Originally published on The World Financial Review

In all likelihood, your restaurant’s food costs make up a significant portion of your budget. Tracking your food costs is essential if you want to improve profitability, but that tracking means nothing if your calculations aren’t accurate. Here is Paul Bulau’s recommended strategy for calculating your food costs accurately every time.

Start by Determining Ingredient Costs

Before you start calculating, you need to know exactly how much every ingredient costs. You can find this out by consulting all of your food purchases and invoices. Accuracy is key here — if you start with inaccurate values, all of your future calculations will be inaccurate, too.

Next, Calculate the Food Cost Percentage

Food cost percentage is a calculation that lets you assess each menu item’s profitability. This process has a few steps:

For each recipe, multiply each ingredient’s cost per unit by quantity — that gives you the total cost of each ingredient in a dish

To get the total cost for a dish, add up its ingredient costs

To get the food cost percentage, divide the cost to make each dish by its selling price and then multiply by 100

For example, say you make a shrimp scampi that costs you $7 to make and sells for $20. You would divide $7 by $20 to get 0.35 and then multiply 0.35 by 100 to convert the answer into a percentage. That gives you 35%. Most experts recommend that restaurants shoot for food cost percentages of 28% to 35% per item.

Keep an Eye on Your Profit Margin

Regularly checking your restaurant’s gross profit margin is essential for financial health. You want to aim for a gross profit margin of 70%.

To get your gross profit margin, you subtract food costs from total sales and then divide it by total sales. For example, if your food costs are $100,000 and your total sales are $700,000, the calculation looks like this:

Gross profit margin = ($700,000 – $100,000)/$700,000

That would give you a gross profit margin of 0.86, or 86%.

Track Variations in Food Costs

The cost of food isn’t stagnant. So, to stay on top of your restaurant’s finances, you’ll need to keep an eye on shifting costs. For instance, if a key ingredient suddenly becomes incredibly expensive, you may need to assess which food items are most profitable and adjust your menu accordingly.

Accurate Food Costs: The Key to Sustainability

You want your restaurant to remain in business and weather economic downturns with ease. When you know your exact food costs, you’ll have a complete picture of your finances. With that data, you can make changes as needed to support better profit and sustainability.

About Paul Bulau

Paul Bulau is a culinary entrepreneur, business founder, and company owner/operator known for operational success, collaboration, and team development.

After earning a degree in Culinary Arts and Restaurant Management from the Scottsdale Culinary Institute, Paul launched, grew, and sold his first business. For the past 25 years, Paul has served in several management roles with a premier, on-site restaurant company.