What is Cost of Goods Sold for Restaurants?

For most restaurant owners, food and beverage costs are the largest expenses. To manage a profitable kitchen, you need a clear view of your margins. Calculating your Cost of Goods Sold (COGS) is the most direct way to understand how your inventory costs are impacting your bottom line.

COGS is the cost of producing the food and beverages you sell to your customers. In other words, it is the cost of the inventory used over a period of time to deliver the food and beverage sales you generated over that same time period.

Actual Food and Beverage Cost of Goods Sold:

It is important to recognize that the dollars you spend on Food and beverage purchases are not representative of your true Cost of Goods Sold. This is because the items you bought during a period may not have been used (they are still in inventory at the end of the period).

The only way to know your actual COGS is to count and value your inventory at the end of each period. The good news is that by taking an end-of-period inventory count, you will get a reduction to your COGS (an increase in profit) on your Profit & Loss Statement for the value of your ending inventory. An average full-service restaurant can easily have $10,000 or more sitting in inventory.

"As food and beverage costs are one of the largest components of the actual cost structure, it is imperative to have accurate, real-time analytics to monitor how things are going. The data tells a story - using a system that can help me interpret the story is invaluable." - Joan Gilchrist, owner of Cherry Lane Ventures

(Beginning Inventory Value + Purchases Value) - Ending Inventory Value = Actual COGS

Inventory Control:

A benefit when you use a system like COGS-Well to count inventory at the end of each period, track invoices with item purchase detail, and record any transfers between locations, is that you are not only tracking your COGS, but you are also tracking the usage quantity and cost for every inventory item in your restaurant.

Knowing your exact usage quantity and cost for each inventory item helps you isolate waste, order more efficiently, and find ways to cut costs without ever sacrificing quality.

For example, you may find substitutes for your most highly used items, or you may be able to negotiate better prices from your suppliers for your high-volume items.

(Beginning Count + Quantity Received) - Ending Count = Actual Usage

Financial Statements:

Finally, calculating your COGS is a necessary step for preparing your financial statements. It allows you to accurately report your food and beverage costs, which is essential for tax purposes or obtaining financing. A quality inventory management system like COGS-Well will export inventory value and cost adjustments to your General Ledger.

“Our old inventory system did not have a General Ledger export, so the ending inventory adjustments were entered manually. Due to the COGS-Well export to NetSuite, we save an hour per week, our reporting is much more timely, and our accuracy is improved." - Linda Liu, Director of Finance and Accounting, Impact Kitchen

Summary:

Ultimately, tracking your Cost of Goods Sold is crucial for the success of your restaurant. By understanding your COGS and inventory usage, you gain more accurate financial reporting, make informed purchasing decisions, and uncover new insights into performance - all of which lead to higher profitability and a more successful business.