So, you’ve decided to open your restaurant – the menu bursting full of deliciousness, but there’s one final element that needs sorting, and that’s pricing up your food items. This is probably one of, if not the most important, task when it comes to launching your restaurant business. After all, sales from your menu will be your sole source of revenue. The cost of your menu will have a direct impact on the other essential assets of your business, including the likes of labor, utilities, equipment, and ingredients. 

So, how do you cost a menu? Whether you’re just starting or you’re giving your food list a bit of a refresh, you should have some sort of formula in place to ensure you’re not losing out on potential profit-making. As experts in restaurant accounting consulting, Prix Fixe can support you in easily calculating the costs of your menu. However, if you want to give it a go yourself, here are two popular ways to cost up your menu.

Formula 1: Using food cost percentage to cost up

This formula is all about making a profit on top of the money spent on acquiring, preparing, and buying ingredients for each menu item. You can do this in a few simple steps:

Step 1: Decide what percentage of each sale you want to be spent on acquiring and preparing that food (known as food cost). Most restaurants usually try and spend between 25% to 35% of an item on food cost. 

Step 2: Determine the cost of the raw ingredients that make up that menu item - this is also known as 'cost of goods sold' (COGS).

Step 3: To work out the menu cost of that item, you should then divide the COGS (in step 2) by the food cost (in step 1). 

To help, let’s use an example:

COGS = $4

Food cost = 25%

So, 4/0.25 = $16

The cost of that particular food item would be $16 if you use this formula.

It's worth noting that this formula demonstrates just how important it is for restaurants to try and lower the amount they spend on acquiring and preparing food, Ultimately, the less spent on food cost, the higher the profit margin.

Formula 2: Using gross profit margin to cost up

Creating a menu based on your gross profit margin is more about the total of each sale that’s profit. This can be a bit tricky and tends to be based more around guesswork, but equally, it gives you the opportunity to gain a better understanding of all of your finances and how they can impact one another. Below is how you use this formula to cost up your menu:

Step 1: Calculate your ideal gross profit margin. This varies from restaurant to restaurant and can be anything from as low as 20% to 80%.

Step 2: Calculate the cost of the raw ingredients that make up that menu item - this is also known as the cost of goods sold (COGS) – the same as in the first formula.

Step 3: Then have a play with the below equation to work out the best cost for each item on your menu:

Gross profit margin (step 1) = (item price – COGS (step 2)) / item price

As we said, this will take a bit more guesswork, and you’ll have to play around with this equation patiently to get your ideal item cost. Here is an example:

COGS = $4 

Ideal gross profit margin = 20%. 

Therefore, we would set the item price as $5.

$5-$4 = $1

$1/$5 = 20%

There are plenty of other factors that could influence the cost of your menu, including checking out your competition or looking at what foods are trending and in high demand. One thing for sure is, it doesn’t matter whether you’re a busy bistro, a casual diner, a street food truck, a local café, or a fast-food restaurant, it’s essential that you cost up your menu correctly if you want to see your business making money. Ultimately, your menu needs to be engineered for profit and geared towards you making money. If you don’t want your profit margins to suffer, then get in touch with the team of experts at Prix Fixe Accounting.