Anyone who has found success in the food industry will tell you to keep a close eye on your food cost percentage. This important metric tells you how much you’ve been spending on the ingredients for your products, which is often a major part of a food business’ budget. And if you’re after maximizing profits while minimizing costs (and why wouldn’t you be?), meticulously monitoring anything your business spends money on should be one of your top priorities.
With so many financial decisions to keep track of, though, what is it about food cost percentage that makes it so important? In other words, what ways can these calculations benefit your business? Let’s explore these questions further below.
It Allows You to Compare Your Spending to Similar Businesses
If you’re new to the food industry and unsure of what your spending should look like, then you can definitely benefit from calculating your food cost percentage. By comparing it to the averages in your particular field, you can determine if you’re within the normal spending range or if you need to make some adjustments to stay competitive.
For example, among quick-service and full-service restaurants, the food cost percentage is usually around 28 – 32%. If you’re in that industry and your food cost percentage is anywhere around that range, then you’re probably on the right track. However, if you find it’s significantly off, you may want to reconsider some of your ingredients.
You’ll Have a Better Understanding of How Supply Chains Impact Costs and Profitability
Supply chain disruptions seem to be more of an issue lately than ever before, and it’s important to understand how this impacts both the costs and profitability of your food business. For example, there was a great vanilla shortage back in 2018, which made the price of this baking essential soar. Bakeries and other food manufacturers who rely on this ingredient were hit hard by this shortage and subsequent price increase. However, those who were able to catch it in time by calculating their food cost percentage and making appropriate adjustments likely had less issues managing their overall profitability than others.
It Lets You Make Better Spending Decisions
By taking the time to calculate the cost of each and every ingredient in your food products, you’ll have a better idea of how strict you need to be with your budget. For example, do you have enough room in there to upgrade to higher-quality ingredients? Or is it so tight that you should consider cutting back? Since margins can be so tight in the food industry you need to be careful, and your food cost percentages can certainly help you understand and make the most of your budget.
You Can Identify Items that Are No Longer Profitable
If your business offers a wide array of food products, then there’s a good chance that some are making you more money than others. By calculating your food cost percentages, you can identify the less profitable items and update, retire, or re-price them accordingly. Your loyal customers may not be thrilled with the changes at first, but your business will almost certainly be better off in the long run.
Need some help managing your food cost percentage? Contact the greater goods today to see how we can help!