Hey guys, my name is Wilson. Today we’re going to be talking about how
do you calculate your food cost. Now, first and foremost, why is food cost
so important? There are basically three types of costs that
would determine whether your business goes bankrupt, or whether you would be having a
thriving restaurant business. The three types of expenses are your rental
cost, your labor cost, and your food cost. So these three things adds up to close to
75% to 90% of your revenue, okay? So what that means is that if you can control
one sector and one component of this cost, you’re going to be able to maximize the amount
of profit that you can bring home. Okay? And in the food and beverage world nowadays,
the margins are really thin and enough, we’re talking about 5% to 10%. So what that means is, if you learn how to
calculate, and when you’d learn how to calculate food cost, you’re going to be able to better
control this item. And when you can better control this item,
that means that you can have a bigger pie and bigger profit, that’s in bigger [inaudible
00:01:08], which is the reason why today we’re going to be talking about how are you going
to be able to calculate your food cost. So now that you understand the importance
of why food cost is so important, I also want to bring to you the three benefits of actually
understanding it. Okay? It is because the first benefit is so then
that way you can strategize and engineer a new menu. There are items on your menu that once you
calculate the food cost, you can understand and you would know that does not make sense
because these items, every time you sell one, you’re losing money, because for example,
if the cost of your burger is like $8, but you’re selling it for only $12, then that
means that your cost of goods sold is way too high to sustain this product. That means you’re not making money from this
product. Aside from cost of goods sold, you also need
to account for your labor, your rent and everything. And when your account everything within this
item, it’s not making money, then why are you selling it? Same thing goes with actually creating new
items. To give you an example, whenever we create
ice cream flavors, we’d always look at, we always start up from how much of a budget
can we work towards? How much of a budget do we have to create
this new item? So for example, if we sell our ice cream or
a part of a dessert menu item that is you’re selling for $8, then we know we can’t spend
more than $2 whenever we’re testing this new product, whether it be the toppings, whether
it be the ice cream base, whether it be the presentation itself, everything adding up
cannot be more than $2 because now we understand our food cost. Whereas if you did not understand food cost,
you’d be putting in tons of topping just to make this ice cream stand out, make it look
super amazing, yet the cost is $5. How can you make any money from that? You can’t, which is a reason why understanding
food cost is so, so important. On the same token, the second benefit of truly
understanding your food cost is that you can actually run proper promotions. And what I mean by that is if you’re running
promotion, so many of us are running promotions, but we don’t even know if we’re making money
or not. If you are, every time you sell a product,
every time you sell an item, it’s not making money, then why are you running that promotion? It’s a lose-lose game. Okay? Your clients and your customers are so used
to you running promotions, that they won’t purchase from you, unless you run a promotion. And at the same time, you keep running promotions
that are not generating you any profits, then what’s the point of a lose-lose scenario? On the same token, if you understand food
cost, if you understand, for example, a piece of cookie, it costs you around 25 cents to
50 cents to make, and you retail, and you sell it all to the public for $5. That’s a really healthy margin that you have,
and if you want to use your cookie as a promotional item where you know what? Come and buy a cookie for 50% off, tons of
people will be flooding in. You’re going to charge them 250, yeah, it
takes you 50 cents to make, and you still have a ton of margin to play with. You still are able to benefit from that, and
to be able to profit from that, which is a reason why you can be very strategical when
you’re running these promotions that half-price cookies and when people come in for their
cookie, they’re going to order a cup of milk, which you can charge a full price, and that’s
a very, very smart way of any promotions all because of the fact that we understand cost
of goods sold. Food cost. The third and final benefit I’m going to be
sharing with you today is that you can actually make more profits by understanding the seasonality
of the cost of the goods that you’re buying. So for example, produce, fruits. Whenever we have any summer promotions, we
usually buy our strawberries or mangoes at the peak, at the more supplied at the time
that the produce is being harvested. We buy a ton of it, and then we cut it up,
and then we freeze it, so then that way we have an ample supply of ingredients. Why do we do that? It is because mangoes don’t always come that
cheap. Usually within a month time they become more
and more expensive as the season fades on. But because of the fact that we understand
that. We understand cost of good sold, we’re able
to strategize, buy them in bulk, buy them and store them, and then now throughout the
season, we can actually control the cost and thus bringing us much more profits at the
end of the day. So now that you understand why it’s on point,
some of the benefits, and with more advanced strategies of how to use food cost. We’re going to dive right into how are you
going to be able to calculate your food cost for your restaurant. Before I do that, I’m going to explain to
you a little bit more about food cost. Food cost is basically, usually comes in a
percentage form, okay? And what I mean by that is usually it’s the
cost of making that food item. It’s the direct cost. Okay? What I mean by that is inventory, all the
ingredients that it takes to create that item. We’re talking about, for example, if we’re
talking about ice cream, okay? We’re talking about the cups, we’re talking
about the napkins, we’re talking about the dry ice that we have, we’re talking about
the milk, we’re talking about the powders, the sugar, the topping. These are all the ingredients that goes into
making this item, okay? And on top of that, we need to add in the
direct cost of preparing the ice cream. So what I mean by that is, before we actually
have that ice cream, we need to create a mixed. A mix that we can pour into that ice cream
machine that turns out soft stir. Now, for us to create, for us to have the
labor to create this box of mix, that itself is a direct cost that goes into creating the
item, not just the ingredient cost. So for example, I need to have a labor, I
need to find a staff to pour all the ingredients in this bucket, blend it up, and then pour
into the machine to make the ice cream. For example, if it takes my staff an hour
to create this product, then I would add this hour into our food cost as well. To give you a better example with numbers
to just to simplify. Okay? In an ideal world, the ideal food cost of
how much it takes. 50 cents for the cone. Okay? 50 cents for the milk. 50 cents for making all the toppings. And another 50 cents for the person that creates
that bucket of mix. Okay? And how do we get down 50 cents for the person
that creates that mix? Well, if it takes that person an hour to create
the mix, and if the mix can create let’s say 30 cups of ice cream, then we can just divide
30 with that person’s hourly wage. So for example, if he gets paid $10 an hour,
then we use 10 divided by 30, which comes up to be 30 cents, then we would add that
to the cost of good sold. So for the sake of this example, we said that
that is 50 cents. So if you add everything up, that is $2 for
making that cup of ice cream, that becomes your cost of goods sold. That becomes how much it cost. Now use that number divided by how much you
actually sell the product for. So for example, if we sell the ice cream for
$5 to the public, then we use $2 divided by $5 to get our cost of goods sold. Typically speaking, cost of goods sold should
range from, I would say 15% to 30%. 30% is the maximum that we would want for
cost of good sold. And at the end of the day, the higher the
cost of goods sold, the less profit that we can make, the less profit that we put into
our pockets. So now that you understand, in an ideal world
how much cost of goods sold are for that ice cream. 20% is what we’re talking about. But in reality, we have not taken into two
big concerns. Number one is wastage. And the second one is theft. In an ideal world, this we don’t, we take
out. But in reality, this happens all the time. These two components, food wastage and theft
is always something that’s going to happen. And what I mean by that is, for example, if
we created a batch of ice cream, and that whole batch is $20. If we retail it for $5, how much can we make? In theory, we’re going to be able to make
$100 in revenue. That equates to 20%. But because of the fact that, you know what? When we were cleaning the machine, we ended
up wasting a batch of ice cream. Then in turn, those ice cream that we wasted
cannot be sold as revenue. So what that means is maybe our revenue becomes
$90. On the same token, if I’m the staff, and my
friend comes in and then I am like, “Hey, you know what? Jason, thanks for coming in. I’m going to give you a free cup of ice cream. Here you go.” But we never charged him. That means that for the same amount of ingredient,
which is $20 of ingredient, I did not receive one order, which is $5. So that brings down the revenue in addition
to all the wastage. So you can now imagine in reality that maybe
the revenue that we bring in is only $80 instead of $100. With this calculation, we use $20 divided
by $80 to get the real actual cost of goods sold, which becomes 25% versus in an ideal
world, to a 20% cost of goods sold. The reason why I’m explaining the ideal food
cost and the actual food cost to you is because we need to understand in theory everything
is perfect. However, our job as owners, we need to understand
what is realistic. What is it, and how we can control the cost
of good sold. So now that we understand the two biggest
components, food wastage and theft, we’re going to have to keep a lot of close eyes
to maintain and to take this element and to prevent these things from happening to ensure
that our cost of goods sold isn’t an optimal percentage. Now, how can we do that? Then we can have better processes, for example,
cleaning, better processes of optimizing the food ingredients that we use, better processes
to understand and to prevent people from stealing, and giving away and copying different meals. This all adds up to your profits. So at the end of the day, you need to make
sure and why are we even calculating food cost? The reason why we’re calculating food cost
is for us to be aware of how much we’re actually spending. Now, how do you calculate actual food cost? All you have to do is, in the beginning of
the month, check your inventory. At the end of the month, check your inventory
again. Take the difference, then that’s the amount
of ingredients that you’ve used throughout the month, and you’re going to be able to
use that to benchmark it against the revenue you generate for each food item, and then
you’re going to have a better understanding of the actual food cost. And for you to understand it, now you can
manage it properly, so then that way you can gain more profits into your pockets. So there you go. We just talked about the importance of understanding
your food cost. We just talked about how do you calculate
your ideal food cost versus your actual food cost. As a rule of thumb, we want to be able to
aim for maximum 30% of an actual food cost because anything higher, you’re going to be
left with no margin to play with. So many times where we’re actually looking
at our bank account, we’re like, “Wow, we’re making tons of money on paper, but in our
bank account, money’s not showing up.” It is because of our expenses out beats the
revenue that we bring in. Just because we make $10,000 doesn’t mean
that all goes into our pocket. We need to pay for tons of money for rent,
tons of money for labor, tons of money for cost of good sold. So our job as owners, as restaurateurs is
to control this cost, minimize it, the below 30, so then that way we can have a healthy
margins for us to take home. So I really hope you’ve enjoyed this video. The only thing I really ask for is for you
to smash the like button. That’s the only thing that really helps me
along this whole YouTube journey. If you guys have any questions, leave it in
the comment section below. And if you want to learn more about how do
you understand building a restaurant, how do you engineer a better menu, so then that
way you can profit up ton. How do you have like more than a thousand
loyal fans, so then that way you don’t need to worry about the competitors around the
block, or just understand my journey on building an Ice Cream Empire. Then definitely, check out in the link below. I created this course of something that I’ve
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