How Proper COGS Tracking Can Improve Restaurant Profitability

In the fast-paced restaurant industry, profitability hinges on more than just great food and service, it requires a deep understanding of operational costs. One of the most crucial financial metrics for restaurant owners is the Cost of Goods Sold (COGS). Properly tracking COGS helps owners maintain healthy profit margins, make informed menu decisions, and control food waste. In an industry where tight margins are the norm, gaining control over your COGS can be the difference between thriving and merely surviving.

What is COGS and Why It Matters in the Restaurant Industry

Cost of Goods Sold (COGS) refers to the total cost of all ingredients, beverages, and items used to prepare the food and drinks sold in your restaurant. This includes meat, produce, spices, dairy, oils, alcoholic and non-alcoholic beverages, and even packaging materials like takeout containers. In some cases, disposable kitchen supplies and garnishes may also be counted, depending on how you manage your accounting.

For restaurants, COGS is a critical financial metric because it directly impacts profitability. It helps you understand how much you’re spending to make each dish you sell—an essential part of calculating your gross profit.

Here’s why COGS matters:

• Profit Margin Insight: COGS is subtracted from revenue to determine your gross profit. Monitoring this helps you maintain healthy margins.
• Inventory Control: Tracking COGS helps spot waste, spoilage, or theft—key for reducing unnecessary losses.
• Menu Pricing: Knowing the cost of each item ensures you're pricing dishes profitably.
• Budgeting and Forecasting: It supports smarter financial planning by identifying cost trends over time.

In short, mastering your COGS allows you to make informed operational decisions, minimize losses, and increase overall restaurant profitability. It’s not just accounting—it’s your business’s financial pulse.

How COGS Impacts Your Bottom Line

The Cost of Goods Sold (COGS) is one of the most significant expenses in a restaurant’s income statement, and it plays a direct role in determining your gross profit. Gross profit is calculated by subtracting COGS from total revenue. When COGS is high, gross profit shrinks—leaving less room to cover fixed costs such as labor, rent, utilities, and administrative expenses.

Gross Profit Formula:  Revenue – COGS = Gross Profit

Here’s how COGS directly influences your financial performance:

• Profitability Monitoring: Keeping COGS within industry benchmarks (typically 28–35% of sales for food) helps ensure your pricing, portioning, and purchasing are aligned with your profitability goals.
• Menu Engineering: High COGS can reveal low-margin items that are hurting your bottom line despite strong sales. Identifying these items allows you to adjust prices, tweak ingredients, or promote more profitable dishes.
• Cost Control and Efficiency: Fluctuations in COGS can point to problems like over-portioning, spoilage, theft, or vendor price increases. Tracking these shifts enables timely operational adjustments.

Effectively managing COGS gives you a clear view of how efficiently your kitchen is running and empowers you to make data-driven decisions that improve financial outcomes across the board.

Key Components of COGS for Restaurants

To accurately calculate the Cost of Goods Sold (COGS), it's essential to understand the core components that contribute to the cost of preparing and serving food. These components not only determine how much you're spending on ingredients but also influence your ability to manage food costs effectively. Here's an in-depth look at the primary elements involved:

1. Beginning Inventory
   The beginning inventory is the value of all ingredients, supplies, and products on hand at the start of a given period (typically a month or a week). This figure sets the baseline for your COGS calculations, reflecting what you already have available before new purchases are made.
2. Purchases
   Purchases represent the total value of all food, beverage, and supply items bought during the period. This includes everything from fresh produce to cleaning supplies, as long as it contributes to food or beverage preparation. These purchases will add to your inventory and increase your overall COGS.
3. Ending Inventory
   The ending inventory is the value of all ingredients, supplies, and products remaining at the end of the period. This number is crucial because it helps determine how much of your purchased goods were used during the period, thus impacting the COGS calculation.

COGS Formula: (Beginning Inventory + Purchases) - Ending Inventory = COGS

To further refine your COGS tracking, additional components may need to be considered:

• Packaging Costs: If your restaurant offers takeout or delivery, packaging costs (such as containers, napkins, and utensils) should be included in your COGS calculation. These costs, though often overlooked, contribute to your total food expenses.
• Wastage or Spoilage: Spoiled ingredients or waste due to over-prepping or improper storage need to be factored into your COGS. Waste can significantly inflate your food costs, so it’s crucial to track spoilage carefully.
• Employee Meals or Comps: Meals given to employees or complimentary meals for guests are still considered costs, even if they are not directly sold. These should be included in your COGS to ensure accurate tracking.

Each of these components plays a significant role in understanding how much you're spending on the items that make up your menu. Consistently tracking these factors will allow you to identify inefficiencies, reduce waste, and make better purchasing decisions—all of which help optimize your restaurant’s profitability.

COGS Tracking Methods: Manual vs. Software

Tracking COGS is crucial for managing a restaurant's financial health. There are two main methods: manual tracking and software-based tracking. The choice depends on your restaurant's size, complexity, and resources.

Manual Tracking

Manual tracking involves recording inventory, purchases, and sales using spreadsheets or paper records.

Pros:

• Low Cost: No ongoing subscription fees, ideal for tight budgets.
• Full Control: Complete flexibility to tailor data entry and calculations.

Cons:

• Time-Consuming: Requires significant time to regularly update inventory and calculate COGS.
• Prone to Error: Human errors in data entry or calculations can lead to inaccuracies.
• Difficult to Scale: As your restaurant grows, manual tracking becomes less practical, especially with multiple locations or complex menus.

Software Solutions

Software automates COGS tracking, integrating with POS and inventory systems for real-time data.

Pros:

• Automation: Quicker and more accurate data entry, reducing manual work.
• Real-Time Reporting: Immediate insights help track trends and make informed decisions.
• System Integration: Syncs with POS and accounting tools, reducing data discrepancies.

Cons:

• Cost: Upfront fees and subscriptions may add up, particularly for smaller restaurants.
• Training Needs: Staff require training to use the software effectively.

Best Practices for COGS Management

Tracking COGS is vital, but managing it effectively is what truly helps your restaurant stay profitable. Adopting the right best practices for COGS management can lead to improved operational efficiency, reduced waste, and stronger financial performance. Here’s a more detailed breakdown of key practices to implement:

1. Perform Regular Inventory Counts

• Why it matters: Regular inventory counts, ideally weekly or bi-weekly, help you stay on top of ingredient usage and identify discrepancies such as theft, spoilage, or waste. By closely monitoring your stock levels, you can prevent running out of essential items or over-purchasing.
• Tip: Schedule inventory checks during quieter periods, and always compare your physical count against your records to spot inconsistencies.

2. Standardize Recipes and Portions

• Why it matters: Standardizing recipes and portion sizes ensures that every dish uses the same amount of ingredients every time. This reduces variability in food costs and prevents over-portioning, which can quickly inflate COGS.
• Tip: Provide clear recipe cards and measuring tools for your kitchen staff to ensure consistency across shifts.

3. Use First-In, First-Out (FIFO)

• Why it matters: FIFO is a method for rotating stock, ensuring that older inventory is used before newer stock. This practice minimizes spoilage and waste, particularly for perishable items like dairy, meats, and produce.
• Tip: Train staff to follow FIFO and label products with purchase dates to streamline the process.

4. Monitor Vendor Pricing

• Why it matters: Ingredient prices fluctuate due to supply chain factors, market conditions, or seasonal availability. Staying informed about price changes allows you to negotiate better deals or seek alternative suppliers when needed.
• Tip: Build strong relationships with vendors and regularly compare prices from different suppliers to ensure you’re getting the best value.

5. Review Reports Regularly

• Why it matters: Regularly reviewing COGS reports allows you to spot trends, track fluctuations, and understand when and why food costs are rising. This insight helps you make informed decisions about menu pricing, purchasing, and adjusting to market changes.
• Tip: Set up automated reports that give you daily or weekly insights, and regularly discuss them with your team to ensure you're on track.

Common Mistakes in COGS Tracking

Even with the best intentions, restaurants can make critical errors in tracking COGS, which can lead to misleading financial reports and reduced profitability. Understanding and avoiding these common mistakes can significantly improve accuracy and help maintain healthy margins.

1. Inconsistent Inventory Counts

• The problem: Skipping inventory counts or using outdated numbers results in unreliable COGS calculations. Without an accurate record of what’s on hand, it becomes difficult to assess how much product is being used, lost, or wasted.
• Solution: Establish a consistent schedule for inventory—weekly or bi-weekly—and train staff to follow a standardized counting process.

2. Lack of Portion Control

• The problem: Inconsistent serving sizes or staff overserving leads to increased food usage, driving up your COGS. Even small variances add up quickly over time.
• Solution: Standardize portion sizes and ensure kitchen staff are trained and equipped to measure ingredients correctly.

3. Not Tracking Waste

• The problem: Spoiled, dropped, or returned food that isn’t logged results in inaccurate cost data. This missing information can distort your true food usage and hide opportunities to improve.
• Solution: Implement a waste tracking log and encourage staff to record any unusable food items immediately.

4. Ignoring Staff Meals or Discounts

• The problem: Meals provided to staff or heavily discounted items still represent a cost to the business. Failing to account for them underreports your actual COGS.
• Solution: Include staff meals and promotional discounts in your COGS calculations to get a true picture of food expenses.

5. Over-Relying on Software Alone

• The problem: While COGS tracking software offers powerful tools, relying on it without regular human oversight can lead to errors. Data inputs must be accurate to produce meaningful reports.
• Solution: Use software as a support tool, but still review reports regularly, verify inventory inputs, and conduct manual spot checks.

How to Use COGS Data to Improve Menu Pricing and Purchasing

COGS data isn't just a financial metric—it's a valuable tool that can drive smarter, more strategic decisions across your restaurant operations. When used effectively, it helps optimize your menu, control inventory, and increase profit margins. Here's how to put your COGS data to work:

1. Adjust Menu Pricing

COGS data reveals the true cost of each dish, helping you identify items with low profit margins. By analyzing these numbers, you can:

• Raise prices on underperforming dishes to improve margins.
• Remove or rework menu items that consistently yield low profitability.
• Focus on promoting high-margin items to increase overall profitability.

2. Streamline Inventory

Use COGS reports to see which ingredients are underused or contribute to excess waste.

• Eliminate rarely used ingredients to simplify purchasing and reduce spoilage.
• Consolidate your menu by removing items that require unique or costly components.

3. Spot Purchasing Trends

Tracking ingredient cost fluctuations over time allows you to:

• Plan purchases in advance based on seasonal price changes.
• Forecast budget needs more accurately and avoid unexpected cost spikes.

4. Create Strategic Specials

Use surplus inventory or soon-to-expire items to craft creative daily specials. This:

• Helps reduce waste.
• Maximizes the use of perishable ingredients.
• Encourages upselling and customer engagement with limited-time offers.

5. Negotiate Better Deals with Vendors

Historical purchasing data gives you leverage when negotiating with suppliers. You can:

• Show volume data to request bulk discounts.
• Identify better-performing vendors based on pricing and reliability.
• Switch suppliers if current deals aren't competitive.

 

Conclusion

Proper COGS tracking is essential for any restaurant aiming to thrive in today’s competitive market. From inventory control to menu pricing, understanding and managing your cost of goods sold helps you make smarter, more profitable decisions. By avoiding common mistakes and adopting best practices, you’ll not only protect your margins but also set your business up for sustainable growth.

At NSKT Global, we specialize in helping restaurants streamline their financial operations with tailored accounting solutions, COGS tracking, and performance insights. Our team leverages industry-specific expertise and cutting-edge tools to help you monitor inventory, optimize menu pricing, and make informed purchasing decisions. Whether you're a single-location eatery or a growing chain, NSKT Global provides the guidance and support needed to boost profitability and drive long-term success.

 

FAQs About COGS in Restaurants

1. What’s included in restaurant COGS?
   COGS includes the cost of ingredients, beverages, and other consumables used to prepare menu items.
2. How often should I track COGS?
   Ideally, COGS should be tracked weekly or bi-weekly for accurate and timely insights.
3. What is a good COGS percentage for a restaurant?
   A healthy COGS percentage typically ranges between 25%–35% of total sales, depending on the restaurant type.
4. How can I reduce my COGS?
   You can reduce COGS by standardizing portions, managing inventory efficiently, and negotiating better vendor prices.
5. Can software help automate COGS tracking?
   Yes, COGS tracking software automates inventory, purchasing, and reporting to improve accuracy and save time.