This is where we take all the data from reciProfity and put it to work.
If you’ve been running restaurants for years, you’re likely already profitable and using reciProfity to streamline your operations. If you’re newer to the industry, this article will help you understand the fundamentals of restaurant profitability.
Revenue Breakdown Primer
Here’s a quick primer on restaurant math:
- Spend 30% of your revenue on food and drinks to sell to your customers.
- Spend another 30% on your staff.
- Spend 20% on everything else—rent, electricity, gas, insurance, taxes, linen, maintenance, repairs, and light bulbs.
- Roll 10% back into the business to make it better.
- Put the final 10% in your pocket. You’ve earned it.
Why Food Cost Accuracy Matters
To get this math right, it’s essential to have an accurate Food Cost—the most basic purpose of reciProfity. In other industries, this is called Cost of Goods Sold (COGS) or Cost of Sales.
Food Cost can be expressed in two ways:
- As a number: how much you pay for the ingredients in a recipe
- As a percentage: what percent of a recipe’s sales price goes toward its ingredients
Terms To Know Before Pricing Your Menu
- Fixed Costs (Overhead): Expenses tied to opening and operating your business daily—rent, electricity, gas, insurance, and anything else that stays the same (or nearly the same) regardless of sales volume
- Variable Costs: Expenses that change directly with sales volume; for our purposes, this is the same as Food Cost
- Payroll: Costs that vary depending on how busy you expect a service period to be, but can’t be expressed as a direct proportion of revenue, so it’s not truly a variable cost
- Gross Margin: The difference between revenue and Food Cost; also called Contribution Margin or Gross Profit
- Net Income: Profit after paying both fixed and variable costs; from your accountant’s standpoint, this is the same as EBITDA (earnings before interest, taxes, depreciation, and amortization)
- Breakeven Point: The amount of revenue needed to cover all fixed costs, variable costs, and payroll—resulting in zero net profit or loss
Breakeven Formula
To calculate the sales needed to hit your breakeven point:
Breakeven Sales = Fixed Costs / Gross Margin %
Example: Applying Food Cost and Margin
Let’s walk through a simple example to illustrate how Food Cost and Gross Margin work in practice.
You pay $10 for a rib-eye steak and sell it for $30:
- Food Cost: $10 — the amount you spent on ingredients
- Food Cost %: 30% — the portion of the sales price that goes toward ingredients
- Gross Margin: $20 — the revenue left after covering ingredient costs, before accounting for fixed expenses like rent or payroll
This margin is what you use to cover overhead and generate profit. Understanding this breakdown helps you price your menu strategically and track profitability with reciProfity.