As an F&B business owner, an operations mistake that you want to avoid at all costs is failing to do recipe costing effectively. This is probably not a new or unnerving concept to seasoned restaurateurs, but if you’re new to the industry or are a first-time cloud kitchen owner in Malaysia, you may still be figuring it out.
The most important question to answer first is: what is recipe costing? Recipe costing is the process that restaurant business operators use to calculate the total cost of a given recipe that’s offered on their menu. This calculation reveals the cost that a restaurant incurs to cook and serve every dish that customers can order. To find this cost, the process involves noting every ingredient of a particular recipe and the exact quantity that’s needed to make one portion of that dish.
Coming back to why you need to do recipe costing, ask yourself this: What’s one of the quickest ways that a restaurant could go bankrupt? One surefire way is not having incoming payments that cover business costs! As a restaurant owner, if you’re not charging enough money for a dish to make up what it costs you to prepare said dish, your business will be in a lot of trouble. To avoid this scenario, we’ve put together this 5-step guide on how to do recipe costing the right way.
Why recipe costing is important for success
There are a few key reasons why getting recipe costing right is so important for long-term F&B business success:
Establishes a baseline for price setting
The only reliable way to know what price to set for each dish on your menu in order to make a profit is to know how much it costs you to make that dish. Accurate price setting is critical if your business is to make a profit.
Signals when recipe or menu changes need to be made
If you find that the cost to make a dish is exceeding forecasts, it’s a clear indication that you must either adjust the ingredients in the dish’s recipe to reduce overall costs, or perhaps discontinue that item altogether.
Helps identify which dishes have promotional value
Knowing which of your menu offerings yields the highest profit margins is extremely useful when choosing the best dishes to offer in promotions and specials.
Before we move on to the five steps to do recipe costing, remember that the end goal is to figure out the cost you incur to make one serving of a dish on your menu—so the total cost is based on the amount of food served for one order.
Now, let’s begin!
How to do recipe costing in 5 steps
Step 1: Write down all recipe ingredients and their quantities
The first step is to do a complete breakdown of the recipe. Jot down every ingredient, plus the weights or measurements required. The ultimate goal is to complete this exercise for every recipe that you’ll be using for your restaurant menu.
For example, let’s say that you’re a traditional Malaysian cuisine cloud kitchen that offers nasi lemak on the menu. You would need to write down each ingredient of your restaurant’s version of the recipe and the exact quantities used—like the rice, coconut, milk, peanuts, anchovies, and any sides you include like eggs or cucumber. What about the side sauce? Make sure you include and account for every ingredient of the sauce recipe too.
Step 2: Calculate how much each ingredient costs
The next step is to identify the price you pay for every ingredient in the recipe. This means looking at the price list or receipt from suppliers—whether it’s a store or a vendor—and noting how much you pay for a whole unit of that ingredient. For example, if you buy 10kg bags of rice, write down what your cost is to purchase one whole bag of rice.
Step 3: Calculate each ingredient’s portion price per recipe
To make this calculation, you need to divide the measurement or weight of each ingredient used in the recipe by the total weight or amount of the whole unit. Then, multiply that number by the purchase price of the unit. The resulting number is your cost for each portion of that ingredient needed to make that recipe.
Step 4: Repeat and add it all up
To get the total cost that you incur to make an entire recipe, you must get the portion cost of each ingredient. You get this by doing step 3 for every ingredient and adding all those numbers together.
Step 5: Figure out the cost per order or serving
To get your final calculated cost for every individual order, you then divide the cost of the recipe (as calculated in step 4) by the number of servings or individual orders that the recipe yields.
Use a simple calculation to determine your profits
You can use a simple calculation to see what your profit is once you’ve determined how much individual orders or servings cost. What you do is take your total revenue from selling a certain number of dishes and then subtract the cost of making the same number of dishes.
Because of the streamlined process offered to cloud kitchen owners, business operation costs are much lower than they are for traditional restaurants, so higher profit margins are quicker and easier to achieve. But, you can see how any missteps in recipe costing could easily affect and damage your bottom line, so you need to make sure that your process and calculations are on point.
What it all looks like in a nutshell
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’d like more information about how to open a cloud kitchen in Malaysia, please contact us today!