How to Cost a Menu to help profitability
Food costing analysis
In 2023 and the post covid world where pressure has never been higher for the hospitality industry managing food costs is an absolute necessity to avoid surprises in the profitability of a business. No matter the size of a food service operation, there must be robust and ongoing food costing analysis carried out or else profits can be easily wiped out. There are many tools to help in costing a menu that vary incredibly in price and the amount of upkeep required. At Harris Restaurant Consultants we train owners and chefs on how to manage the food GP and this can be done on dedicated software on a spreadsheet or as easily on a piece of paper.
Business profit & loss account
In understanding the food cost of a business, it is important to realise that the food cost is only a small part of a bigger calculation which is called the profit & loss account. Every business should have this financial document and it very basically takes your revenue received from paying guests, subtracts all the costs in the business so that there is either a profit or loss figure at the end.
The food cost makes up a very important part of the profit & loss account and it is vital to consider the food costs along with all the other costs in the business. As a chef producing a food cost, the main concern is with the direct costs (food and raw materials). Indirect costs (wages, gas, electric, rent, maintenance etc.) are areas for consideration as dishes that have a lengthy cooking process or require many hours of preparation by a chef may impact other costs of the business. For the purposes of this article we focus on the food costs.
How to calculate cost per serving
The examples below account for the fact that all items on the menu are priced inclusive of VAT at 20%. The simple example below should be used to cost all the dishes on a menu. For this example, we will cost the production of fish and chips.
The costs per serving are as follows:
So, this dish costs £3.01 in raw materials to produce. Due to local competition, it is felt that the restaurant cannot charge anymore than £9.95 for the fish and chips. To calculate the GP% you have to do the following calculations:
- Remove the VAT. This is done by dividing £9.95 (selling price) by 1.2. (1.2 is 20% as a fraction added to the whole number 1). The selling price exclusive of VAT is therefore – £8.29.
- Deduct the food cost from the exclusive VAT selling price and this will give you the profit in the dish. Therefore, £8.29 – £3.01 = £5.28.
- Finally to calculate the GP% divide the profit by the selling price (ex VAT) of the dish. Therefore £5.28 / £8.29 = 0.64 x 100 = 64%.
The manager or owner of the business might be happy with this GP or they might be keen to make it higher. Increasing the GP can be done in three main ways:
- Decrease the portion size.
- Source cheaper products.
- Charge more for the dish.
In a later article I will discuss the question of targeting high GP% or a high cash margin with a low GP.
For help on calculating the profitability of your menu or any questions on how to cost a menu, please get in touch with the team at Harris Restaurant Consultants.