If you’re a new F&B business owner and are unsure of what exactly recipe costing is and why you need to do it right, please keep reading! Recipe costing could mean the difference between the success or failure of your restaurant business—whether you’re a seasoned industry professional or just starting with your own CloudKitchen®—it’s a subject that’s equally important to all.
The first question to answer is: what exactly is recipe costing? Simply put, it’s a vital restaurant business operations process used to calculate the total cost of every individual recipe that’s offered on the menu. Via this calculation, restaurant business owners know the cost the business incurs to cook and serve every dish that paying customers can order from the menu. The process involves tracking every ingredient of a recipe—and quantities—needed to make that particular dish.
Just think about the long-term repercussions on your business if payments aren’t covering costs. Isn’t that one of the biggest mistakes you can make as a restaurant owner? There’s simply no way to have a successful business if you’re not charging your customers enough to cover the amount you pay to prepare the tantalising delicacies on your menu. That’s why we’ve compiled this 5-step guide that explains how to do recipe costing the right way.
Why is recipe costing so important?
As we’ve mentioned, knowing how to do recipe costing effectively is fundamental to long-term restaurant success. Here are some of the main reasons why:
- It gives a clear baseline for setting menu prices
It’s hard to know how much you can earn on a dish if you don’t know how much it costs you to make it, right? Recipe costing is your only clear indicator of what price to set for each dish in order to make a profit.
- Flags when to make menu changes or alter recipes
While going through the process of recipe costing, if you discover that your business’s costs to prepare a dish exceed forecasts, you know for sure that changes need to be made. This means that you either need to alter the recipe’s ingredients to reduce the overall cost or maybe even remove that item from your menu altogether.
- Helps when selecting the best menu item for promotions
Offering promotions and specials is a well-known marketing tactic to attract new customers and increase sales. Recipe costing helps you determine which dishes on your menu yield the highest profit margins, and therefore, will be your best choices for promotional offerings.
Keep in mind that the goal of recipe costing is to calculate the cost you incur to fulfill one order of a dish on your menu—in other words, how much it costs you based on the amount of food you serve for one order of said menu item.
Let’s get started!
How to do recipe costing the right way in 5 steps
Step 1: Write down all ingredients and quantities of each
The first thing to do is completely break down the recipe. Write down all the ingredients one by one with the exact weight or measurement of each.
For example, let’s say that you own a traditional Indian food CloudKitchen® and you want to recipe cost the Tandoori chicken dish on your menu. You’d start by writing down every ingredient—like the chicken, yogurt, oil, coriander, cumin, turmeric, garlic, salt, and any other condiment or seasoning you use in your version of the recipe—plus their quantities. Does an order of Tandoori chicken include rice and a side sauce? Make sure you include that in your calculation as well and break down the sauce’s recipe too.
Step 2: Calculate the cost of each ingredient as a unit
The second step is to identify the price your business pays for every ingredient as a whole. This usually requires looking at the receipt or price list from the vendor or store that you purchase your items from. For example, if you buy 15kg bags of rice at a time, write down how much you pay every time you purchase a bag of rice.
Step 3: Figure out the cost per portion of each ingredient
The third step is where you break down the ingredient cost further by calculating how much you pay per portion of an ingredient. You get this number by dividing the amount or weight of every ingredient in the recipe by the total amount or weight of the whole unit. Next, multiply that number by the purchase price of the unit. The final number represents your total cost for each portion of that ingredient in the recipe.
Step 4: Add up all the numbers
You need to repeat step 3 for every ingredient in the recipe. After you’ve gone through this exercise, you’ll have a bunch of numbers representing your per portion cost of each ingredient. Add those all up, and you’ll get the total cost of how much that recipe costs you.
Step 5: Calculate your cost per individual serving
Lastly, you want to figure out how much you pay per order of that dish. To do so, divide the total cost of the recipe (from step 4) by the number of individual orders or servings that the entire recipe yields.
Use the data to calculate your profit
Once you’ve determined your cost per order, you can use a quick calculation to calculate your profit. Take the total revenue you make from selling a certain number of orders of a dish and subtract the total of what it costs to make that same number of dishes. And that’s your profit!
The advantage that CloudKitchen® owners have is that the built-in streamlined process translates into much lower business operation costs compared to running a traditional restaurant. So, it’s quicker and easier to achieve higher profit margins. But, it’s important to stay on point with your recipe costing process because aggregated miscalculations can quickly dwindle your profits.
Here’s how it all looks
Cost of ingredients used = (amount of ingredient used / the total amount bought) x the cost of the total amount
Cost per serving = the cost of all the ingredients used / the number of servings
Profit = (revenue x number of serving) – (cost x number of servings)
If you’re interested in learning more about opening your own CloudKitchen® in India, please don’t hesitate to contact us!