What is the difference between COGS and operating expenses?
COGS (Cost of Goods Sold) covers the direct cost of ingredients, beverages, and packaging used to create menu items. Operating expenses are the indirect costs of running the restaurant, like rent, utilities, staff salaries (non-kitchen), marketing, and insurance. COGS affects gross profit, while operating expenses impact net profit.
COGS vs Expenses - What Every Restaurant Owner Needs to Know to Protect Profits
Overview
Running a restaurant is more than cooking great food - it's a constant balancing act of quality, service, and financial control. Between keeping staff schedules full, dealing with suppliers, and managing customer expectations, it's easy for accounting details to slip to the bottom of the priority list. Yet one overlooked detail can quietly drain profits - not understanding the difference between Cost of Goods Sold (COGS) and operating expenses.
When these two cost categories get blurred, profit margins become unclear, making it harder to see where the business is truly performing well - or bleeding money. This isn't just a bookkeeping technicality; it's a critical insight that can shape your menu pricing, supplier negotiations, and spending habits. In fact, many restaurants that struggle to maintain healthy margins are often tracking all costs in one lump sum, missing the opportunity to spot specific problem areas.
The good news? Separating COGS from operating expenses doesn't require a finance degree or hours of complicated math. With a clear understanding of what belongs in each category - and a simple system for tracking - you can quickly gain a more accurate picture of your profitability and take action before problems grow.
Defining COGS in Restaurant Terms
In restaurant accounting, Cost of Goods Sold (COGS) refers to the direct cost of producing the food and drinks you sell - nothing more, nothing less. It's the dollar value of the ingredients, beverages, and packaging that physically leave your inventory to be served to a customer. If it's on a plate, in a cup, or in a takeout bag, it likely counts toward COGS.
Here's a simple way to think about it - imagine your restaurant without customers. The lights might still be on, rent still due, and staff still scheduled - but your COGS would be zero, because you wouldn't be producing or selling any menu items. That's what makes COGS directly tied to sales volume - when sales increase, COGS typically rises too.
Examples of COGS in restaurants include -
1. Fresh and frozen ingredients - meat, seafood, vegetables, fruits, dairy, spices.
2. Beverages - coffee beans, tea leaves, soft drinks, wine, beer, spirits.
3. Condiments and garnishes - sauces, dressings, herbs, lemon wedges.
4. Packaging and disposables - takeout boxes, paper cups, straws, napkins.
It's also important to note what's not included- kitchen equipment, staff wages, utilities, and cleaning supplies do not belong in COGS because they aren't consumed directly to produce a single menu item.
From a financial perspective, COGS is calculated using this formula -
COGS = Beginning Inventory + Purchases - Ending Inventory
Accurate COGS tracking allows you to calculate gross profit - sales revenue minus COGS - which tells you how efficiently you're turning ingredients into profit. For most restaurants, keeping COGS within 28-35% of total sales is considered healthy. If it's creeping higher, that's a signal to review portion sizes, supplier costs, or menu pricing.
By clearly defining and tracking COGS, you gain a powerful lever to control profitability - before overhead costs even enter the equation.
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Defining Operating Expenses
While COGS represents the direct cost of producing menu items, operating expenses are the ongoing costs of keeping your restaurant open and running - regardless of how many customers walk through the door. These are the day-to-day expenses that support the business as a whole but aren't consumed directly to make a single plate of food.
Think of operating expenses as the "background costs" of running a restaurant. They keep the lights on, the doors open, and the team in place, but they don't fluctuate as sharply with sales volume as COGS does. Even if you close your dining room for a slow week, you'll still owe rent, insurance premiums, and certain staff salaries.
Common restaurant operating expenses include -
- Rent or mortgage payments for the restaurant space.
- Utilities like electricity, water, gas, and internet.
- Salaries and wages for non-kitchen staff, such as hosts, servers (if not paid hourly only), and management.
- Marketing and advertising costs, including website hosting, social media ads, or printed menus.
- Insurance -general liability, property, workers' compensation.
-Licenses and permits required to operate.
- Software subscriptions for POS systems, accounting tools, or reservation platforms.
- Repairs and maintenance for equipment and facilities.
From a financial standpoint, operating expenses are subtracted after gross profit to determine net profit. This means even if your COGS is in check, high operating expenses can still erode profitability.
Monitoring these costs is just as important as tracking COGS. While some, like rent, are fixed, others - such as marketing spend or administrative costs - are more controllable. Reviewing them regularly helps you identify areas to cut waste without affecting customer experience.
By understanding operating expenses separately from COGS, you can see two sides of your financial picture - how efficiently you produce menu items and how efficiently you run the overall business. Both matter equally for long-term success.
Key Differences Between COGS and Expenses
Now that we've defined Cost of Goods Sold (COGS) and operating expenses, the next step is to clearly understand how they differ - and why that matters for your restaurant's financial health. On the surface, both are costs, but they play very different roles in your profit and loss statement.
1. What They Represent
- COGS. Direct, variable costs tied to producing the menu items you sell - ingredients, beverages, and packaging.
- Operating Expenses. Indirect costs that keep the restaurant running - rent, utilities, salaries for non-kitchen staff, marketing, and more.
2. How They React to Sales Volume
- COGS typically rises and falls with sales. More customers = more food and drink served = higher COGS.
- Operating expenses are often more stable. Rent doesn't change just because you had a slow week, though some expenses like hourly labor or utility usage may fluctuate slightly.
3. Impact on Profitability
- COGS affects your gross profit. Sales revenue - COGS.
- Operating expenses come after gross profit and affect your net profit.
4. Why the Distinction Matters
Mixing the two can distort your understanding of where profits are being lost. For example, if margins are shrinking, you need to know whether it's because of rising food costs (COGS issue) or increasing overhead (operating expense issue). The strategies to fix each are completely different.
By separating and tracking these categories accurately, you gain precise insight into your restaurant's performance, enabling you to make targeted, effective changes rather than broad, guesswork-based cuts.
How to Accurately Track COGS in a Restaurant
Knowing your Cost of Goods Sold (COGS) isn't just about writing down what you spent on ingredients - it's about measuring exactly how much product was used to generate sales during a specific period. Without consistent tracking, you risk basing pricing and purchasing decisions on incomplete or misleading data.
Step 1. Keep Organized Inventory Records
Create a system for listing every ingredient, beverage, and disposable item used to serve customers. Group items logically - meats, dairy, produce, dry goods, beverages, packaging - to make counting easier.
Step 2. Conduct Regular Inventory Counts
Most restaurants benefit from weekly counts, but at a minimum, do them monthly. Count both beginning and ending inventory in the same unit of measure every time - pounds, liters, or individual items - to maintain accuracy.
Step 3. Use the COGS Formula
The standard calculation is -
COGS = Beginning Inventory + Purchases - Ending Inventory
This tells you exactly what was consumed during the period, not just purchased. For example -
- Beginning inventory. $8,000
- Purchases. $5,000
- Ending inventory. $6,000
COGS = $8,000 + $5,000 - $6,000 = $7,000
Step 4. Compare COGS to Sales
Divide COGS by total sales to get your COGS percentage. For many restaurants, a healthy range is 28-35%. Higher numbers may signal over-portioning, supplier price hikes, or waste.
Step 5. Review Trends
Tracking over time allows you to spot patterns, such as seasonal changes or the impact of menu adjustments.
By consistently measuring COGS, you gain control over one of the most variable parts of your cost structure - putting you in a stronger position to maintain healthy gross profit margins even when sales fluctuate.
How to Accurately Track Operating Expenses
While COGS reflects the variable cost of producing food and drinks, operating expenses cover the broader cost of keeping your restaurant open and functional. Tracking them accurately is crucial for understanding your true profitability and spotting areas where you can save without harming the customer experience.
Step 1. Categorize Your Expenses
Break operating expenses into clear categories so they're easier to monitor -
- Fixed expenses (don't change much) - rent, insurance, software subscriptions.
- Variable expenses (can fluctuate) - utilities, hourly labor for servers, marketing.
- Controllable expenses (can be influenced by decisions) - advertising, maintenance schedules, admin costs.
Step 2. Use a Reliable Tracking System
A spreadsheet works for very small operations, but most restaurants benefit from POS systems with accounting integrations or dedicated tools like Altametrics. These can automatically import and categorize expenses, reducing manual errors.
Step 3. Record Expenses Consistently
Set a standard time frame - weekly or monthly - for entering and reviewing expenses. Consistency ensures you don't miss costs like annual license renewals or unexpected repairs.
Step 4. Review Monthly
Compare current operating expenses to previous months and your budget. If marketing costs doubled, ask why. If utility bills spike, investigate whether equipment is running inefficiently.
Step 5. Watch the Ratios
Operating expenses, when combined with COGS, should still leave room for a healthy net profit margin - ideally in the 5-10% range for most restaurants.
Accurate tracking turns operating expenses from a vague monthly outflow into actionable data. It's not about cutting every cost to the bone; it's about knowing where money is going so you can align spending with your restaurant's goals and keep profitability in check
Why Understanding COGS vs Expenses Protects Profits
In a restaurant, profit doesn't disappear overnight - it slips away quietly, hidden in small oversights. One of the most common is treating all costs as the same. When COGS and operating expenses are lumped together, it's impossible to see whether a profit problem is caused by menu production costs or business overhead. Separating them gives you the clarity to fix the right issue.
COGS and Gross Profit
When you subtract COGS from your total sales, you get gross profit - the money left over before paying for rent, utilities, and other operating expenses. If gross profit is too low, it's a sign that menu pricing, supplier costs, portion control, or waste is the issue.
Operating Expenses and Net Profit
After subtracting operating expenses from gross profit, you're left with net profit. If net profit is low despite a healthy gross profit, the problem lies in overhead costs - such as high rent, over-staffing in front-of-house roles, or excessive marketing spend.
Industry Benchmarks
For most restaurants -
- COGS. 28-35% of sales.
- Operating expenses. often 50-60% of sales (including labor).
- Net profit. ideally 5-10%.
When you know both numbers separately, you can take targeted action -
- If COGS is too high. renegotiate with suppliers, adjust menu prices, tighten portion control.
- If operating expenses are too high. review labor scheduling, renegotiate contracts, or scale back non-essential services.
In short, understanding the difference between COGS and expenses isn't just good accounting - it's the difference between guessing and making informed, profitable business decisions.
Making the Distinction a Habit
Mastering the difference between COGS and operating expenses isn't about becoming an accountant - it's about gaining a clearer picture of your restaurant's financial health so you can protect and grow profits. When you track these numbers separately, patterns start to emerge. You can see whether rising costs are tied to the food you serve or the way you operate the business, and you can respond with the right solution instead of guesswork.
The process doesn't have to be overwhelming. Start small -
1. Review last month's Profit & Loss statement and highlight all costs that belong in COGS versus operating expenses.
2. Check your percentages - is COGS in the 28-35% range? Are operating expenses enough for a healthy net profit?
3. Set a regular schedule to track and review both categories, ideally monthly.
Over time, this separation becomes second nature. You'll be able to look at your numbers and immediately know where the pressure points are - whether that's a spike in seafood prices, a gradual increase in utility bills, or too many non-peak labor hours.
The restaurant industry is famously competitive, with average profit margins far slimmer than most other businesses. By making this one accounting habit part of your routine, you give yourself an edge- the ability to act quickly, confidently, and based on facts, not assumptions.
Clarity in your numbers leads to clarity in your decisions - and that's how you keep your restaurant not just running, but thriving.
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Frequently Asked Questions
How often should I track COGS and expenses?
Ideally, track COGS weekly or monthly and review operating expenses monthly. Regular tracking ensures accuracy and helps spot trends before they affect profitability.
How do operating expenses impact net profit?
Operating expenses are subtracted from gross profit (sales minus COGS) to determine net profit. High operating expenses can erode net profit even if COGS is controlled, so monitoring them is essential.
What are controllable operating expenses?
Controllable expenses are costs you can influence, such as marketing spend, discretionary maintenance, or variable labor scheduling. Monitoring them allows for smarter cost management.
What expenses should not be included in COGS?
Items like rent, utilities, insurance, marketing, cleaning supplies, and staff wages (non-kitchen) should not be included in COGS because they aren't directly consumed in producing a menu item.
