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How to calculate true food cost profit margins

“We lose money on each transaction, but we make it up in volume.” It’s an old joke, but when it comes to restaurant food cost, this adage reminds us that knowing the profit margin of each menu item is critically important to overall profitability. 

But keeping menu-mix information current can be a challenge, especially in a multi-unit, multi-region restaurant chains with shifting costs, menu items, selling prices, and frequent LTOs. Here’s how you can tackle food costs:

True food cost gross profit margin

You probably already know how to calculate a profit margin:

  • (Selling price - cost of goods) / selling price = gross profit
  • For example: an item that sells for $10, and that costs $3, would generate gross profits of $7 (selling price - cost of goods) and a gross profit margin of 70% ($7 / $10).

Problems arise when typical variables for a restaurant chain are introduced, such as:

  • Each location has multiple recipes
  • Each recipe has multiple ingredients
  • Ingredient costs may vary by region
  • Selling prices may vary by region
  • Ingredient costs change over time
  • Selling prices change over time

Because there’s an enormous amount of data to track, and because small changes in pricing or ingredients can have a huge effect on restaurant food costs, calculating gross profit can be a very difficult exercise without the right tools.

Help from the restaurant back office

Software-based recipe and menu engineering tools in restaurant back office systems make it easier to keep track of profit margins and, just as importantly, model the effects of changes in selling price, costs, and ingredients.

By drawing on a database of your menu item’s current ingredients and their individual costs (by region, if applicable), these food-cost tools allow operators to:

  1. Specify a desired cost of goods (e.g. 24%) for a given recipe; the tool will then calculate the selling price necessary to achieve that goal
  2. Specify a desired selling price for a recipe; the tool will then calculate the cost of goods and profit margin
  3. Change ingredient amounts, or substitute one ingredient for another; the tool will then calculate a new cost of goods and profit margin

Predict profitability

The ability to model potential changes to recipes gives the user the power to predict profitability. For multi-regional chains, the benefit multiplier is greater, as geographic ingredient cost differences and selling prices are automatically accounted for, delivering super-accurate results at the corporate level.

For restaurant chains with international operations, a back office tool that accommodates multiple currencies eliminates one more opportunity for errors.

Recipe and menu engineering includes many other variables beyond profit margins, from product mix to the physical design of the menu. But the ability to keep tabs on profit margins—and better yet, to predict them, is the basic building block of profitability.

Reach out to CrunchTime to learn more about how enterprise restaurant systems can improve your profitability.

This post is sponsored by CrunchTime! Information Systems

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