Unlock Higher Restaurant Profits in 30 Days by Tweaking How Your Restaurant Reports COGS (Cost of Goods Sold)

If you're like most restauranteurs who are using traditional bookkeeping software like Quickbooks or ERP software like NetSuite, then the odds are that you're still accounting for your cost of goods sold (COGS) in one of two ways. Either you're considering your purchases as your COGS with no beginning or ending inventory value, or you're using the traditional method:

Starting Inventory + Purchases - Ending Inventory = COGS

The problem with this method is that it can only tell you what your cost is, but not what it should be which is like having a map but being unsure of where you want to go. In situations like this, many restaurant operators will use a Google search in hopes of at least getting a generic industry cost. They'll then use that number as a basis to compare against their actual cost. For example, if you search Google using the phrase "what is a restaurant's average food cost," Google will return an aswer of 28% to 35%. For many owners, if their COGS fall within this range, they would consider their COGS percentage to be good enough.

Why Aren't Restaurant Owners More Focused on COGS?

Even though food costs are rising, most restaurants have been able to set prices high enough to stay ahead of rising cost. And despite rising menu prices consumers are still dining out, paying the higher cost but maybe cutting back on the number of times they dine out. In other cases, many restaurants have opted to offset rising food and labor costs by adding alcohol to their menus.

On an older episode of Restaurant Startup (2014 to 2016), one of the consultants demonstrated the importance of adding alcohol to the menu by highlighting an 8% average COGS on bar sales. Even though that episode was filmed about 10 years ago, alcohol continues to be the offsetting menu item that helps gross margins soar.

When we review the profit margin for restaurants, traditional statistics place the average restaurant profit margin between 6% and 9%. However, more restaurants are now achieving net profit margins exceeding 10% and many are hovering around 15% and higher.

The Cost of Ignoring Food Cost Variance

By using the traditional method their is a margin of error as high as 7% which equates to $7K per month or $84K in annual potential losses for every $100K in monthly revenue.

Tweaking Your Restaurant COGS Reporting will Require an Investment but the ROI could be more than 20X

Let me start by saying that this project won't be easy, but it can definitely be worth it. Yes you can manage this project with a spreadsheet however, we recommend exploring technology that automates many of the required tasks. Our recommendations include software programs like XtraChef, Restaurant365 and CooksTime.

• XtraChef: May require a plugin with your current accounting software.

• Restaurant365 and CooksTime: Both are all-in-one accounting programs that connect to your POS, automate processes and includes complete restaurant inventory software features (CooksTime is our favorite).

How to Calculate Your Restaurants True COGS

This project begins with calculating your true COGS by recording the cost of every ingredient sold and calculating the variance, which accounts for waste, spills, or lost inventory.

For example:

• If you're selling a hamburger for $10 with an ingredient cost of $3, imagine a system that records this cost in your financials every time that burger is sold. This would give you a TRUE COGS value.

  
  

Now that we have our TRUE COGS value, let’s figure out how much inventory was lost or wasted. To do this we’ll count our inventory as normal. The count will be a true up between our theoretical on-hand and actual on-hand values. For simplicity sake, let's just say that we're comparing the traditional method of calculating COGS to our TRUE COGS value method. Here's an example:

• Let’s say that our system generated a True COGS value of $1,000 but your traditional COGS calculation generates a COGS value of $1,200, the additional $200 is coded to Cost Variance which is the value of your lost inventory. This is because the $1200 we calculated after our physical count is the value of inventory that is no longer in-house so it’s assumed to be sold. In reality you only sold $1000 which means there’s $200 unaccounted for.

Tracking Your Restaurants Cost Variance

To keep track of your waste, spills or cost variance, you'll need to create a line item within your chart of accounts as a sub-account to each COGS account. This new account will track your waste and missing inventory. For example:

• Food Cost → Subaccount: Food Cost Variance

• Liquor Cost → Subaccount: Liquor Cost Variance

• Wine Cost → Subaccount: Wine Cost Variance

• Beer Cost → Subaccount: Beer Cost Variance

A revised P&L would look similar to the below table.

Example:

Traditional COGS Reporting vs Modern COGS Reporting

How Can This Strategy Boost Your Restaurant Profits

1. Identify the Problem: You can't fix a problem if you don't know it exists.

2. Highlight the Problem: By showing the issue on your financials, everyone becomes aware, and steps can be taken to address it.

3. Fix the Problem: This forces managers to address key factors, resolve the problem and stay consistent with ensuring recipes are correct and up-to-date. If recipes are incorrect or outdated, your menu prices could also be off.

   
   

In Conclusion

In conclusion, understanding your true cost of goods sold (COGS), closely monitoring cost variance, and leveraging advanced accounting tools are crucial steps towards optimizing restaurant operations and ultimately increasing profitability.

Embrace the power of accurate data analysis and strategic decision-making to take your restaurant business to new heights.