Do you know your Actual Food Cost? or are you guessing?
“The formula for Actual Food Cost is :
(Beginning Inventory + New Inventory Purchased) – Ending Inventory = Actual Cost of Goods Sold
Food Cost % = (Actual Cost of Goods Sold /Total Food Sales Revenue) x 100″
Food cost + Labor cost are called Prime Cost. It’s recommended that most Restaurants should not be above 55% (of Revenue ) for Prime cost.
Know your Food Cost, Price your products right for sales, these usually results in healthy Profit Margins
Podcast Key Note
In today’s topic, I will be talking about food pricing and costing. What I have learnt as I have been growing my own business is that most businesses do not cost their products right especially when they are just starting up. They do not price food properly.
Now I think the default calculation is, if I buy food for N4 and sell for N7 I have made N3 profit there is so much costs that has not been factored in and not just that but you have not planned for a better future of the business.
Example, if food cost is N4, I have to sell the products for N12 just to start off with. If I can push it to 14-15, it’s a lot better for me. if I bought it at N4 and sell N12, I’m not making
N8 profit. My profit might be N2 at the end of the day. I see why business owners, startup a business and 6 months on, cash flow becomes a problem because they are not banking as much as they are spending; and why are they spending cash?, because they have not factored the true cost of all the items they are selling. Now your customers don’t care about how low your prices are, they want to buy your product at the best value price for them. So, if I sold my burgers for N1k, they will be happy… but then, if I did that, would I be able to pay bills in 6 months? Pay rent in 1yr? Hire good staff and be able to pay staff benefits? If my answer is no, then my pricing is wrong.
Cost focus is key and if your food price is right, you are certain to make good margins. So generally in the industry, they say your food cost should be 30% of selling price, if you are selling an item for
N100 it should cost you about N30 to buy. It’s usually 30% for food cost, 25% for labor cost or less. The 2 – food cost and labor cost are called Prime Cost. So it’s recommended that most businesses should not do more than 55% in prime cost.
Now, if you are running like high brow restaurant and food cost is very expensive, and then you could do more than that but usually doesn’t help your numbers. Then rent usually should be
N10 (10%) and in Nigeria’s case, there is taxes – LIRS/ FIRS which is 5%+5% = 10% ( N10) again. So you have 30, 25, 10, 10 and your overhead – gen/ equipment maintenance, utilities; things like that will cost another 10%. So if you think about it now, you have a product sold for N100 minus 30, 25, 10, 10, and 10 which is N85 so it means that you have the option to make only N15 (15%) profit off the item and things are always going to happen that will reduce the profit. So again do your numbers.
N100 selling price, N85 is already gone – now this is a critical thing that people are not looking at and there are other expenses we can add in as well – some people might be paying back loans and that have to go out of the N15 left. So you have to know your numbers and you have to price things very well.
Knowing your pricing and doing your costing very well gives you opportunities to make healthy margins and to make sure that whatever growth you are planning for your business, can be actualized. For people who are in business and still doing their 9-5 job, this gives you that opportunity to break away from that job and to grow your passion (business).
In summary, let’s stop thinking that if you buy food for
N30 and you sell for N80, that you are making profit. You may not be making profit!
Thank you for reading, kindly listen to the podcast for more…
Key takeaway Points:
- Manage your Food cost, Labor cost, and other expenses
- Focus on food costing, if your Selling Price is right, you are certain to make Good Margins
- Generally in the industry, food cost should be 30% , if you are selling an item for N100 it should cost you about 30 or less to buy and produce
- Food cost (30%) plus labor cost (25%) are called Prime Cost. it’s recommended that most Restaurant businesses should not be more than 55% in Prime Cost
- Packaging is fantastic and it can help build your brand but at the end of the day the packaging goes into the waste bin
- Know your numbers and cost your food products very well.