Understanding and Managing COGS for Restaurants: A Complete Guide for Restaurateurs

As a restaurateur, one of the most critical financial metrics to track is your Cost of Goods Sold (COGS). Effective management of COGS is essential to the success of your restaurant—if not properly controlled, COGS can silently erode your profits, even if your sales are strong.

What Is COGS and Why Does It Matter?

COGS, or Cost of Goods Sold, refers to the total expenses involved in producing the food and beverages you sell. This includes the cost of ingredients, supplies, and packaging. Managing COGS effectively is crucial because it directly affects your profitability. By keeping COGS under control, you ensure you’re pricing items correctly, maintaining quality standards, and maximizing your margins.

If your COGS is too high, it means that a larger portion of your revenue is going toward purchasing raw materials and supplies, leaving less for profit. Conversely, if your COGS is too low, it may indicate that you’re cutting corners in ways that could hurt the quality of your dishes, which can lead to dissatisfied customers.

Balancing this number and managing it effectively ensures that you’re pricing your menu correctly, maintaining quality standards, and improving your restaurant’s overall profitability.

Calculating Your Restaurant’s COGS

To calculate your COGS, use the following simple formula:

Starting Inventory + Purchases – Ending Inventory = COGS

Here’s an example:

1. Starting Inventory: This is the value of the ingredients and supplies you have at the beginning of the period. For instance, let’s say you start the month with $5,000 worth of ingredients and supplies.
2. Purchases: During the period, you buy more inventory to keep your kitchen running. Let’s assume you purchase an additional $8,000 worth of ingredients throughout the month.
3. Ending Inventory: This is the value of the remaining ingredients at the end of the period. Let’s say you have $3,000 worth of ingredients left at the end of the month.

Now, plugging these values into the formula:

• Starting Inventory: $5,000
• Purchases: $8,000
• Ending Inventory: $3,000

COGS Calculation:
$5,000 + $8,000 – $3,000 = $10,000

This means your COGS for the month is $10,000. This is the cost of the ingredients and supplies used to prepare the meals sold during that month.

By tracking your COGS, you can determine how much of your revenue is going toward the cost of making your food. For example, if you made $30,000 in sales during the month, a $10,000 COGS means your food costs are about 33% of your sales. Ideally, this percentage should fall within a specific range based on your type of restaurant, which can help you adjust pricing and purchasing practices to improve profitability.

Ideal COGS Percentages by Restaurant Type

Different restaurant types have varying ideal COGS percentages. Here’s a guideline to keep your COGS in check:

These ranges serve as general industry standards, but it’s important to note that actual COGS can vary due to several influencing factors, including ingredient quality, portion sizes, pricing strategies, and overall operational efficiency. For instance, fine dining establishments typically experience higher COGS because of their reliance on premium ingredients, whereas quick-service restaurants (QSRs) often benefit from standardized menus, bulk purchasing, and streamlined operations that help keep costs lower.

By aligning your COGS with these benchmarks, you can strike the right balance between profitability and maintaining high standards of quality and service, ultimately ensuring a sustainable and successful operation.

Why is tracking COGS Important?

COGS directly impacts your gross profit margin, which is the money left after covering the cost of food and drinks. Managing COGS ensures:

• Higher Profits: Lower COGS increases profit margins.
• Cash Flow Management: Avoid over-ordering inventory to maintain cash flow.
• Waste Reduction: Lower COGS often signals better portion control, inventory management, and waste reduction.

Mismanaging COGS can lead to:

• Shrinking profit margins.
• Inventory shortages or excess stock.
• Increased food waste.

Key Strategies to Optimize COGS

Managing Cost of Goods Sold (COGS) is essential for maintaining profitability in any restaurant. Below are practical strategies for optimizing COGS, focusing on common pain points restaurant operators face and how KNOW can help address them efficiently.

1. Streamline Inventory Management

Pain Point: Inventory tracking is often neglected or handled inefficiently, leading to waste, stockouts, or overstocking.

• Manual processes like spreadsheets can result in inaccurate data, leading to unnecessary purchases or running out of key ingredients.
• Lack of visibility into real-time stock levels makes it harder to make timely decisions about reordering, resulting in missed sales opportunities or excess inventory that expires before use.

Solution: Set Up a Smart Inventory System

To overcome these issues:

1. Use Technology: Ditch manual spreadsheets. Use tools to automate inventory tracking. These platforms can update stock levels in real time and alert you to shortages.
2. Weekly Counts: Conduct full inventory counts weekly to stay on top of usage trends and avoid last-minute ordering or running out of essential ingredients.
3. Par Levels: Establish clear par levels for each ingredient, ensuring you’re ordering just enough to meet demand, without overstocking.

2. Recipe Costing: Know the True Cost of Each Dish

Pain Point: Restaurants struggle to price their menu items correctly because they don’t fully understand the cost of each dish.

• Hidden costs such as trimming, spoilage, and cooking loss can easily eat into your profits, especially if not accounted for accurately in recipe costing.
• Uninformed menu pricing can result in dishes being underpriced or over-priced, affecting both customer satisfaction and profitability.

Solution: Break Down Your Recipes

Recipe costing involves calculating the cost of every ingredient in a dish. This includes:

• Primary Ingredients: Proteins, vegetables, sauces, etc.
• Secondary Costs: Garnishes, condiments, and accompaniments.
• Waste Factor: Account for trimming, spoilage, and cooking loss.

Once you know the exact cost of each dish, you can:

• Set Profitable Prices: Price your menu items to ensure a healthy margin.
• Spot Costly Dishes: Identify dishes that have a high COGS percentage and consider adjusting portion sizes or ingredient sourcing.

Pro Tip: Aim to keep your COGS-to-sales ratio between 28% and 35% for food items, depending on your concept and pricing strategy.

3. Portion Control: Consistency Is Key

Pain Point: Over-portioning can quickly spiral into significant waste, leading to higher-than-necessary food costs.

• Inconsistent portioning between shifts can lead to significant variances in food costs, especially for high-ticket items.
• Employee mistakes, whether intentional or accidental, can result in portions that are too large, inflating food costs unnecessarily.

Solution: Standardize Portions

• Train Your Staff: Ensure that kitchen staff understands portion control through proper training, and use scales or portion scoops to maintain consistency.
• Pre-Portion Ingredients: For high-cost items like proteins or cheese, pre-portion servings during prep to avoid overuse during service.
• Monitor Waste: Regularly monitor plates returned by customers to identify trends in waste or over-portioning, and adjust as needed.

Pro Tip: Use visual guides (e.g., photos of plated dishes) to ensure your staff is adhering to portion control standards consistently across all shifts.

4. Supplier Relationships

Pain Point: Ingredient costs often escalate if you’re not actively managing supplier relationships or comparing vendors.

• Lack of price comparisons can lead to paying inflated prices for ingredients, especially if you’re not negotiating terms with suppliers regularly.
• Lack of supplier diversity can lock you into high prices for specific ingredients, leading to unnecessary cost increases.

Solution: Build Strong Vendor Relationships

• Compare Suppliers: Regularly review pricing from multiple suppliers and consider bulk purchases or long-term contracts to secure better rates.
• Negotiate: Don’t hesitate to negotiate payment terms or delivery fees, which can significantly impact overall costs.
• Seasonal Sourcing: Take advantage of seasonal price fluctuations by purchasing fresh, in-season ingredients. This not only saves money but also adds variety to your menu.

Pro Tip: Local sourcing can cut down on shipping costs and resonate with customers who value fresh, locally sourced ingredients.

5. Minimize Waste: Reduce, Reuse, Recycle

Pain Point: Waste—whether from spoilage, overproduction, or mishandling—directly impacts your bottom line.

• Spoilage and overproduction are silent profit killers, particularly in a kitchen where perishables have a limited shelf life.
• Wasteful practices, like improper storage or cooking excess portions, result in valuable ingredients being discarded without generating any revenue.

Solution: Implement a Waste Management Plan

• Track Waste Daily: Use a waste log to identify patterns and areas where waste is occurring (e.g., certain ingredients being over-prepared).
• FIFO System: Implement a “First In, First Out” storage method to ensure older items are used before new stock.
• Creative Reuse: Turn kitchen scraps into soups, stocks, or sauces, not only reducing waste but adding value to your menu.

6. Monitor Sales Trends: Match Demand to Supply

Pain Point: Ordering too much or too little inventory leads to either waste or missed opportunities.

• Fluctuating demand can make it challenging to predict what ingredients will be in demand at any given time, especially during seasonal changes.
• Stockouts or overstocking are both costly mistakes. Running out of popular ingredients means missing out on sales, while overstocking leads to waste and higher storage costs.

Solution: Use Data to Drive Purchasing Decisions

• Sales Analytics: Leverage POS systems like Square, Toast, or Lightspeed to analyze sales trends and predict ingredient demand more accurately.
• Cut Slow Movers: Eliminate dishes that aren’t selling well, reducing the need for their associated ingredients.

Pro Tip: Seasonal shifts in customer preferences can be predicted and factored into inventory orders, reducing the risk of overstocking.

7. Regularly Review and Adjust Your Menu

Pain Point: A static menu can result in inflated COGS if certain dishes become too expensive to produce.

• Rising ingredient costs can suddenly turn previously profitable menu items into money-losing ones.
• Underperforming dishes continue to tie up inventory and drive up COGS if not removed or altered.

Solution: Optimize Your Menu

• Menu Engineering: Categorize dishes into “stars,” “puzzles,” “plow horses,” and “dogs” to evaluate their profitability and popularity.
• Adjust Prices: Increase prices on dishes with high COGS but strong demand, ensuring you maintain margins without alienating customers.
• Swap Ingredients: Replace expensive ingredients with more cost-effective options that still maintain quality.

Pro Tip: Introduce limited-time specials to test new dishes or adjust portion sizes without overhauling the entire menu.

8. Theft Prevention: Protect Your Inventory

Pain Point: Employee theft, whether intentional or accidental, can quietly inflate your COGS.

• Inventory discrepancies may arise from either intentional theft or errors in stock management, and can significantly inflate your food costs.
• Lack of accountability in tracking stock usage and handling high-value items can make it difficult to pinpoint sources of loss.

Solution: Implement Controls

• Track Usage: Regularly compare inventory counts with sales data to spot discrepancies.
• Limit Access: Restrict access to storage areas and track who handles high-value ingredients.
• Surveillance and Audits: Use cameras in storage areas and conduct random inventory audits to deter theft.

9. Involve Your Team

Pain Point: Staff often don’t see the financial impact of their actions on COGS.

• Lack of training on the importance of portion control, waste reduction, and following recipes leads to unnecessary food costs.
• Low staff engagement in cost-saving initiatives means employees may not take ownership of reducing waste or optimizing portions.

Solution: Train and Empower Your Team

• Explain the Impact: Help your team understand how their actions (e.g., portioning, waste) impact the restaurant’s profitability and their job security.
• Gamify Savings: Create friendly competitions around reducing waste or meeting portion standards. Reward winners with perks like gift cards or extra time off.
• Regular Feedback: Share COGS data with staff and celebrate improvements. This transparency encourages accountability and involvement.

How KNOW Can Help You Reduce COGS in Your Restaurant

Reducing your Cost of Goods Sold (COGS) is essential for maximizing profitability while maintaining the quality and efficiency of your operations. KNOW helps you achieve this with a results-driven approach:

1. Standardize Recipes and Portions for Consistent Costs
   With KNOW your team can access videos/guides of standardized recipes and precise portion sizes, reducing overuse of ingredients. This ensures every dish meets both quality and cost expectations, keeping your food costs predictable and in line with industry benchmarks.
2. Turn Waste Into Insights
   KNOW helps you track and analyze waste trends, uncovering inefficiencies like over-prepping or spoilage. By addressing these pain points, you can significantly reduce unnecessary expenses and make more informed purchasing and preparation decisions.
3. Align Purchases with Customer Demand
   By providing insights into sales trends, KNOW allows you to align inventory purchases with actual demand. This prevents both shortages and overstocking, ensuring that every ingredient purchased contributes to revenue generation.
4. Empower Your Team for Better Results
   KNOW ensures your team is equipped with the training and knowledge they need to reduce errors and stick to portioning standards. Staff efficiency leads to fewer mistakes, less waste, and ultimately lower COGS.
5. Prevent Equipment-Related Losses
   KNOW’s proactive equipment maintenance schedules minimizes downtime and ingredient loss due to equipment failures. Quick issue resolution prevents spoilage and helps maintain seamless operations.

By integrating KNOW into your restaurant, you can reduce waste, control purchasing, and empower your team—all of which contribute directly to lowering your COGS and boosting your profitability. It’s not just about managing costs; it’s about transforming your operations for sustained success.

Bringing It All Together

Managing COGS isn’t a one-time task—it requires ongoing attention, monitoring, and adaptation to ensure your restaurant stays profitable. By addressing common pain points like inventory tracking, waste, and pricing—and involving your team in the process—you’ll set your restaurant up for long-term success.

Remember, every dollar saved on COGS is a dollar added to your bottom line. KNOW helps you optimize costs, reduce waste, and empower your team to operate more efficiently.

Book a demo with us today! Our team will show you how KNOW can streamline your operations and transform your restaurant for success.