Cost of Goods Sold in Restaurants: How to Generate Profit

Hello. This is Masashi.

There are important numbers you must manage when running a restaurant.
That is, the 'cost of goods sold (COGS) ratio'. Do you know your restaurant's COGS ratio?
Do you have your restaurant's COGS ratio in mind?

If you dislike looking at numbers, put them off, or leave them unattended, you will not make a profit. To generate profit, managing your costs is essential.

What is an appropriate COGS ratio for a restaurant?
What is the correct way to calculate the COGS ratio, and how do you control it when costs soar?

The 'COGS ratio' is an important management indicator for any business, not just restaurants.
The COGS ratio is an indicator that shows how much raw material costs plus waste account for in relation to sales.

To reliably make a profit, cost management is essential.
No matter how much you sell, if your costs are too high, they will squeeze your profits.
You cannot have stable management without cost management.

I will explain the 'correct calculation method' for determining the COGS ratio
and the 'control methods' for restaurants to optimize their costs.

To determine the COGS ratio, which is also necessary for calculating profit and profit margins, here is the 'calculation method'

COGS ratio = Cost of Goods Sold ÷ Sales × 100

For example, if your 'sales are 500 yen' and your 'cost is 150 yen', the COGS ratio is 30%.
The formula is simple.

COGS ratio for products
Since 'food loss (waste)' can occur during operations, causing the COGS ratio to rise higher than expected, you should basically think about 'cost relative to sales' as explained above.

However, you may also consider the COGS ratio for each menu item during product development.

For example, if the cost of one bowl of ramen is 300 yen and the selling price is 900 yen, the COGS ratio is 33.3%.

The formula is super simple as follows.

Cost of Goods Sold ÷ Selling Price × 100 = COGS ratio

'Control methods' for restaurants to optimize costs

Even if the COGS ratio is high, it is entirely possible to secure profit by increasing sales through location, turnover rate, etc. Actually, my restaurant is in a residential area and the location is not good. However, you must not forget that if you can lower the COGS ratio by even 1%, your profit will increase by that much. Things you can do to lower the COGS ratio and increase profit, as well as control methods and precautions to ensure sales do not drop.

1. Cooking Manuals
2. Inventory
3. Food Waste Loss
4. Downgrading Ingredients

1. Cooking Manuals
By creating cooking manuals, it becomes easier to grasp the amount of ingredients used, making management tasks like purchasing and inventory easier. Also, it prevents the overuse of materials, eliminates waste, and can reduce material costs (COGS) in the long term. Furthermore, because the amount of food becomes consistent, you can provide equal portions to every customer, which also leads to customer satisfaction.

2. Inventory
Inventory involves checking the stock levels and values of ingredients and seasonings in the kitchen and recording them in the books. By confirming how much stock and inventory value you have, you can eliminate unnecessary purchasing and help review your business operations. Furthermore, by checking the expiration dates of ingredients at the same time, you can ensure thorough quality control. This is an essential task that should be performed at least once a month.

3. Reducing Food Waste Loss
If the food waste rate exceeds 3%, it will affect your business performance, making it a critical management point for increasing profits. Try not to be too fixated on purchasing a wide variety of ingredients. Aim to provide diverse dishes with as few ingredients as possible to reduce waste. Additionally, purchasing large quantities of single ingredients can help lower material costs (cost of goods sold).

4. Downgrading Ingredient Quality
By downgrading ingredients, you can directly lower your cost ratio and increase profits. However, in this case, customer satisfaction is likely to decrease along with the quality of the taste. While it is easy to increase profits in the short term, a decline in customer satisfaction can lead to customer churn, which may result in lower sales in the long term. Therefore, proceed with caution when downgrading ingredients.

There are various ways to increase sales and profits.

Cost accounting takes time, but by performing proper cost management,you can certainly increase your earnings by a few percent.

Also, by calculating the cost ratio, business management becomes much easier. As a first step toward increasing sales, start by managing your cost ratio.

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