As a restaurant owner, one of the most important records in your financial statements is the Cost of Goods Sold (COGS). An accurate record of this detail will help you manage your business more profitably.
What makes COGS even more crucial is that it has a direct effect on your pricing. And when you get your pricing wrong, you’re risking your business profit.
COGS is not that hard to track and monitor. Just read on as we consider some basic things you need to know about your Cost of Goods.
What is the Cost of Goods Sold?
In simple terms, COGS is the total cost involved in the production and delivery of a product. For a restaurant, it is the summation of all it costs to make and deliver your food.
From purchasing raw food materials to all the cooking and post-cooking expenses, you need to know the exact cost of producing a menu item. Your gross income less all these expenses gives you your net profit.
What is Included in COGS for a Restaurant?
The expenses that directly apply to the production and delivery of your products are what make up the COGS. Such costs for a restaurant can be the purchase of food and ingredients, cost of cooking gas, cost of packaging materials, etc.
Indirect expenses such as rent and electricity bills do not count as COGS. This is because they are not directly affected by daily production and sales.
Two basic tests that will help you determine whether or not an expense qualifies as COGS are:
Will I still incur this cost if I don’t produce or sell anything today?
Will an increase or decrease in sales affect this expense?
If your answers are yes, then you can include the cost as part of your COGS and vice versa.
Calculating Cost of Goods for a Restaurant
Some major figures are important for calculating the COGS for a given period.
Firstly, find the total value of your inventory at the start of the period.
Secondly, calculate the total value of all the inventory purchased within this period. Also, find the total direct expenses incurred in the process within the given time.
Finally, get a record of the total value of the inventory at the end of this period.
The simple formula for calculating COGS is:
COGS = (Opening Inventory + Purchased Inventory + Other direct expenses) – Closing Inventory.
Let’s take a simple example.
Assuming your restaurant had some goods of total value $2000 at the beginning of the year. Let’s say a total of $7000 worth of goods was purchased within the year.
Let’s also pretend you spent a total of $1000 on other direct expenses such as cooking gas, direct labor, and delivery fees.
Then assume also that you closed the year with a total inventory value of $3000.
Your COGS will be: ($2000 + $7000 + $1000) – $3000.
So, your COGS for the year is $7000.
The price of goods and the costs of services vary from time to time. So, the COGS for making a meal this week might not be the same in the next two weeks.
So, you must regularly analyze your restaurant’s COGS to know whether your current pricing guarantees profit or loss.