What’s Cost of Goods Sold Really Saying About Your Restaurant?
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Cost of Goods Sold (COGS) is a crucial metric to track for your restaurant operation. It helps you calculate plate costs, manage menu profitability, and control prime costs (one of the largest restaurant costs.)
COGS restaurant metrics are a great first line of defense against rising food costs—but it should be just that, a FIRST line of defense.
You need to go beyond COGS measures and gain individual menu items insights to truly optimize costs and sustain long-term profitability. Maybe you know this but have chosen not to go down the path because it’s too time-consuming. We’re here to tell you that it doesn’t have to be.
Keep reading to look at COGS in more detail, figure out what it says about your business, and see how to go beyond COGS and achieve ingredient-level cost insights.
What is Cost of Goods Sold for restaurants & how can you calculate it?
COGS is the cost of ingredients used by a restaurant over a certain period to create the menu items being sold—factoring in waste, theft, shrinkage, and more.
To see where you stand, use this COGS formula:
What does COGS say about your restaurant?
COGS tells you how much you are spending to make what you’re selling across your restaurant operation—individual locations, shared concepts, or an entire portfolio.
The COGS/Sales ratio quantifies your spend relative to revenue. A lower ratio is preferred as it suggests you’re spending less to make more money. It’s generally a sign of good financial health.
COGS typically varies between restaurants depending on factors like size and concept.
Consider a fine dining restaurant vs. a fast food one. Fine dining generally has higher COGS because they use better quality, more expensive ingredients. This higher COGS isn’t necessarily alarming because they then charge a premium to more than cover these costs.
That being said, a good average COGS number to aim for is usually around 31%.
You can track your COGS and COGS ratio over time to identify trends and determine if you’re in control of your costs.
For example, if COGS consistently rise for three months while turnover remains constant, you may have a problem. Maybe suppliers have increased their prices, and you haven’t adjusted yours. Perhaps food waste in the kitchen is higher than usual due to several new hires.
COGS is most definitely a critical restaurant accounting KPI, but it needs to be a starting off point and not your only metric — much like restaurant inventory turnover ratios, restaurants need more precise insights to accompany COGS measures.
How to go beyond COGS for more in depth insights
The first step in going beyond COGS is diving into more granular numbers to monitor individual ingredient cost fluctuations.
For example, you can monitor chicken thigh prices over time to see supplier price increases. Product price increases do roll up to impact your overall COGS, but they’re also directly impacting the profitability of each menu item that product is in.
Consistent plate cost management is another great way to zoom in on COGS and see the direct impact of price fluctuations.
With this information, you can decide to increase menu prices, shop around for cheaper vendors, remove menu items entirely, or pivot to less expensive product alternatives.
Achieving this sort of granularity is difficult and time-consuming without the right tools, which is why many restaurants never take the time to drill down. Luckily, this is exactly what xtraCHEF is built for…
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Tracking COGS, plate costs, & more begins with invoice details
You need to accurately track product price fluctuations and monitor the insights that come from them — that starts with ingesting item-level details from your invoices.
AP automation and digital invoices processing provide restaurant operators with an absolute truth of sorts. Many operators never take full advantage of this truth because they still rely on manual data entry to record invoice data, whether through QuickBooks accounts or ongoing spreadsheets.
This is an unsustainable process due to time constraints, human error, and the burden of managing, storing, and even paying for postage and shipping paper invoices.
xtraCHEF helps you easily ingest invoices — automatically pulling and routing general ledger data to your accounting system and line-item details to your xtraCHEF account for further analysis. And after scanning, your paper invoices are irrelevant. Everything is in our system.
Our invoice automation and price-tracking features helped Choice Market, a new kind of convenience store, gain control of their COGS and achieve profit targets.
“For us, xtraCHEF is an essential tool to help us keep on track toward our goals,” explains Mike Fogarty, Founder and CEO of Choice Markets. “As our product mix and the prices of those products constantly change, xtraCHEF’s powerful price tracking feature and reports allow us to recognize how those changes impact our profitability.”
The bottom line on tracking COGS
Achieving an accurate COGS measure is a goal within itself, but it’s just the beginning of folding more actionable insights into your business decision making.
xtraCHEF starts with invoices, unlocks COGS, and then enables you to drill down into ingredient-level insights.
Schedule a demo to see how xtraCHEF can help you take control of your COGS to make more profits with less effort.