🥕 What's COGS?
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. For restaurants, this typically includes food ingredients, paper products, and supplies. Calculating COGs basically comes down to calculating the cost of ingredients or restaurant inventory within a certain time period.
Typically, restaurant COGS is not measured for each individual dish or drink sold since this would be both difficult and time-consuming. Instead, total purchases can be used to calculate COGS. Because COGS increases with sales (the more hamburgers you sell, the more money you spend on beef), it is typically measured as a % of sales:
COGS % = COGS $ / Revenue $
The average cost of goods sold in the restaurant industry varies, but the cost of goods sold percentage is typically between 28% and 32% of revenue.
🔑 Why is it important to track COGS?
COGS is an important metric for your restaurant's financial health because it is subtracted from your total revenues to determine your gross profit.
💸 How does budgeting for COGS work?
To budget for COGS you first want to choose a COGS % target. This should be based on historic data so you know it is a reasonable goal, but also should take into account your profitability goals.
By setting a COGS % target, you can monitor your actual COGS and identify opportunities to improve your profitability.
⬆️ What if your COGS are too high?
If you are exceeding your COGS target, you should consider taking one or more of the following actions:
♻️ Consider waste, if this is an issue you will want to invest in inventory controls
🥕 Negotiate with ingredient vendors
🍴 Review your recipe builds and portion sizes
💸 Reevaluate your menu prices
⬇️ What if your COGS are too low?
If your COGS % is lower than target, you may be overpriced or running out of stock of key items. Evaluate your target as well as your demand indicators (customer feedback, sales volume, etc) to consider any changes you need to make.