The average cost of goods sold in the restaurant industry varies, but it sits around 30% to 35%. This is because CoGS are measured by inventory count rather than individual dishes or drinks. The more dishes served, for example, steak versus salad with no meat and side order fries instead of a baked potato means that everything gets averaged together into one figure - this makes calculating costs much easier!
CoGS is how much it costs you to produce a menu item. The cost of goods sold is also referred to as the “cost of sales.” One of the key components in the restaurant business is to control its cost of goods sold (CoGS). CoGS is especially important because it is related to your restaurant's profit margin for any period, revenue, and inventory management. Restaurants that do not control their CoGS and monitor it regularly may put the business at financial risk.
Cost of goods sold (CoGS) includes all the costs and expenses related to the making of the menu item. CoGS exclude and do not include indirect costs such as overhead like rent, signage, maintenance, and marketing cost. Some of the items included in (CoGS) cost of goods sold are:
Cost of goods sold (CoGS) ties directly into your menu engineering efforts, profit margin, revenue, and inventory. Without a strong understanding of the cost of goods sold, you might find it hard to get a clear view of your business's true performance and business decisions, and ensuring things are within ideal range or healthy range.
To ensure a profitable business, the Food Service Warehouse recommends your restaurant's cost of goods sold (CoGS) should not be more than 31% of your sales. This is the rule of thumb as regards CoGS and a way to ensure you run a successful restaurant. While fine dining restaurant CoGS may be a bit higher due to more expensive food costs, pizza shops should aim for the low to mid 20% range, having lower operating costs.
The cost of goods sold is calculated as follows:
Beginning Inventory + Purchased Inventory – Ending Inventory = Cost of Goods Sold (CoGS)
Assuming you want to get a better idea of your inventory from last month. You had $3,000 of leftover inventory at the start of the month, including food, drinks, beverage items, spices, and fresh ingredients, and other materials — anything and everything it takes to get a meal on a plate and a drink in a glass.
Throughout the month, you ordered $8,000 of additional inventory and ended the month with $2,000 worth of inventory.
Cost of Goods Sold = $3,000 + $8,000 – $2,000 = $9,000
In this example, your restaurant's cost of goods sold — or the amount of money spent on food and drink served in your establishment during the month — reaches a total of $9,000.
CoGS ratio, also known as CoGS to Sales Ratio, refers to the ratio of your cost of goods sold compared to the money generated through sales in a certain period. The lower the ratio the better, as it means you'll have spent less money to make more.
In restaurants, a lower CoGS number typically means a higher average profit margin. It is important to remember that a lower CoGS is not always a good thing. For example, if you did not have any CoGS, it means you did not sell anything. To be able to stay consistent with sales numbers while being able to purchase food and inventory with a smaller amount of the profit made is what you hope to achieve. The big question is how to go about implementing this without compromising the quality of your menu items. Remember that raising menu prices has no direct effect on your CoGS. Menu pricing and menu items are independent of how much you pay your suppliers for them.
Some of the ways the cost of goods sold can be reduced include:
The option to lower your CoGS is considered a last resort in most circles. If you have ever experienced a restaurant's quality decline, but the price point was the same, you would notice. And your customers would, too. That is why purchasing products at a lower price point to bring down CoGS is not the best idea.
One way to purchase cheaper products without settling for lower-grade items is to price shop. Talk to different food suppliers to see who has the best overall prices that are a good fit for your restaurant.
For instance, one supplier may have better deals on steak than chicken, but if you sell drastically more chicken than steak, the price difference may mean you are better off going with another supplier who charges more for steak because you will retain more profit from your more popular menu items that feature chicken.
Also, do not be afraid to reach out to your supplier and re-negotiate any standing deals. If you are struggling to maintain a reasonable CoGS, chances are your supplier would rather lose a bit of money than all your business.
To promote sales of your specials and stock items, you should consider using creative menu design to reduce food waste. Make some price changes so that you can anticipate the seasons and avoid making unnecessary inventory that gets lost in the inventory piles.
In general, meticulous inventory management is the best method for decreasing the cost of goods sold. By implementing measures for separating and categorizing food waste, maintaining detailed inventory logs, and applying food waste procedures, you can ensure the quality of your food stays high, save money, and keep your kitchen running smoothly.
Your CoGS can exist independent of your sales. This usually happens because of poor inventory management. If your restaurant does not have clear back-of-house guidelines or procedures in place, you could be losing money every shift due to inventory spillage. Improper portioning, over-ordering, waste, and theft can take a substantial chunk out of your restaurant's CoGS without adding a penny to your bottom line.
Make sure you have a reliable restaurant inventory management system in place to closely monitor the ins and outs of your restaurant inventory. If you are not too careful, your CoGS number will be much lower than it needs to be, and your wallet will be emptier than you will want it to be.
Some restaurants bulk-buy certain supplies to benefit from supplier discounts. Buying in bulk can help you lower your CoGS if you are purchasing inventory that turns over often or has a long shelf life.
For example: If you can buy eight ounces of chicken at a cost of 50 cents per pound less, but only need to purchase it for your dishes at eight ounces per entrée, you can avoid spending 25 cents per entrée by having a bulk supplier.
One question is whether to get something in bulk. Freshness is one element to consider; it might suffer if left in the freezer too long. In addition, you need to know how much storage space you have for big items in your storage areas. Your kitchen staff will be making their way through obstacles such as the boxes that are hindering them.
The average profit margin for restaurants is between 2% and 6%
The items that make up costs of goods sold include the Cost of items intended for resale.
Your expenses include the money you spend running your business. The difference between these two lines is that the cost of goods sold includes only the costs associated with the manufacturing of your sold products for the year while your expenses line includes all your other costs of running the business.
A business strives for a low CoGS ratio, meaning the costs of producing a product are low compared to the sales generated. Conversely, a company will prefer a high gross markup, meaning it can sell the product at price well above the cost of producing.
A good online retailer’s profit margin is around 45%, while other industries, such as general retail and automotive, hover between 20% and 25%.
When adding a CoGS journal entry, you will debit your CoGS Expense account and credit your Purchases and Inventory accounts. Purchases are decreased by credits and inventory is increased by credits.
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