 Hey guys, my name is Wilson. Today we're going to be talking about how do you calculate your food cost. Now, first and foremost, why is food costs so important? There are basically three types of costs that would determine whether your business goes bankrupt or whether you would be having a thriving restaurant business. The three types of expenses are rental costs, your labor costs and your food costs. So these three things adds up to close to 75 to 90 percent of your revenue. OK, so what that means is that if you can control one sector and one component of this cost, you're going to be able to maximize the amount of profit that you can bring home. OK, and in the food and beverage world nowadays, the margins are already thin and we're talking about five to 10 percent. So what that means is if you learn how to calculate and when you learn how to calculate food costs, you're going to be able to better control this item. And when you can better control this item, that means that you can have a bigger pot and bigger profit. Which is the reason why today we're going to be talking about how are you going to be able to calculate your food cost? So now that you understand the importance of why food cost is so important, I also want to bring to you the three benefits of actually understanding it. OK, it is because the first benefit is so that we can strategize an engineer and new menu. There are items on your menu that once you calculate the food costs, you understand and you would know that does not make sense because these items every time you sell one, you're losing money. Because for example, if the cost of your burger is like eight dollars, but you're selling it for only twelve dollars, then that means that your cost of good sales is way too high to sustain this product. That means you're not making money from this product. Aside from cost of good sales, you also need to account for your labor, your rent and everything. And when you count everything within this item, it's not making money. Then why are you selling it? Same thing goes with actually creating new items to give you an example. Whenever we create ice cream flavors, we always look at we always start from how much of a budget can we work towards? How much of a budget do we have to create this new item? So for example, if we sell our ice cream or a product, a dessert menu item that is retailing for eight dollars, then we know we can't spend more than two dollars whenever we're testing this new product, whether it be on the toppings, whether it be the ice cream base, whether it be the presentation itself, everything adding up cannot be more than two dollars because now we understand our food costs. Whereas if you do not understand food costs, you'd be putting in tons of topping just to make this ice cream stand out, make it look super amazing, yet the cost is five dollars. How can you make any money from that? You can't, which is the reason why understanding food costs is so, so important. On the same token, the second benefit of truly understanding your food costs is that you can actually run proper promotions. And then what I mean by that is if you're running promotion, so many of us are running promotions, but we don't even know if we're making money or not. If you are, every time you sell a product, every time you sell an item, it's not making money, then why are you running that promotion? It's a lose, lose game, okay? Your clients and your customers are so used to you running promotions that they won't purchase from you unless you run a promotion. And at the same time, you keep running promotions that are not generating you any profits, then what's the point? A lose, lose scenario. On the same token, if you understand food costs, if you understand, for example, a piece of cookie, it costs you around 25 cents to 50 cents to make. And you're retelling, you sell it out to the public for five dollars. That's a really healthy margin that you have. And if you want to use your cookie as a promotional item, where you know what, come in and buy a cookie for 50% off, tons of people will be flooding in. You're going to charge them 250, yet it takes you 50 cents to make and you still have a ton of margins to play with. You still are able to benefit from that and to be able to profit from that, which is the reason why you can be very strategic when you're running these promotions that have priced cookies and when people come in for their cookie, they're going to order a cup of milk, which you can charge at full price. And that's a very, very smart way of running promotions all because of the fact that we understand the cost of goods sold to food costs. The third and final benefit that I'm going to be sharing with you today is that you can actually make more profits by understanding the seasonality of the cost of the goods that you're buying. So for example, produce, foods. Whenever we have any summer promotions, we usually buy our strawberries or our mangoes at the peak, at the most supply time that the produce is being harvested. We buy a ton of it and then we cut it up and then we freeze it. So in that way, we have an ample supply of ingredients. Why do we do that? It is because mangoes don't always come that cheap. Usually within a month time, they become more and more expensive as the season fades on. But because of the fact that we understand that, we understand cost of goods sold, we're able to strategize, buy them in bulk, buy them and store them. And then now throughout the season, we can actually control costs and thus bringing us much more profits at the end of the day. So now that you understand why it's so important, some of the benefits and like more advanced strategies of how to use food costs, we're going to dive right into how are you going to be able to calculate your food costs for your restaurant. Before I do that, I'm going to explain to you a little bit more about food costs. Food cost is basically usually comes in a percentage form. And what I mean by that is usually it's the cost of making that food item. It's the direct cost. What I mean by that is inventory, all the ingredients that it takes to create that item. We're talking about, for example, if we're talking about ice cream, we're talking about the cups, we're talking about the napkins, we're talking about the dry ice that we have. We're talking about the milk, we're talking about the powders, the sugar, the topping. These are all the ingredients that goes into making this item. And on top of that, we need to add into the direct cost of preparing the ice cream. So what I mean by that is before we actually have that ice cream, we need to create a mix, a mix that we can pour into that ice cream machine that turns out soft serve. Now for us to create, for us to have the labor to create this box of mix, that itself is a direct cost that goes into creating the item, not just the ingredient cost. So for example, I need to have a labor, I need to find a staff to pour all the ingredients in this bucket, blend it up and then pour into the machine to make the ice cream. For example, if it takes my staff an hour to create this product, then I would add this hour into our food cost as well. To give you a better example with numbers, just to simplify everything, in an ideal world, the ideal food cost of how much it takes. 50 cents for the cone, 50 cents for the milk, 50 cents for making all the toppings and another 50 cents for the person that creates that bucket of mix. And how do we get that 50 cents for the person that creates that mix? Well, if it takes that person an hour to create the mix and if the mix can create, let's say, 30 cups of ice cream, then we can just divide 30 with that person's hourly wage. So for example, if he gets paid $10 an hour, then we use 10 divided by 30, which comes out to be 30 cents. Then we would add that to the cost of good solds. So for the sake of this example, we said that that is 50 cents. So if you add everything up, that is $2 for making that cup of ice cream. That becomes your cost of good solds. That becomes how much it costs. Now use that number divided by how much you actually sell the product for. So for example, if we sell the ice cream for $5 to the public, then we use $2 divided by $5 to get our cost of good solds. Typically speaking, cost of good solds should range from, I would say, 15 to 30%. 30% is the maximum that we would want for cost of good solds. And at the end of the day, the higher the cost of good solds, the less profit that we can make, the less profit that we can put into our pockets. So now that you understand in an ideal world, how much cost of good solds are for that ice cream? 20% is what we're talking about. But in reality, we have not taken into two big concerns. Number one is wastage. And the second one is theft. In an ideal world, this we don't take out. But in reality, this happens all the time, these two components. Food wastage and theft is always something that's going to happen. And what I mean by that is, for example, if we created a batch of ice cream and that whole batch is $20, if we retail it for $5, how much can we make? In theory, we're going to be able to make $100 in revenue. That equates to 20%. But because of the fact that, you know what, when we're cleaning the machine, we ended up wasting a bunch of ice cream. And in turn, those ice cream that we wasted cannot be sold as revenue. So what that means is maybe our revenue becomes $90. On the same token, if I'm the staff and my friend comes in and then I'm like, hey, you know what, Jason, thanks for coming in, I'm going to give you a free cup of ice cream. Here you go. But we never charged them. That means that for the same amount of ingredient, which is $20 of ingredient, I did not receive one order, which is $5. So that brings down the revenue in addition to all the wastage. So you can now imagine in reality that maybe the revenue that we bring in is only $80 instead of $100. With this calculation, we use $20 divided by $80 to get the real actual cost of goods sold, which becomes 25% versus in an ideal world, about 20% cost of goods sold. The reason why I'm explaining the ideal food cost and the actual food cost to you is because you need to understand in theory, everything is perfect. However, our job as owners, we need to understand what is realistic, what is it and how we can control a cost of goods sold. So now that we understand the two biggest components, food wastage and theft, we're going to have to keep a lot of close eyes to maintain and to take this element and to prevent these things from happening to ensure that our cost of goods sold isn't an optimal percentage. Now, how can we do that? Then we can have better processes, for example, cleaning, better processes of optimizing the food ingredients that we use, better processes to understand and to prevent people from stealing and giving away and copying different meals. This all acts up to your profits. So at the end of the day, you need to make sure why we're even calculating food costs. The reason why we're calculating food costs is for us to be aware of how much we're actually spending. Now, how do you calculate actual food costs? All you have to do is in the beginning of the month, check your inventory. At the end of the month, check your inventory again. Take the difference than that's the amount of ingredients that you have used throughout the month and you're going to be able to use that to benchmark it against the revenue we're able to generate for each food item. And then you're going to have better understanding of the actual food costs. And for you to understand it, now you can manage it properly. So that way, you can gain more profits into your pockets. So there you go. We just talked about the importance of understanding your food costs. We just talked about how do you calculate your ideal food costs versus your actual food costs? As a rule of thumb, we want to be able to aim for a maximum 30 percent of the actual food costs because anything higher, you're going to be left with no margins to play with. So many times we're actually looking at our bank account. We're like, wow, we're making tons of money on paper. But in our bank account, money is not showing up. It is because of our expenses outbeats the revenue that we bring in. Just because we make ten thousand dollars doesn't mean it all goes into our pocket. We need to pay for tons of money for rent, tons of money for labor, tons of money for cost of goods sold. So our job as owners, as restauranteers is to control this cost, minimize it to below 30 so that we can have a healthy margins for us to take home. So I really hope you enjoyed this video. I've the only thing I really ask for is for you to smash the like button. That's the only thing that really helps me along this whole YouTube journey. If you guys have any questions, leave in the comment section below. And if you want to learn more about how do you understand building a restaurant? How do you engineer better menu so that we can profit a ton? How do you have like more than a thousand loyal fans so that way you don't need to worry about the competitors around the block or just understand my journey on building an ice cream empire? Then definitely check out the link below. I created this course of something that I've done the last ten years. So definitely check out in the link below. Otherwise, follow along this whole journey. I'll see you guys in the next video.