes has gone up due to seasonal changes, or maybe your supplier has raised their rates. By keeping an eye on these numbers, you can decide whether to adjust your menu prices or find alternative ingredients that won’t hurt your bottom line as much. Ultimately, understanding and tracking COGS gives you the insight needed to make informed decisions that keep your restaurant running smoothly and profitably.
Now that you know the importance of tracking COGS for your restaurant business, let’s explore how to reduce it effectively.
How to reduce your COGS to stay profitable
Reducing your COGS is crucial for maintaining profitability in a competitive industry. Here are some effective strategies:
Track your inventory closely
Monitor food inventory in real time. Use software or manual systems to keep tabs on what items are selling well and which aren’t. By understanding what’s being used versus what’s being wasted or spoiled, you can make better purchasing decisions and reduce waste.
For example, if you find that certain ingredients are consistently going unused and spoiling before they’re sold, consider adjusting your menu or ordering smaller quantities.
Buy in bulk amounts
Purchasing ingredients in bulk can lead to significant savings. While this requires upfront investment and careful storage management, buying larger quantities often reduces per-unit costs and can help stabilize prices over time.
For instance, if you regularly use a particular spice that comes in bulk at a lower price per ounce than buying smaller containers individually each week, switch to bulk purchasing.
Compare different vendors and suppliers
Don’t settle for the first supplier you find. Take time to compare prices from different vendors. You might discover that one supplier offers better rates on certain expensive ingredients than another.
If you’re paying $3 per pound for chicken from one vendor but find another offering it for $2.50 per pound with similar quality, switching suppliers could save you hundreds over time.
Use less expensive and seasonal ingredients
Consider adjusting your menu to incorporate seasonal ingredients that are often less expensive and fresher than out-of-season options. Not only does this help reduce costs but it also allows you to create unique dishes that attract customers looking for fresh flavors.
If strawberries are out of season and expensive in winter but plentiful in summer at a lower price point, adjust your dessert specials accordingly.
Track COGS with automated software
Let’s face it—managing COGS can be a total pain for restaurants. That’s where automated accounting software for restaurants comes in to save the day. It takes the hassle out of tracking inventory, dealing with supplier invoices, and nailing recipe costs. Everything syncs with your POS and inventory systems, giving you real-time updates on food costs, wastage, and overall profitability. Bonus? It handles tax compliance and reporting like a pro, so you’re always prepared. With automated accounting software you can finally say goodbye to drowning in Excel sheets and hello to focusing on what really matters—serving amazing food and keeping your customers coming back for more.
Final thoughts
In short, calculating and managing COGS is vital for running a successful restaurant. By understanding how to track these costs effectively and implementing strategies to reduce them, you can significantly improve your gross profit margins. Remember that every decision, from ingredient sourcing to portion sizes, affects your bottom line.
If you’re looking for a way to streamline this process while ensuring accuracy in tracking expenses, use Synder, an accounting automation tool for syncing data from sales channels, POS systems and payment platforms right into your books. Tracking COGS with Synder is a breeze!
Sign up for a 15-day free trial or book a spot at a Weekly Public Demo and start managing your COGS like a pro!
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