The Basics of Calculating Food and Beverage Cost for Bar Owners

Are your food and beverage costs higher than expected? Learn the key formulas and strategies to take control of your margins.

Many restaurants and bars struggle with tracking costs accurately, leading to unexpected losses. Understanding the difference between actual and theoretical costs can help you maximize profitability.

In today's episode:

• Learn the simple yet powerful formula for calculating food and beverage costs.
• Discover how to track waste, spillage, and variance to keep your costs in check.
• Understand why weekly inventory and standardized recipes are essential for accurate cost control.

Tune in now to master cost control and ensure every dollar counts toward your bottom line!

Learn More:
Email Chris
Schedule a Strategy Session
Bar Business Nation Facebook Group
The Bar Business Podcast Website
Chris' Book 'How to Make Top-Shelf Profits in the Bar Business'

Thank you to our show sponsors, SpotOn and Starfish. SpotOn's modern, cloud-based POS system allows bars to increase team productivity and provides the reporting you need to make smart financial decisions. Starfish works with your bookkeeping software using AI to help you make data-driven decisions and maximize your profits while giving you benchmarking data to understand how you compare to the industry at large.
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A podcast for bar, pub, tavern, nightclub, and restaurant owners, managers, and hospitality professionals, covering essential topics like bar inventory, marketing strategies, restaurant financials, and hospitality profits to help increase b...

Transcript

Chris Schneider (00:01.592)
Today, learn the basic formula for calculating your food and beverage costs. Understand the difference between theoretical and actual costs, and discover how to properly account for waste and spillage.

Chris Schneider (00:16.558)
I'm sure many of you have listened to the podcast a lot. You know I love to talk about food and beverage costs. But oftentimes we're talking about something else and we're just kind of bouncing off of it. So today I wanted to take just a couple minutes and really hammer in on what is food and beverage cost? How do we measure it? How do we know what's right? And what formulas do you need to know? We're actually going to talk some math today.

Chris Schneider (00:43.736)
So the first thing I want to do is talk through some basic formulas. So when we talk food and beverage costs.

It is cost divided by sales price times 100. That is your basic equation. Cost percentage equals cost of product divided by sales price times 100. And it's only times 100 because you're turning the decimal into a percentage. So we're really just taking our cost divided by our sales price.

Chris Schneider (01:19.074)
Now what's important to understand here is that for each individual item, yes, cost divided by sales price. For categories, cost divided by sales price. Not overall revenue as a percentage, but the actual item. So if your P &L has a line for draft beer, you calculate your draft beer cost by taking the cost of draft beer, dividing it by the sales price of the draft beer that you sold.

seems pretty simple, but you got to be careful because almost all financial software is set up for general businesses. So it'll take your cost divided by total revenue. It'll make your numbers seem way lower. And like QuickBooks does this, if you just say percentages and you throw it on there and it'll say, my food cost is 10%. I'm the most amazing restaurant over. No, your food cost is like 30%. You just don't know it. Because you took your revenue, your cost divided by revenue.

instead of your cost divided by specifically food revenue.

So it's really important. It's a huge distinction that a lot of people miss. And again, be careful when you're using percentages on financial software because that's not how it's going to calculate it unless it's restaurant specific.

The other thing that's important here is there are two components of this equation. Cost and price.

Chris Schneider (02:50.862)
Now for beer, a keg of beer is pretty easy. A keg of beer costs you 200 bucks. You're going to get on a 90 % yield, which is what I do all my costing for draft beer. I factor a 90 % yield. You're going to get basically 108 pints out of a keg. 120 would be full yield. But you don't.

ever get full yield. I like to price based on 90 % yield and then aim for 95 % yield so that my actual and theoretical are look just awesome. And we'll talk about actual and theoretical cost here in a second. But so beer or a vodka soda, that's real easy. Vodka soda is basically free. Vodka costs what it costs. Boom, boom, done.

Where this gets a lot more complicated, and we've talked about this before, is food or complex cocktails. Five ingredients, six ingredients, seven ingredients in a cocktail.

All of that is part of your cost. Your mixers, your garnishes, all of that needs to be considered in your cost calculation.

Because if you don't include that in your cost, what you're going to do is you're going to say, oh, well, I made my theoretical cost on all these items 20%. Yeah, except you didn't count the mixers or the garnishes. So you're 20 % on the liquor. By the time I had mixers and garnishes and all this other stuff, especially if it's pineapple juice and orange juice and a bunch of expensive juices, well, OK, so my liquor cost in that drink is 20%.

Chris Schneider (04:29.07)
I mean, the cost of the liquor is 20 % of the sales price, but by the time I add all that stuff in, my actual cost is 32%, 34%. So all your ingredients, all your garnishes, everything needs to be factored into that cost. Now, like I said, let's talk a little bit about actual and theoretical cost. So first, let's define these because I throw these around a lot and I don't always define them. Theoretical cost is what your cost should be based upon perfect portions.

Chris Schneider (05:01.515)
So.

Chris Schneider (05:05.902)
theoretical cost, you use your P-Mix.

You know the cost to make each item and you sold 30 Budweiser's and each Budweiser costs

dollar. So it's $30 a cost. $1 per unit. That's simple. But again, we get into food and complex cocktails. It gets a lot more complex than that. And theoretical cost is just understanding what your cost should be based upon what you have sold. If everything was poured properly, if every standard was followed.

Now obviously that doesn't happen in the real world. So then we have actual cost. The real cost of everything, including your waste and loss.

Now what does actual cost look like? How do we calculate actual cost? Well, you can't know cost just by inputting numbers from invoices.

Chris Schneider (06:04.428)
You might be kind of close, but you could be way off. Because that's not, that's what you purchase, not what you used. Real cost is what you used. Real cost.

is cost of goods sold. What is our cost of goods sold equation? Cost of goods sold, beginning inventory plus purchases minus ending inventory equals cost of sold. Beginning inventory plus purchases minus ending inventory equals cost of goods sold.

Chris Schneider (06:37.166)
So we're not looking at the PMAX. We're not. No, we're counting everything we have and saying, what does this cost, right? If I had $15,000 worth of inventory at the start of the week and at the end of the week I have $10,000 worth of inventory, I used $5,000 of cost.

So actual, theoretical, it's based on your P mix, it's based on your theoretical calculations. Actual is just your cost of goods sold, beginning inventory plus purchases minus ending inventory. That is your actual cost week to week. Now, why do we need to know both theoretical and actual? Because you need to reconcile one against the other.

Particularly because, you know what, especially when it comes to food, but also when it comes to booze, and particularly wine, saying, well, my standard food cost is 35%. Let's just say. All right. But maybe people ordered a bunch of high cost food items or low cost food items. Your P-Mix actually has to be involved here to understand your theoretical.

Then you take your actual, this is what I actually did, and then we look at what is the difference between these two numbers. In a perfect world, the difference between those two numbers is less than 2%. 2 % is, in my mind, where I red flag that variance. You're always going to have some variance between actual and theoretical, especially if you're doing something like free-pouring, right? I don't care if I have a bartender that can free-pour an ounce and a half.

and an ounce and half is my standard drink and they can free pour that every day perfectly.

Chris Schneider (08:16.204)
When you're working, when you're slinging drinks, some are going to be a little heavy, some are going to be a little light.

That is what it is.

But you need to understand some variance will always exist. To me, that's 2 % allowable. But that actual versus theoretical should be under 2%. If it's more than 2%, you have a problem and you need to go figure out what the heck happened. Why have you spent way more money than you should have? Or why have spent way less money than you should have? Is everybody pouring light? Are your customers not getting the product they should be getting? Is that why it's cheaper? Because a lot of times,

industry, we see a high cost number and we go, oh no, I gotta bring that down. We see a number that's too low compared to theoretical. go, oh, that's awesome. I saved mine this week. Yeah, but something suffered. Something is wrong. Any variance, whether in your favor or not in your favor, between actual and theoretical, over 2%, you need to figure out why and stop them. Now, a couple things here to implement and actually have good cost control in your business.

Number one is regular inventory. You need to do a full inventory every week.

Chris Schneider (09:33.43)
Not every week, every month. To at least get that actual number on a monthly basis. I like to do it every week because then every week I can look at actual theoretical. I know where I should be. I know what's happened. I know if I'm wrong or not.

I say do inventory every week.

Obviously, none of this works unless you have standardized recipes, standardized portions, standardized pores. Everything must be standardized, down to the penny. Otherwise, you can't calculate actual and theoretical, right? When I say standardized down to the penny, I mean, what are your portions? How big are they? What are your garnishes? All of that needs to be standardized. And the other thing that you really need to keep control of your cost is a waste log.

You need to understand what got wasted. Why did it get wasted? And then fix that in the future so things don't get wasted.

So understanding and tracking your food and beverage cost is like the most essential thing, literally the most essential thing to maintaining a profitable operation. Really, when it comes to cost, it needs to be all about the math because the math on the cost, the math on your pricing is what gives you a margin that puts food on your table as an owner. If you implement basic calculations and cost controls, you can ensure a profit.

Chris Schneider (10:59.606)
or a pricing structure that supports healthy profits.