The Cost of Goods Sold (COGS) refers to the direct costs associated with producing or purchasing the goods a business sells. For restaurants and bars, this primarily includes the cost of ingredients, beverages, and consumables needed to prepare and serve menu items. COGS is a vital metric in the hospitality industry because it directly impacts the Profit & Loss (P&L) statement and overall profitability.

On a P&L statement, COGS is deducted from total revenue to calculate gross profit. This calculation demonstrates how efficiently a business is turning revenue into profit before accounting for operating expenses. A high COGS reduces gross profit, leaving less room to cover fixed costs, operating expenses, and ultimately net profit.

For example:

• A restaurant earns €50,000 in revenue with €20,000 in COGS, resulting in a €30,000 gross profit.
• If COGS increases to €25,000 due to rising ingredient prices, the gross profit falls to €25,000, directly shrinking the bottom line.
•  

This demonstrates the importance of closely monitoring and managing COGS to ensure profitabilitY.

Several variables impact COGS, making it a dynamic and controllable element of the P&L:

Food and Beverage Costs: Seasonal fluctuations, supply chain issues, and inefficient purchasing practices can increase expenses.

Waste and Spoilage: Overportioning, improper storage, and poor inventory control lead to unnecessary waste, driving up costs.

Supplier Pricing: Failing to regularly negotiate contracts or compare suppliers may result in higher purchase prices for key ingredients.

Menu Design: Items with higher food costs or complex preparation methods can disproportionately raise COGS.