More than ever, the restaurant business is one of tight margins, and one of the most important fundamental margins that must be understood, controlled and manicured is food cost. Along with alcohol sales, food sales are one of the two main profit centers of just about any restaurant. In some cases it's the only profit center.

When you count so much on food sales to generate enough gross profit to cover payroll, rent, insurance, costs of goods sold, repairs, marketing, utilities, administration, taxes and fees (I could keep going, but I don't want to sound pessimistic), and still have something left over to take home, you really want to be as effective as possible with how you handle your food costs. While the gist of it is "buy low, sell high," there's more to it than that. Let's look at the process from start to finish, and particularly the role of the chef or kitchen manager in keeping these costs in line.

Food Cost Defined

First, let's define what we mean by "food cost." Technically, we're referring to the costs of goods sold -- in this case food, expressed as a percentage of what we sell it for. Let's say we've figured out that the food on a certain plate costs us $5, and we sell it for $20. We divide our cost of the food by the selling price and come up with 0.25, or 25 percent (5/20 = 0.25). This means we have a "food cost" of 25 percent for that plate.

While knowing the food cost for each menu item is important, it's also important to know your overall food cost. To arrive at this figure for a certain period -- a month is typical -- first do an opening inventory of all food. Add to the value of this inventory the cost of any food purchased during the period in question.

Do a closing inventory at the end of the period and subtract its value from the sum of the opening inventory and purchases (this will tell you how much product was used). Now divide the cost of the food used by your food sales for that same period, and you'll have your overall food cost percent, the same as you had for an individual dish earlier, but on a bigger scale. Some operators subtract the cost of family meals, promotions and waste from the food cost, but care should be taken with this practice as it may end up being more deceptive than helpful.

Before we discuss how to control this cost, I'd like to bring up two important points that restaurateurs sometimes miss. The first point is stated in my favorite definition of cost control: the elimination of any expenses that won't diminish the quality of goods or services as perceived by the customer.

If, to reduce your food costs to a predetermined point, you lose customers either because your quality goes down or your portions become unacceptable, you lose. Keeping a higher percentage of a lower number (of sales) may be OK, but there's a good chance it's not.

You have to be careful to control your costs in ways that won't cost you customers. Another concept to watch out for can be summed up in the old adage, "You can't spend percents, and you can only spend dollars." Here's an example of what I mean. Let's say one of your chicken entrées costs you $4 and you sell it for $16. That would mean its food cost was 25 percent (4/16 = 0.25). Let's say your rack of lamb entrée costs you $12 and you sell it for $32. The lamb dish would then have a food cost of 37.5 percent (12/32 = 0.375).

If you only looked at the food cost percent, you'd think you would be better off selling the chicken. After all, 25 percent food cost is better than 37.5 percent, right? But consider how much money you make with each dish. With the chicken, you're taking in $12 (16-4 = 12), but with the lamb, you're taking in $20 (32-12 = 20). The lesson here is, while food cost percents are very important, don't forget to always see the bigger picture. Higher-cost items frequently will have a lower markup than lower-cost items, but might still be more profitable. You'll see the same scenario play out frequently on your wine list. 

Next time, let's take a look at how to use the menu, your concept, and common ingredients to lower your food costs. A couple of good strategies can make a big difference.