Are you COGS aware? Food cost savvy? If you manage or own a food business, you should be. Your COGS—Cost of Goods Sold—is one of the most critical metrics in your arsenal. In fact, that COGS number in your P&L (profit & loss statement) is make-or-break in terms of your long-term success. Ignore it, and you’ll end up like 60% of restaurants in the U.S.: closed within your first year.
So, what is COGS for restaurants, and how do you manage it? Well, buckle up, because a deep dive into food cost is a heck of a journey.
What Is the Cost of Goods Sold in a Restaurant?
Cost of Goods Sold, or COGS, is the raw material costs of your individual menu items—in other words, your food cost. They typically come in the form of a percentage on your P&L (which is why they are also called your COGS%). So, if you sell, say, a grilled sourdough Gruyère sandwich, your COGS is the total cost of all of the ingredients it takes to make one serving of that sandwich. Right down to the side of potato chips and the olive oil you use to caramelize the onions.
And how do you manage your COGS? It starts with your recipes (building them for optimal profits) and then managing what ends up on your plates day-to-day. Seriously.
Tracking your COGS%—in real time—is the only way to ensure that your recipes are built for profit, and that they stay profitable. This is especially important in an era where food costs swing up and down like crazy. And building your recipes for profit is the only way your restaurant is going to succeed.
Why in real time?
Your COGS% is like an altimeter in an airplane panel: it doesn’t help you to know that a mountain lies ahead in the fog after you have already hit the cliffside. And it doesn’t help you to make timely adjustments in your specials lineup, for instance, if you can’t see if those specials make a profit until long after they are over.
I’ve said this many times in many articles, and I’ll say it again here: there is only one way a food business can stay in business, and that’s through selling—profitably selling—food and drink. If the items you put on your menu don’t drive sales or the cost of producing and selling them is more than they earn, guess what’s going to happen? That’s right: Seriously. Big. Problems.
As a long-time restaurant operations and menu management executive, I cannot tell you how many times I’ve found food businesses with unprofitable items lurking on their menu. And it’s usually because they aren’t monitoring their COGS%. At the very minimum you can use COGS% to understand whether your profit margins are being maintained. Used at their best, they can help you keep your profits at the maximum possible level.
And that is the goal, right? Max profit? (If we don’t agree on this point, I’m sorry but we can’t be friends and you should probably stop reading here.)
Still here? Great. Good to have you on the COGS train, friend. Now let’s dive into the full lowdown.
How to Calculate COGS Percentages
Before I show you how to calculate your food cost as a Cost of Goods Sold percentage, let’s round up all of the terms that you’re going to see on a restaurant P&L.
Basic P&L Terms
Gross profit: Your revenue minus your COGS
Prime costs: Your labor costs plus your COGS
Unit-level operating income: Your revenue minus your prime costs
Controllable profit: Your unit-level operating income minus your operating expenses
Net income: Your controllable profit minus your occupancy (expressed as a profit or loss)
If you aren’t familiar with these terms, or with what these expense categories contain (i.e., occupancy = rent, lease amortization, real estate taxes, and common area maintenance fees, which you may know as “CAM charges,” and so on), then I strongly suggest you also have a look at How to Read a Restaurant P&L.
Okay, cool. Now let’s dig into the actual COGS% part. This requires a series of calculations.
Formula 1: Your Monthly COGS
BEGINNING INVENTORY + Purchases – ENDING INVENTORY = COGS
So, this means you take the value of all the ingredients you have in store at the beginning of your tracking period (ideally weekly or at least monthly), add the costs of anything new you purchased, and then subtract the value of all the ingredients you have in store at the end of your tracking period. Your COGS then, basically, is the cost of everything you used up during that period. (Yes, it’s as simple as that: your food cost is the cost of the food you used.)
Here’s an example of how that looks:
January 1: You have $3,000 in ingredient inventory onsite.
During January: You purchase a total of an additional $2,000 worth of ingredients, and you use up $3,000 worth of ingredients.
February 1: You should now be left with $2,000 in inventory.
So:
$3,000 + $2,000 – $3,000 = $2,000
Your January COGS is $2,000.
Some businesses simplify this and only track purchases, to avoid the need for monthly inventories. That can work too, if you’re strapped for resources. So, in our example, you wouldn’t worry about that initial $3,000 in inventory. All that matters is what you purchased:
January COGS (purchases) = $2,000
Formula 2: Unit-level Operating Income
INCOME ($) – COGS ($) – LABOR ($) = Unit-Level Operating Income ($)
This is relatively straightforward. Take all your income (the revenue you took in), and subtract your COGS and the cost of your labor. That gives you a dollar figure.
But we’re not there yet. Now, take those numbers and make them percentages:
Income (%) – COGS (%) – Labor (%) = Unit-level Operating Income (%)
Now, see that COGS percentage? THIS IS THE KEY NUMBER. Yes, all caps and bold!
That’s how important your COGS% it is.
Want to see this in action? Check out the snippet below. You’ll see that the COGS% is 20.5% for this restaurant’s dinner category.
What Is a Good Cost of Goods Sold Percentage?
Right—it’s important to know your COGS%, but how do you know if it’s too high or too low? Well, that’s going to vary from business to business, but let’s set a ballpark of 30%.
So, if you have $10,000 a week in revenue (your sales), and your weekly COGS are $3,000 (that’s your total food costs for the week), then your COGS% is 30%. In other words, not too shabby!
If you can monitor this percentage on a regular basis, you will be able to act quickly if it gets out of line. If one week your COGS% is 30% and the next week it registers at 32%, you need to investigate why your costs just went up 2%. Sure, 2% might sound like a low number, but if your profit margin is, say, 10%, that’s 20% of your profits! Poof! See why it matters so much?
Let me pause here for another aside: If you are feeling unsure about why your COGS % matters to your business’ long term financial sustainability, check out Step 3 in this article. It’s a good refresher on how many expenses your food business has to pay. And here’s a gentle reminder: Where does the money you pay for with all those expenses come from? The profits from what you sell on your menu!
What Is Included in COGS for a Restaurant?
Every restaurant and food business defines what goes into their COGS a wee bit differently, which is totally okay. In general, think about it like this: your Cost of Goods Sold (COGS) is the raw food cost of your menu items. But don’t get hung up on the “food” in food cost: in the broadest possible sense, COGS include everything that goes into a recipe—and that can include the packaging, too (more on that later). It also includes any little side items, like the ketchup packets you throw in the bag or the maple syrup bottle you put on the table when your customers order the pancakes. Every single cost related to serving up a specific menu item (whether that’s food or drink) should be included in your COGS bucket.
What matters most is that you are consistent in what you include in your COGS. Don’t include maple syrup one week and then leave it out the next. Track the exact same things week to week, and the change in numbers will have meaning in terms of your performance. Vary up what you track and that 2% change could be a critical shift in profitability, or it could be that you started tracking your apple weights with the peel on instead of off. (Yes, food scraps can affect your COGS! It’s not just “apples to apples”—it’s either “peeled apples to peeled apples” or “whole apples to whole apples.” Pick one, and stick with it.)
Same goes for your calculation formula. If you only include purchases in your COGS, be consistent month to month. If you include inventory and consumption, be consistent with that. (Month to month, I mean. You do have the right to change systems, if you do it conscientiously.)
Right. Now that you have that in mind, let’s lay out exactly what to consider when determining your COGS. To start driving max profitability, you need to gather the following information:
- Inventory items: Poultry, cheese, vegetables, mustard... all of your raw ingredients, basically.
- Prep recipes: This is the stuff you make that you make other stuff from, and it’s based on your raw inventory items: tuna salad mix, mashed potatoes, house-made salad dressings, and so on. Think of this group as the recipes that are “sub-recipes” to your menu items. These also need to be fully recorded, with accurately captured yields.
- Menu recipes: These are the recipes that use a combination of inventory items and prep recipes, and that are featured on your customer-facing menu: roast chicken dinner, veggie delight pizza, iced cherry lemonade, and so on. This is basically the “whole enchilada” recipe. Sometimes literally.
- Packaging: Some businesses lump packaging into their COGS and some do not. It’s totally up to you and how closely you want to analyze this category. If you do decide to include it, you can include it in your menu recipe category (like if you have a line of retail or grab-n-go products). Or, you can break it out into its own category.
I bet this is starting to feel like a lot. Don’t worry! Coming up in the next few sections you’re going to find lots of handy tools and processes that can help you make sense of it all. (If you’re so eager to get started that you don’t want to wait that long, jump ahead to our downloadable, customizable Mise Mode Master Recipe MGMT tool. Also, I respect the hustle.)
How to Calculate a COGS Percentage
There are a few things you need to consider when calculating your COGS%. To start, there are both menu item-level (i.e., recipe-level) COGS and category-level COGS. Just like you want to know your monthly COGS, you also want to know your category COGS and your individual menu item COGS.
If you want to achieve true COGS management mastery, you have to do some work up front at the recipe level before you can begin to understand their cost impact in at the category level.
Here’s a simple way to look at it. “Sandwiches” is an example of a category. And a grilled mushroom panini would be a good example of a “sandwich” menu item. So, to properly understand your sandwich category COGS (i.e., how your sandwich category is affecting your overall profit), you first have to understand your grilled mushroom panini COGS (i.e., how that specific panini is affecting your sandwich category profit).
Your own COGS categories will look different depending on what kind of food business you are running. For example, a pizzeria may look at all meat and poultry costs grouped together in one category bucket (“meat toppings”) while a steakhouse may give beef its own category so they can analyze those costs more closely.
Remember that information gathering to-do list from the previous section? This is where that first list—your inventory items—comes into play. That’s right: it’s food cost spreadsheet time!
So, as you can see from the snippet of Mise Mode’s downloadable template, this is what a common ingredient inventory list looks like:
The fastest way to collect this information is to grab it from your vendor ordering guides or the receipts from purchases you make directly. Record each item, along with the pack size and price. And if you buy items from a restaurant warehouse, or some other place where you use a credit card? Grab those details too. Anything you purchase to create your menu items should go on this inventory list.
Why Does Having a Master Inventory List Matter When It Comes to Prep Recipes and COGS Management?
Here’s why a master inventory list matters when it comes to managing your food cost: if you build this out correctly, all you have to do to keep it up-to-date is to update the pricing every week. Then—boom—it will automatically populate all of your recipes with real-time food cost information.
Whoa! I know! Do this little bit of upfront work, and you can have real-time recipe costing information at your fingertips. That’s step one of next-level COGS mastery. Now, let’s keep going.
Once you have your master inventory list in one spot, it’s time to build out your prep recipes. Here’s how that looks in our handy Master Recipe MGMT tool:
If you want your prep recipe information to be accurate (and trust me, you do), you must make sure to capture an accurate yield of the entire batch you are making. That way you will know exactly how much it costs to make one batch, and exactly how many servings you can execute with that one batch.
Look closer at the data for our hummus prep recipe example above. You can see that all the ingredients used in that recipe add up to a batch size of 56.5 ounces. So, if you use 4 ounces for every portion in your customer-facing menu item (say, your Mediterranean platter), your hummus cost for that menu item is 34 cents per serving.
If you don’t have an accurate batch yield, you cannot calculate your by-serving food cost. And knowing your serving cost is critical if you want that Mediterranean platter to make a profit! So do not skip this step. Seriously!
Welcome to COGS% Action Time
Okay, so where do you go from here? This is where you pull it all together. It’s time to record all of your customer-facing recipes so that you have an accurate COGS% for each menu item on your menu. Here’s what that looks like in our Master Recipe MGMT tool:
Thanks to all that work you’ve already done, you can create a listing for each menu item, list the ingredients by amount, plug in the sales price, and the Mise Mode Master Recipe MGMT tool will do all the math for you. Now you know your cost margin (aka COGS%) for that specific menu item.
Want to do it the hard way? Here’s the pencil-and-paper formula for determining your COGS% by menu item:
Recipe Cost ÷ Menu Price = COGS %
So, using the above example:
1.68 ÷ 6.00 = 28%
Nice. 28% is a solid COGS%.
But what would happen if your menu price was $4.25 instead of $6.00?
1.68 ÷ 4.25 = 40%
40%! That COGS% is way too high for a fresh food business.
Here’s the good news: now that you can see your COGS% in real time as your ingredient costs change, you can act quickly. Change your sales price, change your recipe (we industry folks call this “re-engineering), or do both. Whatever it takes to lower your COGS% and ensure a healthy profit margin.
Yes, the Profit Margin on Your Recipes Matters!
Maybe you’re thinking that a wonky profit margin on one or two of your recipes isn’t all that big a deal—I mean, we’re all in this for the love of food, right? Well, think again. Ensuring that each and every menu item you sell has at least a semi-decent profit margin matters so dang much! The short reason for this is that the profit on those items is the only thing paying for everything it takes to keep your business afloat, from your dishwasher’s wages to the dish soap itself. For the long answer, read this.
When you understand all that, you can begin to understand how important it is to do the initial work of recording your recipes accurately. That’s how you can start to evaluate your COGS% and menu prices and ensure they deliver the profit margin necessary to ensure that you stay in business.
Why Monitoring COGS for Restaurants Is Crucial
Setting consistent food cost (aka COGS) categories—whatever those look like to you—is an incredible tool for maximizing profitability. If your sandwich category suddenly spikes up in cost, you will be able to see that change in real-time: no more silent bleeding of profits you only discover after it’s too late.
Then, once you have been alerted to that change, you can drill down into why it happened. Maybe you’ll discover that there is a cheddar shortage and you need to stop featuring cheese-based items in your specials rotation until pricing returns to normal. (Or simply change your recipe to use Monterey Jack instead.) And yes, these things happen! Remember that egg crisis from not long ago? Suddenly an omelette was a luxury order.
So many different ingredients will change in cost week to week. That’s why understanding your COGS at the recipe or category level can help you make good decisions—especially when you translate that COGS dollar costs into your COGS%. When an ingredient is scaling cheaper, you can promote those dishes heavily. When an ingredient is scaling higher, you can dial back your promotions, or ditch those recipes altogether, or swap out that ingredient (or that gouge-happy vendor) until the price moves closer to reasonable.
The key to monitoring COGS successfully is to have “real-time” information at hand. Finding out three weeks after the fact that your beef prices doubled doesn’t help anything. Suddenly you’re in a cash flow crunch and you can’t pay the rent. This kind of thing happens all the time and it’s a genuine business killer! For real: If you can’t maintain steady profitability, how can you pay your bills?
What Is a Good COGS Percentage for Restaurants?
I gave you a couple of examples earlier about finding that sweet spot for a given dish. But is there one ideal COGS% for a fresh food restaurant business in 2023?
Well, the truth is that I can’t answer that here. Every single food business is different, and every single menu offering is different. That means your food cost benchmarks will be unique to you.
Okay, okay. I’ll give you a ballpark, but just for a fresh food business. A realistic target range for your COGS% is 26% to 32%.
And yes, it’s 32%, tops. No joke. More than this and you are definitely leaving money on the table. For no reason.
If you read our post on setting up a restaurant profit and loss statement (P&L), you’ll be familiar with some of what’s to follow. Here is an example of a healthy cost breakdown for a fresh food catering business with one location:
Healthy Cost Breakdown for a Fresh Food Catering Business
Revenue: 100%
COGS: 32%
Labor: 29%
Total Prime Costs (COGS & Labor): 61%
Unit-level Operating Income :39%
Controllable Expenses: 18%
Occupancy: 3.9%
Unit-level Net Income (Profit or Loss): 17.1%
Executive Pay: 5%
Total Net Profit / Loss: 12.1%
*Note that Occupancy is usually around 10%, but these folks had incredible timing and basically “lucked out”!
In my experience, the total net profit percentages for a typical restaurant operation range from 2% to 6%, but it can go as high as 18% with more mature, corporate-led operations. I’d consider 12% to be excellent.
Now let’s look at what happens to the bottom line when your COGS are out of line (aka way too expensive).
Unhealthy Cost Breakdown for a Fresh Food Catering Business
Revenue: 100%
COGS: 42%
Labor: 29%
Total Prime Costs (COGS & Labor): 71%
Unit-level Operating Income :29%
Controllable Expenses: 18%
Occupancy: 3.9%
Unit-level Net Income (Profit or Loss): 7.1%
Executive Pay: 5%
Total Net Profit / Loss: 2.1%
*Same note as the one about Occupancy above—typically this is around 10%, just FYI!
See what happened there? Your high ingredient costs just ate your profit margin. If you listen closely, off in the distance, you can hear the sound of restaurant equipment liquidation agents giggling in anticipation.
When we consult with a restaurant and get them using a COGS tracking template like Mise Mode’s Master Recipe MGMT tool, we can see an increase in profitability of up to 5%. If I haven’t made it clear yet, that’s a big gain. Those liquidation agents aren’t giggling anymore.
So, get the tool. Or build your own! All that matters to me is that you start taking your COGS seriously.
9 Ways to Improve Your COGS (aka How to Lower Your Cost of Goods Sold or Food Cost)
If your COGS% is higher than it should be, there are a few improvement tactics you can put into action. We’ll be writing more on all of these in the future, so stay tuned. For now, roll up your sleeves and start digging into these “COGS outliers”:
- Purchases review – Have your ingredient costs gone up? Is it time for a new vendor? Or time to change up your menu items?
- Inventory review – Do you have the right systems in place to ensure you aren’t wasting food (or that food isn’t “walking out the door”?)
- PAR set up & review –PAR means “Periodic Automatic Replacement,” which is a very intimidating way to describe an “oldie but goodie” system for inventory management. Your PAR system can tell your team how much of an ingredient they need to keep on hand to minimize waste and maximize freshness while ensuring you don’t run out. If you set this up correctly, your daily and weekly ordering becomes a breeze. (Plus, it will seriously help you manage your COGS.)
- Recipe review – Do your recipes need re-engineering? (Basically, are the ingredient costs of that menu item too high to make it worth including on your menu?) If so, you can update the recipe, raise the price, or eliminate that item until you can afford to bring it back. (Need help making these kinds of decisions? Check out our Mise Mode guide on How to Design the Perfect Menu System.)
- Staff knowledge and training – This is a big one. If everyone on your team doesn’t know what their role is in helping your business manage its COGS, you are going to have a hard time. Because everyone on your team does play a role in this! Portioning tools, clear recipe cards, and good training materials will all go a long way to minimizing waste and achieving your food cost target.
- Ordering review – Are your ordering lists accurate? Is there any waste you could put a stop to? (Like ingredients purchased from the wrong vendors, at the wrong prices, or for no good reason.) Big corporations have electronic systems in place that automatically block overpriced or unnecessary items from being ordered so that teams don’t make mistakes. Even if your operation is too small for a system like that, you can still pay attention to that cue and make sure your ordering system is as buttoned up as it can be.
- Prep lists – Is your team organized and provided with clear instructions on what to prep every shift? There is a ton of opportunity here to manage your COGS.
- Line checks / portioning audits – Yep, this is the “checks and balances” part of a kitchen operation. If you want to make sure your portioning is being executed correctly now, and next week, and a month from now—remember: new staff comes on board, habits start to slide, things fall apart, the center cannot hold—then you have to check in regularly with rigorous auditing. And I mean regularly! Every service period, every day. You may have a cook on the line who LOVES to give extra chicken on your signature club sandwich, believing that she is winning customer loyalty. But every time that happens, it’s unplanned money going out the door. And worse: when that customer comes in the next week and gets a smaller portion from a different cook, that loyalty goes poof. (It’s true: they won’t see the extra they got before, they’ll only see what’s missing this time. Consistency is critical!)
- Waste logs – If you don’t track your waste, how can you know waste is even happening? Waste logs are a big opportunity in the food world. Tracking waste—basically, knowing exactly how much food you throw away each day—can help you identify huge weaknesses in your system that would otherwise be invisible.
Next-Level COGS MGMT
Okay, want to get serious? Now that you see the big picture, it’s time to get in line for our Mise Mode Theoretical COGS MGMT Tool. We made this tool to help food businesses like yours drill down into your COGS management. But first: do that preliminary work. This tool won’t help you if you don’t have accurately recorded recipes. So, either make your own spreadsheet, or use Mise Mode’s Master Recipe MGMT Tool to get started on recording those recipes.
Stay tuned for more articles that dive deep into all the different tactics you can take to get your COGS% where it should be. If you are interested in other topics related to restaurant financial, menu, and/or general operations management badassery, you can sign up to the Prep List Newsletter and stay “in the know” for new tools and articles as they are released. Our mission is to create accessible, practical easy to use tools so that your business can thrive. If there is a tool or solution you need and don’t see listed, definitely contact us and let us know how we can help!
FAQs
What is Cost of Goods Sold (COGS) in a restaurant?
The Cost of Goods Sold (COGS) in a restaurant refers to the cost of the raw materials (ingredients) that go into your menu items. Some folks refer to this as “food cost.” Some food businesses (typically take-out/grab-n-go type operations) include packaging costs in this calculation, some only include real food costs. COGS and labor are often called Prime Costs because they are so important in determining a food business’s overall profitability. If your COGS are too high, you are highly likely to face cash flow challenges and overall profitability issues. And that in turn will make it hard for you to maintain or grow your business.
So, if you want your business to have long-term viability, focus on building menu items that are profitable! Start by reading this article and learning all about how to master your COGS management.
What is an example of a Cost of Goods Sold (COGS)?
We get this question a lot. Here are practical examples of what Cost of Goods Sold (COGS) is.
First, in order to determine your COGS for a menu item, you have to have two things:
- An estimated sales price.
- A complete recipe costed out with the correct sub-recipes/prep recipes.
Once you have that, the formula for determining your COGS % by menu item is this:
Recipe Cost ÷ Sales Price = Cost Margin (COGS %)
Here is an example of that formula in action:
1.68 (Recipe Cost) ÷ 6.00 (Sales Price) = 28% COGS
28% is a solid COGS%! It means that your profit margin for making this item is 72%: that’s 100 (the total percentage) minus 28 (your costs). That’s awesome.
But what would happen if your sales price was $4.25 instead of $6.00?
1.68 (Recipe Cost) ÷ 4.25 (Sales Price) = 40% COGS
In other words, way too high.
A 40% COGS means your profit margin is only 60%. And that means you have some work to do. Remember, if you read this whole article, you’ll know that, ideally, you want to stay at or below 32% for a fresh food business. The profit from your menu items is the only thing paying for eeeeeveryyyyyy other cost of running your business. So, you need to squeeze out every penny you can!
If you only take away one epic, game-changing tip for managing your COGS? The choice is simple. Manage your COGS “in real time.” That’s it—that’s the tip. If you don’t have a real-time view of your COGS performance, you can’t make real time decisions to ensure maximum profitability.
What do you include in Cost of Goods Sold (COGS)?
Your Cost of Goods Sold (COGS) should only include the raw materials you need to make a given menu item. Whether you include packaging in that is up to you—if most of your products are sold packaged, then maybe you should. If most of your products are plated, then probably not.
The most important thing for effective COGS management is consistency. So if you include packaging now, include it always so that the percentages you are seeing today line up accurately with the ones you are seeing next year. Tracking changes in COGS is the important thing, so you want any changes you see to be real, and not because you’ve changed what you track.
Here’s an example of a complete fresh food menu item recipe costing:
To effectively manage your COGS, all of the menu items you offer should be in one master file with accurate recipes, yields, and costs. If you don’t have a spreadsheet like this, don’t worry! We’ve got you covered: check out our free Mise Mode Master Recipe MGMT tool!
Want to go further into menu development excellence? We’ve got you covered there too. Check out our Mise Mode Guide for How to Design the Perfect Menu System and download all the free templates. COGS mastery awaits!
