Running a restaurant is all about controlling inputs and outputs from your kitchen. It is easy to think of your kitchen as a factory and your food items as widgets being produced by the chefs. Every widget differs based on the items found on your menu.
A turkey club has different ingredients compared to chicken risotto soup, therefore, the inputs are different. Inputs are where food costs come into play. You acquire your ingredients, or inputs, at a certain market price. Once you assemble the ingredients to create the menu item, you must sell it at a higher rate than the entirety of the ingredient's costs. This results in a profitable enterprise. However, there is a science to ensure you are actually profiting off of your menu, which is what we will review today.
1. Understanding Ingredient and Food Cost
The easiest way to get started is by listing all of the ingredients of the dish you are evaluating. This includes sauces, spreads, and even seasoning, spices or oil required for cooking. If an onion costs $1 and can produce 10 slices, then each slice has an ingredient cost of 10 cents. There are two reasons for creating this list. First, it helps establish consistency in your kitchen. Consistency is critical to running a profitable restaurant. Ensuring the same ingredients and portions are utilized in each dish preparation will create profitable results if you have costed those ingredients correctly. The second reason is so that you have a baseline of ingredients to assign costs and markup.
Once you have calculated ingredient costs, you can now add all of the ingredient costs to understand the total food cost for the dish. If you already have a dish priced on your menu, you can take the food cost and divide it by the menu price to understand the percentage of the dish's revenue that goes to your food cost.
Food Cost / Menu Price = % of Revenue Consumed by Food Cost
2. Understanding Overhead Cost
Up until this point we have not discussed the cost of labor, rent, advertising, or other factors that are defined by overhead costs. The goal is to understand what your overhead on a daily basis, as well as the number of customers served daily. This will give you two numbers to better understand the 'Overhead Cost Per Person'. If you spend $1500 per day on overhead and you have 200 guests on average, then you can assume your Overhead Cost Per Person is $7.50.
3. Determining Menu Prices
Now that the Food Cost and Overhead Cost have been calculated, you can estimate a profitable menu price. If your Food Cost is $3.50 and Overhead Cost Per Person is $7.50, then the total cost for serving the dish to one individual is $11, which does not include any profit. From here, you can increase the price to $13 for a $2 profit on the dish, or work backwards to decrease ingredient costs or overhead to lower the overall price of the item and maintain profit.