Is Your Restaurant's COGS Eating into Your Profits? Here's What to Do

What is COGS? Why is it Important to Restaurants?

Cost of Goods Sold (COGS) is the cost of everything that goes into creating the dishes and drinks you serve, and is the essential recipe for your restaurant’s financial health. From the main ingredients to the often-overlooked spices, garnishes, and even takeout packages should be counted.

Here’s a general lists of your restaurant’s COGS: raw food ingredients, beverages, cooking supplies, packaging materials, and those direct prep costs. The basic formula is: COGS = Beginning Inventory + Purchased Goods - Ending Inventory.

In F&B industry generally, the margins is around 5% pre-tax profit on average. With such thin profit, controlling COGS becomes a key to survival. No matter it's a too big portion that you serve, wastes caused by spoiling food or paying too much on takeaway packages, seeing these numbers from a simple COGS equation can help you gain insights and turn them into a healthier financial bottomline.

How to Calculate Restaurant COGS?

The standard formula of COGS equation is just as simple as Beginning Inventory + Purchases - Ending Inventory = COGS. What you should focus on are the definitions of each part of this equation.

Step 1: Define Your Calculation Period

Consistency is key here. Restaurant Business Online generally recommends monthly calculations for a good overview, but weekly tracking provides a finer level of control. Choose a period that fits your restaurant's rhythm. It's suggested to do a weekly tracking, which will allow you to track immediate data, but the weekly number can jump around. So a monthly or quarterly reviews can help with offering a more stable view of trends. 

Step 2: Calculate Beginning Inventory Value

The hint of calculating the beginning inventory is to include every single ingredient, as the National Restaurant Association suggests. That means proteins, produce, dry goods, spices, oils, and even packaging materials. A another helpful tip is to use the previous period's ending inventory as your starting point.

Step 3: Calculate Total Purchases

Keep track of all food-related purchases. Sysco's financial guidance suggests recording invoice totals from all your suppliers. Don't forget to include all extra purchasing costs like freight, delivery and handling fees, as well as bulk discounts.

Step 4: Calculate Ending Inventory Value

You should also keep track with a complete physical inventory count. Utilize tech platforms like POS systems, ERP, or digital inventory tools. These can track stock levels, automatically calculate values, and reduce human error.

Calculation Example

Here's a practical scenario:

• Beginning inventory: $4,000

• Total purchases: $20,000

• Ending inventory: $3,000

• Total food sales: $60,000

COGS Value: $4,000 + $20,000 - $3,000 = $21,000

COGS Percentage: ($21,000 ÷ $60,000) × 100 = 35%

By the way, a 35% COGS is fairly standard for full-service restaurants. However, ideal percentages vary depending on what you serve and how you serve it, according to the National Restaurant Association. Keeping track of the calculation and COGS of your restaurant helps understand more about your business and and the capability to turn data into actionable strategies.

COGS Impact on Restaurant Profitability

COGS is arguably the most vital financial metric for a restaurant. It has a direct impact on your gross profit margins, and every percentage point counts.

Industry Standard COGS Percentages: It’s Complicated

Read more: Industry COGS Benchmarks: How Does Your Restaurant Compare? (eats365pos.com)

Red Flags of High COGS

Watch for these signs that shows the potentially hazardous COGS rate:

1. Shrinking Profits: High COGS can put a strain on your resources, according to Restaurant Business Online. It can mean delaying staff training, holding off on equipment upgrades, less marketing, and difficulty handling unexpected costs.

2. Pricing Dilemmas: High COGS can trap restaurants in a tough spot: raise prices and risk losing customers, or keep prices steady and lose profits.

3. Operational Compromises: Some restaurants facing high COGS might cut corners on ingredient quality, serve smaller portions, limit menu choices, and reduce investment in their staff.

4. Less Financial Flexibility: The COVID-19 pandemic showed how vulnerable restaurants can be, with 65% taking on new debt. High COGS restricts financial flexibility. This makes paying down debt, building savings, and expanding more difficult.

Strategies to Reduce Restaurant COGS

Lowering your restaurant's COGS involves a multi-pronged strategy focusing on suppliers, waste reduction, and smarter purchasing. Restaurants that systematically reduce COGS can expect a profit margins jump up 3-7% within 12-18 months, proving that proper measurement and realistic goals make all the difference.

COGS Reducing Strategy 1. Smart Negotiation Tactics

Firstly, know your numbers! Know what you buy, how often, and how much it costs, because suppliers respond better to concrete data. Create detailed pricing comparisons for your most frequently ordered items to compare vendors head-to-head. 

Try exploring group purchasing organizations (GPOs). Studies by the Foodservice Purchasing Cooperative show members get 5-20% in savings. Before diving in, research potential vendors, what they offer, their pricing and quality and do benchmark assessments every six months.

However, you may sometimes look beyond prices. Good relationships usually mean better pricing, service, and special deals, which often come from reliable payment and clear communication. Fewer, stronger supplier partnerships can often lead to 15% lower costs than numerous transactional relationships. Futher than focusing on prices, try negotiating from payment terms, delivery schedules, product quality, and even long-term contracts.

COGS Reducing Strategy 2. Cut Food Wastes

While restaurants typically waste 4–10% of what they buy, you don't have to be one of them. Or if you found it difficult to bargain with your supplier, focusing on reducing food waste will be a great alternative for you. Cutting waste by even 1% can save serious cash. It's suggests to conduct regular waste audits and aim for waste below 3% within a year

Consider using trim waste, rethink dishes with high waste, and improve ingredient handling to combat the estimated 85% of unused restaurant food thrown away.  A good approach is a 30-day trial, followed by a 90-day rollout, with increasing waste reduction goals each month.

COGS Reducing Strategy 3. Optimize Inventory 

Manage your inventory strategically. A simple FIFO (First In, First Out) system, combined with proper date labeling, can help prevent spoilage. By simply adapting your inventory control with FIFO system can cut spoilage by 40-60%. You can further set up automated reordering and maintain the right stock levels to avoid both running out of items and having too much on hand. Aim for an inventory turnover rate of 12-15 times per year and spoilage rates below 2%.

Modern restaurant management systems like POS or ERP systems can automate inventory tracking, monitor sales, and process invoices, all of which reduces human error and provides real-time cost analysis. These systems can also highlight unusual activity and alert you when costs go over budget. 

Streamline Operations and Boost Profits with Eats365

Effectively managing COGS is crucial for restaurant profitability. Eats365's POS system integrates seamlessly with inventory management tools, providing real-time data and analytics to optimize purchasing, reduce waste, and ultimately boost your bottom line. Contact us today to learn how Eats365 can help your restaurant thrive.

FAQs about What is COGS in Restaurant Industry

What is COGS in the restaurant industry?

COGS (Cost of Goods Sold) refers to the total direct costs of ingredients, beverages, and supplies used to produce the menu items sold in a restaurant. It includes food, beverages, cooking supplies, and packaging needed to serve customers.

How do restaurants calculate COGS accurately?

Restaurants calculate COGS using the formula: Beginning Inventory + Purchases − Ending Inventory. This accounts for the value of ingredients at the start, purchases made during the period, and leftover inventory at the end, showing the actual cost of goods used.

Why is managing COGS important for restaurant profitability?

Managing COGS effectively helps control expenses, optimize menu pricing, reduce food waste, and improve profit margins. Since food and beverage costs can represent 25-40% of sales depending on the restaurant type, precise COGS management is critical for survival and growth.

How can Eats365 help restaurants control and track COGS?

Eats365 can be seamlessly integrated with third-party inventory applications or ERP systems that automate stock tracking, calculate COGS in real time, and reduce human errors. This enables restaurants to streamline the ordered dishes with their ingredient usage, prevent spoilage, and maintain accurate inventories easily to improve financial insights.

What strategies reduce restaurant COGS and prevent profit loss?

Key strategies include negotiating better supplier prices using data, implementing FIFO inventory rotation to prevent spoilage, minimizing food waste through portion control and waste audits, optimizing purchasing processes, and using technology like a POS system to enhance cost tracking.