Enterprise Insight:
FINANCIAL ANALYSIS Part II: RECIPE COSTING

To run a profitable enterprise, all businesses must control their prime costs. Experience and expertise tells us, all food & beverage and labor costs should be 65% of sales or less in order to achieve profitability. Today, we are going to share with you a few tips on how to start your business with 30% (product) food & beverage costs or less.

First, when embarking on a new enterprise, all businesses must understand how much one portion of each product you sell costs; recipe costing. This includes the raw ingredients to produce that product. Once we get a total recipe cost for each product, the next step is to price your products. Let us say you want to achieve 30% food cost for your business and you are producing and selling sandwiches. After you have done your calculation and have determined one sandwich costs $2.50, there is a simple formula to determine your selling price. $ Food Cost / Food Cost % = $ Selling Price. In our example, to achieve a 30% food cost, we would have to sell our sandwich for $8.33 = ($2.50 / 30% ).

Next, we would want to produce a market study of like and unlike businesses in the location we are opening, in addition to an analysis of like concepts that are not in your area. From this analysis, you would determine the pricing for all sandwiches that are similar to the one you are selling. If your analysis tells you that most sandwiches of the same have a higher selling price and you feel that your enterprise through design, service, ambience and unique selling proposition warrants a higher selling price, you could then sell your sandwich at $9.50, achieving a lower food cost of 26.3%. This is called value pricing; pricing a product for more than the anticipated selling price credited to the added benefits you offer your guests.

For all products you sell, a recipe cost must be developed. Without this, it will be very hard to determine if you have priced your products properly in order to achieve the financial results you seek. Remember, it is the pricing of your products that set the tone for how much money / sales you achieve on a daily basis.

Happy Recipe Costing… TaraPaige Group

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