How Can Food Costing Software Boost Profitability?
Food costing software determines food costs at the point of sale to allow a cost-effective pricing strategy. A food costing application can help regulate waste, manage costs, save time and increase the profitability of your distribution business. Some applications manage individual food item prices and check against availability, while others compute the cost of recipes and food lists.
A food costing application is part inventory management system, part accounts package and part reporting/analytics tool.
Food costing tools are extensively used by restaurants, catering businesses and suppliers of prepared meals of all varieties. They can also be of great assistance to food distributors, wholesalers and other supply-side companies in managing costs and delivering customer demand.
Keep Control of Prices
Inflation and the reduced value of the pound has driven up the price of food imports. This places pressure on food service companies to balance raised costs with a realistic pricing strategy that still delivers an acceptable profit margin. Especially when supplying products for catering or pre-prepared meals, which can be difficult to quantify, care must be taken not to lose money per unit. At the same time, the end product must be seen by its market to offer genuine value for money – a tricky balancing act.
Food costing software can help you keep control of prices. By mapping out the products you buy you can trace actual expenses, compare suppliers and assess market tolerance for different pricing levels.
Calculating Your Food Cost Percentage & Ideal Food Cost
Most food costing tools work in the following way. For each step of the process we give an arbitrary value to show how the software can track costs, reduce waste and boost profits:
1) Starting Inventory £30,000
The value of your starting inventory is determined in terms of SKUs and monetary value.
2) Purchases £7,500
Purchase inventory is calculated for all new food supplies purchased during the accounting period. This can be set up to trace costs on a daily, weekly, monthly or annual basis as required. Purchases can be traced throughout the period, e.g. were there any returns, additional purchases etc.
3) Final Inventory £32,000
At the end of the accounting period a final inventory is taken, linked to a total monetary value.
4) Sales £10,000
The software will determine your total food sales during the accounting period.
Now for the fun part.
The program may calculate your food cost percentage using a variation of this formula:
(Starting inventory + Purchases –Final inventory) / Sales = Food Cost Percentage
(30,000 +7,500 – 32,000) / 10,000 = 0.55, or 55%
Is our example of 55% a good food cost percentage? One way to determine this is by benchmarking it against averages in your sector, but it is more useful to compare your actual figure to your ideal or target food cost.
Food costing software can also help you with this side of the equation, using two factors for each type of food item:
- Total cost (Item cost x volume sold per accounting period)
- Total sales (retail price x volume sold per accounting period)
The Ideal food cost can then be calculated as Total Cost / Total Sales. For example: Costs £3,000, Sales £10,000:
3,000/10,000 = 0.3, or 30%
Improving Your Profit Margin
Armed with a regular and accurate flow of pricing data for each food item, you can establish strategies for optimising your figures, bringing your food cost percentage in alignment with your ideal food cost. There are many ways you can do this, including selective price rises, varying suppliers, adopting seasonal products, seeking out more popular, better selling items and so on. A food costing tool won’t provide the answers to your costing strategy, but it will arm you with the data you need to implement meaningful changes and keep track of your profitability. Food costing is just one of the functions of our Prodigy Food Services platform.