How to Calculate Cost of Goods Sold (COGS) for Restaurants? – A Complete Walkthrough

Cost of Goods Sold (COGS) for Restaurants

“Annual income twenty pounds, annual expenditure nineteen six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery” – Charles Dickens.

Powerful words come from powerful people. We are so engrossed in running after earning money that we often forget to handle our finances. Running behind money without tracking the expenses is like capturing water with a sieve. To fill a barrel of water, you need to save every drop. Likewise, to spike up the revenue of your restaurant, you will have to keep a close watch on your COGS. Let me help you fill your business profit barrel by familiarizing you with the term Cost of Goods Sold (COGS).

What is Cost of Goods Sold (COGS)?

COGS (Cost of Goods Sold) is the total cost required to prepare the food items sold during a specific time frame. Food COGS is not calculated for individual items as it is time-consuming and tiring. The total stock of goods is taken into account while calculating COGS. The main purpose of calculating restaurant COGS is to keep track of the expenses incurred in purchasing the ingredients. By calculating the restaurant COGS percentage, the menu pricing can be determined.  

What is the importance of COGS in the Restaurant Industry?

A single word created a whole new branch of Physics. Can you guess which one?

Its the three lettered interrogative – “Why”.

Though apples have been falling from the tree for more than 10000 years, no one had the curiosity to ask ‘why’ until 1665, when Sir Isaac Newton was hit on the head – both by an apple and an ingenious idea!

Hence, before moving on with the concepts, we will learn the importance of COGS in the restaurant industry.

COGS is the ECG of your business health. It helps in determining the proper functioning of your business pulse. Restaurant COGS percentage can help determine the taxable income and assist in calculating the business profits. Hence in restaurants, the cost of goods sold percentage is vital for analyzing the net income and maintaining stable menu pricing. It indicates the amount you spend on preparing your menu items. The higher the value of COGS, the menu pricing also increases. With uneven pricing, the restaurant might lose customers’ trust that it has built over the years leading to poor sales.

How do we calculate the Restaurant’s Cost of Goods Sold (COGS)?

COGS value largely depends on the size of the restaurant, ingredient pricing, and inventory health. Hence, an effective way of calculating food COGS is by automating the inventory calculation. Once you get to know the inventory reports, you get the restaurant COGS percentage in no time.

The calculation process starts with setting a time frame. Say you calculate the food COGS for a particular month. To derive the COGS value, you need to know the values of

  • Opening Stock – stock count at the beginning
  • Purchased Stock – stock that we purchase to refill the inventory
  • Closing Stock – stock count after the food item is sold

Cost of Goods Sold (COGS) Formula:

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COGS Percentage = (Opening Stock + Purchased Stock – Closing Stock)/ Food Sales

Let us understand the cost of goods sold in restaurants with an example. Imagine you have a tea shop and you are preparing black coffee. You will need 1 teaspoon of instant coffee powder or 10 ml decoction, 1 cup (100ml) of water, and sugar as needed by the customer for making one cup. If you consider a time frame of one month for COGS calculation, you will need nearly 250 grams of coffee powder (Opening Stock). What if you need more than 250 grams? You start purchasing the required items (Purchased Stock).

Now, that you will have an ample quantity of items to proceed with preparation, it is important to track the stock once you complete it. That will give you the value of the closing stock. To avoid the situation of ‘low stock’ in the eleventh hour, it is important to keep a close watch on the inventory. With automated inventory management to track the shelf life of ingredients, the calculation of restaurant COGS becomes a piece of cake.

What is the difference between Food Cost and Food COGS?

Food cost is the ratio of the cost of ingredients to the revenue generated by selling those. Here in the COGS calculation, we don’t consider the revenue. Rather we count the stock at the beginning and end of sales.

The connection is that food cost can be calculated with COGS using the formula,

Cost of Goods Sold (COGS) for Restaurants

What are the different expenses to include while calculating COGS?

Though we have a ready-made formula for calculating COGS, we may miss out to include a few factors while calculating.

  • The shipping cost of inventory items
  • Cost of ingredients transported to another branch (Transfer in and Transfer out)
  • Discounts/offers on items
  • The labor cost of employees directly involved in the production

Average COGS for Restaurants

The value of the COGS percentage depends on the type of restaurant. Big restaurants have a higher COGS percentage when compared to small-scale restaurants. Having a higher COGS value doesn’t mean that the restaurant is making less profit. The advantage of premium restaurants is that they cover up for the higher COGS by charging more for their services. The average COGS for a medium-sized restaurant is around 30% to stabilize the business sales. The size of the restaurant is directly proportional to the COGS.

How do we lower the Cost of Goods Sold (COGS) in Restaurants?

Now that we understood that the restaurant COGS percentage should be lower, let us find out the different ways to reduce it.

What is the first thing that pops up in your mind when we talk about cost-cutting?

Purchasing items at a lower cost.

  1. Buying items at a lower rate is one way to lower the COGS for restaurants. Stick to a vendor who delivers high-quality items at a cheaper rate. How will the vendor agree to supply items at a lower cost? By buying items in bulk.
  2. Purchasing bulk items is a great way to reduce the food COGS. Based on the different seasonal items and needs of your restaurant, buy items and store them in a hygienic area to avoid wastage.
  3. Managing the shelf life of ingredients is mandatory while running a restaurant. Validating the expiry of each item manually is a tiring task. A POS System that contains an efficient Wastage Management feature automates the entire process by notifying you of the shelf life of ingredients.
  4. While buying a POS system, make sure to check if it has accurate Inventory Management to keep track of the stock.

One final tip to reduce your Restaurant COGS, know the seasonal ingredients and stay updated with your menu. Seasonal ingredients are cheaper during their seasons. Hence, buy bulk items and reduce the expenses. Preparing a unique variety of dishes each season attracts more customers, thereby increasing the profit margin of your restaurant and lowering the COGS of food and beverages.

What is the role of a POS System in reducing the COGS in the restaurant industry?

Every restaurateur would have experienced a ‘no-stock’ situation for at least one food item during their service. Why does this happen?

The kitchen would have run out of a certain ingredient that is required to prepare the food item. How will you avoid such situations?

By preparing food items in large quantities? A strong ‘NO’. That would lead to more wastage. So what is the best way to handle both inventory and wastage? Counting the stock regularly?

Manual counting of stock is tiring and is more prone to human errors. An efficient POS Software would fetch you accurate and updated reports on inventory and wastage by categorizing the items into best-selling and slow-moving ones and providing discount options for customers to increase sales. Make sure you choose the right POS that provides you with insights on different types of restaurant reports such as Menu Analysis, Inventory Reports, Ingredient cost and Wastage Reports, and Sales Reports.  

Menu Engineering or Menu Analysis is the process of analyzing the sales and inventory of the restaurant to identify the best-selling items over a period of time, based on their popularity and profitability. This will help in organizing the menu better to increase the sales of slow-moving items. Menu catches the eye while the taste conquers the heart. Hence, both are mandatory for enhancing the profits of the restaurant. With Menu engineering, it is easier to design an attractive menu to attract customers and with a proper Recipe Management System, it is easier to retain the gained customers and capture new ones. Hence, with the right POS in action, it is easier to maintain a lower COGS for restaurants.

Final Thoughts

With the concept of COGS being so vital for the rocketed sales of the restaurant, every restaurateur should calculate their restaurant COGS regularly. Lack of COGS calculation leads to high menu pricing that will eventually lead to a decrease in customers. As a restaurateur, we must know the art of balancing pricing and quality. With so many technological advancements such as receiving updated live notifications straight hot from the restaurant to the palm of your hand, it is much easier to maintain the restaurant cost of goods sold percentage and handle end-to-end restaurant operations without any hassle. With the best POS in hand, you can easily optimize the COGS percentage and fill barrels of profits for your restaurant business.

Cost of Goods Sold (COGS)