Running a successful restaurant isn’t just about serving food—it’s also about managing costs effectively. One of the critical metrics in this business is the Cost of Goods Sold (COGS). Whether you’re familiar with COGS or exploring it for the first time, understanding and controlling it can significantly impact your restaurant’s profitability.
What are COGS? COGS stands for “Cost of Goods Sold.”
In business, particularly in industries that involve selling products, COGS refers to the direct costs attributable to the production of the goods sold by a company. For a restaurant, the COGS specifically represents the total expenses associated with producing the food and beverages sold to customers within a defined period. Some of these expenses can include ingredients, packaging, and any direct labor expenses intricately tied to preparing the dishes that grace your menu.
Why do Cost of Goods Sold Matter?
Think of it as the heartbeat of your restaurant’s financial health. It acts as a pivotal benchmark for evaluating operational efficiency and profitability. An accurate cost of goods sold calculation provides a clear panorama of how effectively your restaurant utilizes resources and aids in setting menu prices to ensure optimal profitability.
Traditional vs. Streamlined Approach: Calculating COGS
Traditionally, calculating COGS involved manual and time-consuming methods, leaving room for errors and delays. We are now entering an era of streamlined back-office technology—a game-changer in restaurant management. Leveraging automation gives operators access to real-time insights, enabling accurate and swift calculations. Here’s how:
Traditional COGS Calculation Process
- Manual tracking of inventory
- Labor-intensive calculations
- Prone to human errors and discrepancies
- Time-consuming reconciliation
Streamlined COGS Calculation with Technology
- Automated inventory tracking
- Real-time data analysis
- Reduced margin for errors
- Swift and precise cost breakdowns
Steps to Improve Your Restaurant’s COGS
Optimizing your cost of goods sold requires proactive strategies. Consider these actionable steps to elevate your restaurant’s cost efficiency:
Regular Inventory Audits
Schedule routine checks to ensure accurate stock levels and identify potential discrepancies.
Negotiating Supplier Contracts
Explore opportunities to improve pricing or terms with suppliers to lower ingredient costs.
Minimizing Wastage
Implement waste reduction strategies and train staff to manage resources efficiently.
Efficient Portion Control
Fine-tune portion sizes to minimize food wastage while ensuring customer satisfaction.
Sales Forecasting
- Calendars: remember first quarter events like community events, federal holidays, winter/school breaks.
- Ordering: over ordering? If you are over sales forecast, you have too much product.
- Scheduling: Are your employees properly staffed for daypart – specific food prep tasks?
- Training: Forecasting and scheduling training & developments for all employees
Order
- Deliveries: schedule truck order 2-3 times a week
- Organizations: Storage areas, order guide, use inventory management to track product
- Use built-to-order system
- Implement a 10% sales buffer that can help accommodate for random spikes in sales
Receiving
- Make ordering a two-person process
- Order enough product to get through to next delivery
- Appoint someone to receive the order and put it away
- Check-in items to make sure you are getting what you order
- Rotate products! This will prevent loss, waste, and quality issues
Inventory
- Keep kitchen and storage areas clean and organized
- File inventory sheet for review and teaching
- Have opening manager verify previous day’s count/variances
- Continuously check inventory through the week
Preparation
- Have specific book and recipe cards to be followed
- Make sure utensils and cookware are clean
- Hot foods: protect yields and cook to proper temperatures
- Monitor all prep and carryover / non-peak times
Line Operations
- Use proper portioning tools and use portion control
- Train kitchen staff on all recipes, ingredients, and cleaning
- Monitor waste in garbage cans and sinks
POS metrics/ loss of theft
- Train cashiers and implement register accountability
- Monitor all POS metrics
- Perform surprise cash audits on cashiers
Empowering Independent Restaurants with Back Office Technology
For independent restaurants, navigating the complexities of cost of goods sold can be transformative. Enter Back Office technology, designed to empower restaurateurs by offering:
Key Features of Back Office Technology
Inventory Management
- Real-Time Tracking: Back office technology offers real-time visibility into inventory levels, aiding in accurate COGS calculations.
- Inventory Optimization: Analyze stock levels, track ingredient usage, and set par levels to minimize waste and efficiently manage inventory turnover, directly impacting COGS.
Recipe Costing and Menu Engineering
- Precise Cost Analysis: Detailed breakdowns of ingredient costs per dish allow for accurate menu pricing based on COGS, ensuring profitability.
- Menu Optimization: Evaluate the profitability of each menu item, identify high-cost ingredients, and optimize recipes to maintain margins while meeting customer expectations.
Supplier Management and Purchasing
- Supplier Performance Analysis: Track supplier pricing, quality, and delivery efficiency to make informed purchasing decisions that impact COGS.
- Cost Negotiation: Utilize data insights to negotiate better prices or terms with suppliers, directly impacting the cost of ingredients and thereby reducing COGS.
Data-Driven Decision-Making
- Comprehensive Analytics: Access detailed reports and analytics on purchasing patterns, sales trends, and cost fluctuations, aiding in strategic decision-making for COGS optimization.
- Predictive Insights: Forecast demand, analyze historical data, and anticipate market trends to make proactive adjustments in purchasing and menu planning, positively affecting COGS.
Automated Expense Tracking and AP Automation
- Streamlined Invoicing and Payment: Automate invoice processing and payments to suppliers, reducing manual errors and ensuring accurate recording of expenses affecting COGS.
- Expense Visibility: Gain insights into all costs incurred, including supplier bills, labor expenses, and other overheads, contributing to a more accurate COGS calculation.
Integration with Accounting Systems
- Financial Transparency: Seamless integration with accounting functions ensures accurate tracking of COGS-related expenses and facilitates easier reconciliation and reporting.
- Budget Allocation: Allocate budgets and track spending against set targets, allowing for better control over expenses impacting COGS.
These features within Back Office technology collectively empower restaurant owners and managers with the tools necessary to meticulously manage and optimize their COGS, ultimately contributing to improved profitability and sustainable growth.
Controlling your COGS isn’t just an aspiration—it’s a necessity for sustained profitability among independent restaurants. Leveraging a partnership with Dining Alliance gives you access to innovative back-office technology and offers more than just simplified COGS management; it provides restaurateurs with a roadmap to success.
Remember, behind every exquisite dish lies a meticulously managed COGS. It’s the secret ingredient to financial resilience and enduring success in the competitive world of foodservice.
Click here to discover How Dining Alliance can help independent restaurants streamline food cost management or fill out the form on contact us page and one of our restaurant experts will contact you.
Frequently Asked Questions
How do you calculate a restaurant’s COGS?
Use this formula: Beginning Inventory + Purchases – Ending Inventory = COGS. This shows how much your restaurant spent on the products used during a specific period.
What is a good COGS percentage for a restaurant?
Many restaurants aim for COGS around 25% to 35% of sales, but the right target depends on your concept, menu, pricing, and operating model.
What’s the fastest way to lower COGS?
Start by reducing food waste, tightening portion control, managing inventory, and reviewing supplier pricing. Small improvements across these areas can add up quickly.
What is included in a restaurant’s COGS?
Restaurant COGS typically includes the direct costs of the food, beverages, ingredients, and other products used to prepare items sold to customers.
How often should restaurants calculate COGS?
Restaurants should calculate COGS regularly, ideally weekly, to spot cost changes, waste, or inventory issues before they significantly impact margins.
