What’s the difference between your Cost of Goods Sold and your operating expenses in your food business?

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Jan 14

January 15, 2022 Edition

By speaking to a few prospects and clients, they can get very confused what the difference is between your Cost of Goods Sold (CoGS) and your expenses. There is a big difference between the two (2). Your Cost of Goods Sold (CoGS) lets you know how well you are pricing your products and controlling your inventory. As a restaurant owner, it’s important that you know how these ratios are calculated and what they can tell you about the general health of your business. Your operating expenses are types of costs involved in running a company and significant in determining its financial well-being.

Understanding CoGS

“Cost of Goods Sold” is the raw material costs of your menu items – the actual amount of food and beverage used to produce your food and beverage sales. The CoGS refers to the business expenses directly tied to the procuction and sale of a company’s goods and services. In lamens terms, CoGS represents expenses directly incurred when a transaction takes place. For example, when the coffee shop sells a double espresso, CoGS accounts for the price of the to-go cup, the protective sleeve, the coffee filter, the water, the processed beans, and so forth.

Examples of CoGS includes:

Labor directly tied to production
Direct materials needed for the production of goods and services
Taxes on the production facilities
Supplies used to produce the end product
Packaging for the end product
Shipping/Freight*

*If a business has no real costs of production and only engages in the purchasing and reselling of goods over the internet, it may still list the amount spent on purchases as COGS. Packaging may even be included, but only so long as the packaging is unique and resembles what would appear on a shelf in a physical location. The bubble wrap, tape, and cardboard used to deliver the widget to a customer are not COGS. The cost of shipping to the customer is also not included in COGS.

It’s important to note that CoGS is separate from theoretical costs. “Theoretical Cost” is what you should have used: your ideal spend. But the cost of the food and beverage you actually used is not always equal to what you should have used based on your recipes.

Raw material costs can change, and then there’s waste, inconsistent portioning, and shrinkage (the polite term for employee theft) – these can all create differences in theoretical versus actual costs. Your bookkeeper or accountant will produce your actual cost using your inventory and invoices as inputs.

Normally, CoGS is expressed as a ratio of a percentage of cost-to-sales. These ratios are usually categorized as follows:

Revenue / Cost

Standard ratio range (%)

Food cost / Food sales

25–40%

Beverage (non-alcoholic) cost / Beverage (non-alcoholic) sales*

10–30%

Wine cost / Wine sales

30–50%

Draft beer cost / Draft beer sales

20–40%

Bottled (canned) beer cost / Bottled (canned) beer sales**

30–35%

Liquor cost / Liquor sales

10–20%

Bar mix and consumables cost / Liquor sales***

5–25%

Acceptable ratios are largely determined by your regional market and business model, and can vary from concept to concept. As a general rule, your combined CoGS and labor costs should not exceed 65% of your gross revenue – but if your business is in an expensive market, you should aim for a lower percentage.

Generally accepted ratios vary from market to market and concept to concept. Your percentage of costs will be largely determined by how much you sell something for versus how much it costs to produce. The cost percentage will be generally determined by the bestsellers on your menu, rather than the menu as a whole.

A steakhouse or high-end seafood restaurant can have food costs of 40% and higher. A “from scratch” Italian restaurant specializing in pasta and pizza in a high-rent neighborhood could have a food cost as low as 20%. The key difference is the average check and the amount of labor needed to serve those items.

Rolling dough, cutting noodles, and prepping sauces and toppings are a lot more labor intensive than a restaurant that does not transform the raw product as much. Grilled steaks and steamed seafood, for example, don’t require much beyond proper seasoning, cooking, and storage/handling. A restaurant can be profitable with a 40% food cost, as much as a restaurant with 20% food cost can be losing money.

*Food and non-alcoholic beverage are sometimes combined, but this is less common.

**Draft and bottled beer is sometimes combined, but this is not recommended. The serving, storing, and pouring methodology for each is different, as are the costs.

***Bar consumables are sometimes combined with non-alcoholic beverage or liquor; use your own discretion to determine with your accountant if this is right for your restaurant.

Understand your Operating Expenses

Operating expenses refer to expenditures that are not directly tied to the production of goods or services. Typically, selling, general, and administrative (SG&A) expenses are siloed under this category, as a separate line item. Examples of operating expenses include:

Rent
Utilities
Office supplies
Legal costs
Sales and marketing
Payroll
Insurance

A company must shrewdly budget for its operating expenses while maintaining its competitive edge. After all, these costs are incurred regardless of sales figures. For example, a donut shop must continue paying rent, utilities, and marketing costs, regardless of the number of French crullers it moves in a given week.

Key Takeaways

Operating expenses (OPEX) and cost of goods sold (COGS) are discrete expenditures incurred by businesses.
Operating expenses refer to expenditures that are not directly tied to the production of goods or services, such as rent, utilities, office supplies, and legal costs.
Cost of goods sold refers to expenses directly related to the production of a product, such as the materials needed to assemble a product and the transportation needed to bring goods from a distributor to a retailer.
Both types of expenses are recorded as separate line items on a company's income statement.

Thank you all for reading!