This section is our Cost Of Goods section for our Bar and Restaurant Start Up Guide. Feel free to check out our Full Resource on How to Own and Operate a Bar or Restaurant. There are great articles such as Choosing a restaurant location, Cost of a Start up Bar or Restaurant, How to get a liquor license, or a Break Down of a Restaurant Financial Report. Those who are interested in studying business concepts like cost of good sold might consider an online MBA degree from an accredited university, like Benedictine online.
COGS: Cost of Goods Sold
Cost of Goods Sold (COGS), also known as “cost of goods used”, is the calculations of the cost to your restaurant for food and beverage products that your restaurant sells. Cost of goods relates to your inventory, and monitoring what comes in and goes out. The equation for COGS is as followed:
Opening Inventory + Purchases – Closing Inventory = Cost of Goods Sold
The Opening or Starting Inventory means the amount of product that you have in your kitchen and storage rooms at the beginning of a period you are monitoring. Inventory counts can be done weekly, monthly, yearly, daily; it is up to you. My suggested period would be weekly. Our inventory was done every Monday morning at most places I worked at. If you were going to measure last weeks Cost of Goods Sold, you would want to have an Opening Inventory be the Inventory you had last week at the beginning of the period.
Purchases would be the dollar amount of the food and beverage orders in that same amount of time. For example, if we were doing a weekly inventory starting on Monday and wanted to look at last weeks cost of goods sold, we would start with last Mondays inventory count. For purchases, we would then add up any invoices that came in for food or beverage in the last week up until the next Monday.
Closing or Ending inventory would be the inventory count you made on the last day of the period. If we use our weekly Monday to Monday example, Opening Inventory would be last Monday’s inventory count, and Closing Inventory would be this weeks Monday Inventory Count. Purchases would be any inventory that came in in between last Monday and this Monday.
Let me give you an example:
Last Monday, I counted the inventory of liquor at my bar. In total, I had $10,000 in Liquor. It is now Monday and I want to find out the cost of goods sold between last Monday and today. I counted the inventory today and it is now $13,000. I do my ordering on Mondays because it make sense. I have already done an inventory of all the products, so I know how much of everything I have, I just need to call in an order. The order comes in on Wednesday. Last Wednesday, I received a liquor order of $8000. That was the only order that came in that week. Here is how we calculate what our Cost of Goods Sold was:
Opening inventory ($10,000) + Purchases ($8,000) – Closing Inventory ($13, 000) = COGS ($5000)
If you have mulitple purchases, you can add up all the purchases together first before entering into this equation. Say I take the above example but instead of one order for $8000, I received one order for $2000, an order for $3000, and another for $3000. I can add up all my invoices first to see what my total Purchases are. $2000 + $3000 + $3000 = $8000. I can then plug that number into the formula to calculate the Cost of Goods Sold.
Transfers can also be a factor in your Cost of Goods Sold if you work for a company with more than one location. To help each other out, if you are running low on something, instead of paying for a small order, or just selling out of a product, you may ask a sister store if you can transfer a product. Transfers will be negative if you are transferring out of the store (giving the product to another location) and will be positive when you are tranfering in to the store (acquiring product from a sister location. To keep track of transfers, my companies always invoiced each other so we had a paper trail. The Cost of Goods Equation then looks a little more complicated. It would be as follows:
Opening Inventory + Purchases + Transfers In – Transfers Out – Closing Inventory = COGS
“Transfers out” can also include any products that you transfer out of your bar or restaurant to a different part of your bar or restaurant. For example, cooks may need wine to cook with. You may want to transfer wine from the bar to the kitchen. The reason you do this is so you have an accurate usage from your specific areas in your bar or restaurant. If the wine cost is up and you have not been doing transfers, you never know if the kitchen is using too much wine in their cooking, or if the bartenders are over pouring a glass of wine. To find out, you need transfers to be done.
To give you a good real time example, I will go back to my previous example. I am working on bar inventory and trying to calculate cost of goods Sold. Everything is the same, so I have an Opening Inventory from last week that is $10,000, I purchased $8000 in total liquor for the week, and I counted my inventory and my Closing inventory is $13,000. Now, with my establishment, I have a kitchen. They make an amazing Jack Daniels Burger consisting of a barbeque sauce infused with Jack Daniels Whiskey. Whatever they use, I am not going to count as a cost of goods sold for my Liquor because my Bar didn’t sell it, it was part of our food production. Because of this, I am going to do a transfer. I provided them $100 worth of Jack Daniels to use in their barbeque sauce. That means, I have a transfer out. Here is My new equation:
Opening Inventory ($10,000)
+ Purchases ($8000)
Transfer Out ($100)
Closing Inventory ($13,000)
= COGS ($4900)
The other restaurant department or location will reverse the transfers, so if I was the Chef doing my Food inventory, my transfer would be a transfer in so it would be + $100 because I aquired $100 worth of liquor I need to count towards my food cost.
Cost of Goods Percentage
Just having the dollar value for your cost of goods is not really going to help. You will know what is being used, but you will want the percentage of sales that is being used. By dividing the Cost of Goods by the Sales of the Goods, you can see what percentage of your sales are being used just on the cost of the product. Notice i said the Sales of the Goods, and not just Sales. You want to segregate the sales based on the products. This will let you monitor specific aspects of the business and is the only way to provide you with a real number that makes sense. Cost of Goods Percentage is the Cost of Goods Sold divided by the Sales of those goods. For food, Food Cost Percentage would be Cost of Goods Sold for food divided by Food Sales only.
Here is an example of why total sales will not work to help explain: Month one, you sell $10,000 in sales and your COGS is $2000 in food. Your cost of sales is 20% . The next month, sales stayed the same, but liquor sales went up and food sales dropped, so COGS for food is only $1000 because not as much food was used and overall sales is still $10,000. This means it looks like you went from 20% cost of food to 10% cost of food from Month 1 to Month 2. That makes no sense. It doesnt really explain if your kitchen was efficient or not. Cost of sales is relative to the product being sold. In food service, this percentage represents the portion of sales spent on food.
How to separate your products you sell
It is very helpful to break down your food cost into all the types of foods and beverages your purchase. It means a little more organization in terms of number crunching. For example, if you split up your food into meat, dairy, produce, etc., you will also need to go through invoices and separate the costs of the items accordingly. At the same time though, each section will have a different goal in terms of percentage of food sales. It will really come down to how your establishment will function. If you plan on having an upscale restaurant with an always changing menu based on the chef , segregating your order as just explained would be best.
If you plan on having a consistent menu, I don’t really think you need to separate the food into categories. All my restaurants I worked at just Stuck with food cost in general. For high dollar items like steaks, they would lock them up and do weekly checks to make sure no steaks went missing. The only thing to keep in mind is if you have a specific budget for your food, if you do a steak selling contest with the servers, or something where your cost of sale will be higher, you will see your food cost jump a little bit.