Latest / Chef's PSA Podcast / Food Cost Explained Part 1 : What is Money? Ep. 55

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Food Cost Explained Part 1 : What is Money? Ep. 55 · Chef's PSA Podcast

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Hello Chefs, you're listening to Chefs PSA Podcast.
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I'm your host, Andre Natara on today's episode.
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This is going to be part one of the series on food cost.
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Stay tuned. So before we begin, I'm going to
0:24
give you a brief update on. Progress of these Spanish
0:28
translation books, I've already translated three of the Chef's
0:31
PS:, A series So, Culinary Leadership, Fundamentals, Line
0:36
Cook, Survival Manual, and Bad Sue, Good Chef have all been
0:40
translated into Spanish. I'm Finalizing Kitchen, Art of
0:44
War, and How Not to Be The Biggest City in the Kitchen.
0:47
They'll be out by the end of next week, so if you wanted
0:49
those books in Spanish, either for you or for your staff, they
0:53
are available. Go get them.
0:55
You can find them all on Chefs psa.com.
0:57
Additionally, I did a podcast with Line Cook Thoughts where we
1:01
talked all things social media strategy from the roll out of
1:04
threads to why branding is so important.
1:07
We talk about Instagram, Twitter versus Threads and so on.
1:10
It's a great podcast. If you're interested in social
1:14
media content creation, that's a great episode to go listen to.
1:17
It's online Cook Thoughts, which is also a very good podcast as
1:21
well. Go check it out.
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Let's get into today's episode. Today's episode is going to be
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the first part of the series on food cost.
1:29
Now, I haven't done a food cost podcast and I haven't really
1:33
gotten too much into it, and I did write about it in the
1:35
Culinary Leadership Fundamentals book and I also have a companion
1:38
to the book which is a video course where I do cover food
1:41
cost. Now the reason I haven't done a
1:44
food cost specific podcast really has a lot to do with the
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complexity of the subject because in my style of teaching,
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I don't think I could do a simple food cost podcast.
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And help people really understand what food cost is,
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because food cost is a very simple subject, and it's also a
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very complex subject. The very simple answer how to
2:02
manage food costs is cost divided by sales equals your
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food cost percentage, and that's usually what you're going to be
2:08
measured on in most restaurants. If you only take one thing from
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this podcast series, it's that cost divided by sales equals
2:15
food cost percentage. And that's the formula that's
2:18
used for labor cost, controllable expenses.
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The majority of your career, that's going to be the single
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formula you use for food cost. So I don't need to do a whole
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podcast on understanding that formula, and we'll get into some
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more complex formulas throughout the series.
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But to really understand food cost, I think you have to
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understand money. I think you have to have a
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little bit of history of money. I think you have to understand
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what money is. I think you have to have a
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mindset on thinking about money differently when you're working
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in the kitchen. I also think that you have to
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have very specific strategies when there are problems to know
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where to look. I get a lot of questions on food
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cost specifically and that's why I decided to do this episode and
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everyone always says teach me about food cost.
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Now I'm always a little bit confused what they mean by teach
3:01
me about food cost because I could teach you the formulas and
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you'll understand math, or I can teach you how to think about
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money, or I could teach you to think about how to organize
3:11
yourself and where to find problems.
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All three are very lengthy subjects.
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And probably the shortest subject is understanding the
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formula part. But here's why I haven't wanted
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to teach just a formula. The formula is important and
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you're going to need it for the rest of your career.
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But you could memorize it in about 10 seconds.
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That doesn't teach you what you need to know about food cost,
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because a formula is not a strategy.
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So then what we need to do today is we need to understand money.
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So what I want to do is first I want to get into what is money,
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Some history of money. Why do we use?
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Paper money or digital currencies or the banking system
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versus trading with rocks or seashells or apples for that
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matter. What makes something money and
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why you should view all food as money.
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If you don't understand money, really, then you really should
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have no business managing money. So the first thing that we're
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going to do in this podcast series is explain what money is.
4:03
So the very simple answer of what is money?
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It's a medium of exchange for goods and services, with it
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being a store of value, a medium of exchange and a unit of
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accounting. Those are its three primary
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functions. But in order for something to be
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considered money, it needs to have some very specific
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properties. And specifically today we're
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going to talk about the three specific properties that
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something needs in order to be considered money, and that is #1
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fungibility, #2 saleability and #3 scarcity.
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So if you've never heard the term fungibility, you probably
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if you were paying attention to the Internet couple years ago,
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everyone was going crazy for NF, which is.
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An acronym for non fungible tokens.
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So what is fungibility? Fungibility is a like for like
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exchange. So for example if I have a $1.00
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bill and you have a $1.00 bill and we exchange them, we both
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still have $1.00. If my $1.00 bill is wrinkled and
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I give you the $1.00 bill and you give me one that's crisp, we
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still have $1.00 bill that is fungibility a like for like
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exchange. Something that is non fungible
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would be two very different things.
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So for example, the exact value of a banana is not the same as
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the exact value of a apple. Those two things are not
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necessarily fungible. Art is also something that's not
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fungible because the value of two different squares with
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painting on them could be extremely different.
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So the first thing for something to be considered money is
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fungibility. That's a fun word, learning.
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You'll you'll be smarter than all your other chef friends if
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you walk around. Teach at them about the
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properties of money. Anyway, we digress.
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Let's move on. The next property of money is
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salability across time and space.
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When we talk about the space part, it's pretty easy.
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It's it's the portability of money.
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So you need to be able to carry it from one side of the planet
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to the other side of the planet. So that's the portability aspect
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of money. It needs to be portable.
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The time aspect when we're talking about salability is a
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little bit more confusing, so. When we're talking about time,
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if you have something, let's say, look, we're going to use
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the apple as the example. An apple is not saleable over
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time because if we use apples as money and I give you an apple,
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what's going to happen to the apple over a short period of
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time? It's going to start to decay.
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So apples are not saleable over time.
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So from a saleability standpoint, you want it to be
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saleable across time and space. So you need something that is
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going to not only be portable. We also need something that's
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going to be incorrupt. And then the last quality of
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money is scarcity. So I'll I'll give you an example
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of what I what I mean by scarcity.
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And this also ties into food cost in a lot of ways.
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People often say why are truffles so expensive or why is
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caviar so expensive? Usually has to do with the
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difficulty of getting the truffles, the scarcity of the
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truffles, the difficulty of getting caviar, the scarcity of
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the caviar. The more difficult it is to get
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something in, the more value it's going to have, which is a
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property of money. So the reason something becomes
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valuable is because it's not in excess in the world.
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So for example, if we decided to use sand as money, well everyone
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would be rich. You could just go outside and
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and grab some sand, which makes it not a good property of money
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because there's no scarcity with sand.
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So for something to have value, it has to be scarce.
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Which brings us to what makes gold and silver so valuable over
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the last several 100 years. Well, the reason gold and silver
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are so valuable one is because they are scarce metals 2.
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They are saleable over time and space.
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Gold and silver are extremely durable.
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They don't corrode, they don't rust, and they don't degrade
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over time. So that makes them a great store
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valuable. In addition to them being very
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scarce, you have to put effort into mine gold and silver so.
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It has all the properties of money, which makes gold and
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silver hard money. It makes it good money.
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Gold and silver can also be divisible.
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Hence you have several different sizes of gold coins.
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It's also portable, you can move it around and it's fungible.
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So if I give you a one ounce gold coin for $2000 and you give
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me a one ounce gold coin, it's still worth $2000, right?
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One ounce of gold. That's roughly the price right
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now, which is why gold and silver have been used for so
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many years. So anyway, now that we
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understand the properties of money.
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And we understand why gold and silver have been really the
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money of choice for many people. Let's talk about the evolution
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of money. In the very beginning, when
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people were, you know, throwing rocks at each other, I guess you
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would, you would have what's called the barter system.
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So the barter system is just a a system of trade.
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You give me a cow, I'm going to give you a horse.
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We're going to determine that. That's the same value we're
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going to trade or maybe I'm going to say two horses for one
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cow or vice versa. That's a barter system.
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So people were trading resources between one another.
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Like sometimes when you're a chef and you got to go say, hey,
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can I, can I borrow this and I'll give you that, that's,
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that's the barter system. After the barter system, we move
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to commodity money. These would be things that have
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intrinsic values. So let's say wheat, rocks,
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shells, things like that, things that could be commodities that
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could be used, you know, today, commodities you'd consider like
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oil and things like that would be considered commodities, but
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people started using commodities.
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As trade, then we moved into metallic money.
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So this is what we started going into.
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Gold coins and things like that. Gold and silver coins really
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became the money of choice after commodity money.
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Then you had representative money, which is basically like
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the Goldsmiths or the banks, that would hold the money and
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you could exchange your paper notes for gold that they would
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hold for you for a long period of time.
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It was the gold standard. So for example, if you had a
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paper note, it used to be redeemable in gold.
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Now we got off the gold standard in 1971 and we moved to the
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current system, which is Fiat money, which is basically backed
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by the confidence of, you know, the the government, for lack of
10:06
a better term. And nowadays we're moving into
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electronic money. You know, most of the
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transactions that you make in restaurants or in purchasing,
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you're dealing with invoices, you're paying them over credit
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card. There's very little exchange of
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actual cash or checks these days.
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A lot of times it's just electronic bake transfers.
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So we move into the era of electronic money.
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And then moving forward, if I had a crystal ball, it seems
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like we're moving into the world of digital money, so
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cryptocurrencies and things like that.
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So, so now that we understand the history of money and what
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makes something money, there should be a lot of things that
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factor the value of money. So I I just want to touch on
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that again, this is, this is a very rudimentary crash course on
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what money is. Disclaimer, I am not a professor
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of economics. I just like to read a lot.
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I should also say that this is not financial advice.
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There's a lot of things that affect money, but let's just
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stick to two things. So one is inflation and the
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other one is deflation inflation.
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Basically the price of goods and services is going up.
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So the purchasing power for your dollar is basically going down
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over that show. A good way to think about it is
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if they say inflation is up 8%, that means your dollar.
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That you are using to buy things with lost about 8% of its
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purchasing power. Inflation can happen through
11:25
increased production costs, the amount of money that's being
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circulated. So that's could be maybe called
11:31
currency debasement. Deflation is the opposite.
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So deflation is when you're when you're purchasing power of your
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dollar that you're using is actually going up.
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So to think about it this way, inflation is something that's
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decreasing in value and deflation is something that's
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increasing in value, both of them.
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Have their pros and cons with deflation, the problem is if
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people are holding on to their money because the the price the,
11:53
I'm sorry, the value of their dollar is going up, they may be
11:56
more reluctant to spend it. Two last things I'm going to
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talk about so people understand money and how this affects you
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is 1 is going to be CPI and the other one is PPI.
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They sound exactly the same. They affect you differently.
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CPI is Consumer Price Index. So basically what this is, it's
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a it's a basket of goods that's measured that consumers
12:15
purchase. Typically goods and services,
12:18
oil, gas, medical care, things like that are going to go into
12:22
CPI. Basically what you're paying for
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things at home, that's CPIPPI which is Producer Price index is
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the opposite. This is these are the people
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that are producing things and it's their cost could
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potentially be going up. A good way to think about it
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would be CPI is what your customer is paying at your
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restaurant and PPI is what you're paying to your vendors
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for the products that you're using in your restaurant.
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Now I will say there's there's an interesting book out there
12:49
that maybe people should read. It's How to Lie with statistics.
12:51
And you know, the official report may come out and say
12:55
inflation is is only 3% or 8% or whatever the case may be, but
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it's measuring a specific basket of goods that might not be your
13:03
particular inflation for your restaurant.
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While the national average, let's say just use 8% as the
13:08
example, the national average of inflation maybe 8%, restaurants
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may experience more or less inflation.
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Based on what you're purchasing. So if you want to know what your
13:18
true inflation is for your particular restaurant, the way I
13:21
used to track it is I would look at my top 20 spend items, which
13:26
may be, you know, your beef, your seafood, your cheese,
13:30
things like that. I would list out the top 20
13:32
items and I would look at the price difference between a year
13:35
ago and today and then you could see what your true inflation
13:40
increase is based on the items that you're spending now a lot
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of times. What you'll be surprised is that
13:45
your inflation for your restaurant might be up 20 to
13:48
30%, even though the national average is only up 8%.
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So a good food cost strategy is to understand what your
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particular inflation rate is for your restaurant or for your
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operation. So now that we understand what
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money is, the next thing that I want to walk you through is we
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need to understand that everything in your kitchen that
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you buy is money. The food on the shelf, the food
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in the walk in. The mesum plus that you have in
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the line that is all money and so a good exercises instead of
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viewing everything as commodities, so lettuce and
14:21
tomatoes start looking at it as dollar bills.
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I went to a seminar years ago when I was when I was a younger
14:28
chef and this guy that was doing the presentation, he talked
14:32
about how we need to view food as money and he gave some great
14:36
examples. It made such a big impact on me
14:39
that I I still use these examples to this day so I'm
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going to share them with you. He said when you look at your
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walkin cooler, don't look at it as a refrigerator.
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Look at it as a bank vault. And instead of looking at all
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the food on the shelves as food, start looking at them as
14:57
dollars. And if that was the case, would
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you treat it different? And that.
15:02
And the answer is yes, of course you would.
15:05
If it was a bank vault, you wouldn't allow just anyone to go
15:08
in and out. If someone came to you and said,
15:10
hey chef, can I go in and get some lemons really quick and
15:12
some oranges, maybe you would have them sign a Ledger so you'd
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have really good accounting practice of what's going in and
15:19
out of your coolers. If the food truck, when it
15:22
delivers food, don't think of it as a Cisco truck or whatever.
15:29
Think of it as a Brinks truck carrying cash.
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Instead of thinking that there's produce in there, think about
15:36
that as money. And if someone was delivering
15:38
cash to you, wouldn't you count it first?
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Of course you would, right? If someone was delivering
15:43
$10,000 to your bank, you would have just say, Oh yeah, put it
15:47
in there, the coolers over there or the bank faults over there.
15:50
You would say, let me count all the money before it goes in the
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same principle, it applies because what they're delivering,
15:55
yes, it's food, but if you think about it is money, you might be
15:58
a little bit more meticulous in your practices.
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You might have a scale. You might want to weigh
16:03
everything. You're going to spot check the
16:05
invoices. You're going to double check the
16:07
prices. That is the first step in
16:09
managing food cost is understanding that everything
16:11
that you're dealing with is money.
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Then when you look at the products that you're using, if
16:16
you were buying something and you were storing it on the
16:19
shelves, but you're not rotating it, think of it as money that's
16:23
depreciating in value right away.
16:25
As food starts to lose quality, it starts to go off it, it
16:30
becomes moldy and it begins to decay.
16:34
Well then that's money that's basically being thrown away.
16:37
When you throw the produce away, what you're actually throwing
16:39
away is dollars that you spent. The most expensive thing that
16:43
you have in your kitchen is the thing that gets thrown away.
16:47
And what I mean by that is, if you're buying something and
16:49
you're only thrown away, then you've generated 0 revenue off
16:53
that product. And if you're generating $0.00
16:56
off something that you purchased, that is a 100% food
16:59
cost. That is a 100% loss.
17:02
So think about it. The most expensive thing in your
17:05
kitchen is the thing that doesn't sell.
17:07
It's the thing that is in the track.
17:09
The other thing is you have to reframe how you think about when
17:11
you're throwing things away at the end of the night, what
17:14
you're giving away. Let's just use this as an
17:16
example. You have a restaurant, and that
17:19
restaurant serves hamburgers. And one of the service staff
17:21
comes up here and says, hey, I rang in a ticket, can you put
17:24
some avocado on that burger and some extra bacon and you don't
17:27
charge for it. So you give them the extra
17:29
avocado and you give them the extra bacon now.
17:31
Let's say you pay a dollar for the avocado and a dollar for the
17:34
bacon. Remember, This is Money.
17:36
So we're thinking about this as money.
17:37
If you went up to someone in a restaurant and you said, hey,
17:40
can I get a burger? Can you also give me $2.00 back
17:42
with it? What would you say?
17:43
You say Absolutely not. Why would I give you $2?
17:46
But that's what you're doing when you're giving away the
17:47
avocado for free or that bacon for free.
17:51
Whenever you give something away for free, it's zero income
17:54
generated. Now I understand that a lot of
17:56
places you're going to say, but it makes the customers happy.
17:58
That's up to you to decide. If you want to give food away,
18:01
that is completely your choice. But you need to understand that
18:04
when you're giving that food away, you're also giving money
18:07
away. So make sure you're making a
18:08
responsible financial decision when you decide to give things
18:12
away. Now the last thing that we're
18:14
going to talk about today because this is going to be a
18:15
multi part series, but really I want you to start thinking about
18:18
food costs differently beginning now and that is understanding
18:23
that all food is not equal when it comes to its value.
18:27
And I'll tell you a little story.
18:29
When we were hit with COVID and all these restaurants were
18:31
closing left and right, you quickly realize the value of
18:36
something perishable versus the value of something
18:38
nonperishable. If you had $10,000 in your
18:42
produce cooler and you had to close your restaurant down for
18:45
two to three months, that was $10,000 in the trash because
18:48
that produce would not survive the three months of closure.
18:53
So even though it had value, the initial value of the the money
18:56
exchange when you bought it. It no longer had value by the
19:00
time you returned. Now if you took that same
19:02
example and you looked at your dry storage and I'm making this
19:05
up, cans of tomatoes, flour, sugar, etcetera, most likely you
19:11
didn't lose that. So when you came back three
19:13
months later and opened up your restaurant, that $10,000 worth
19:18
of dry storage retained value. So here we have, we're talking
19:22
in terms of assets, you have a depreciating.
19:27
Asset, which is the produce that is it's, it's losing value.
19:31
The longer it stays on the shelf, the more it depreciates
19:34
and quickly, right. Some some things go bad within a
19:37
couple of days. We're on the other end, you have
19:39
a more stable asset. Again we're using assets as an
19:42
example. It's going to maintain value
19:46
over a longer period of time. So we get back to that point
19:49
that we're making earlier saleability across time and
19:52
space, the saleability of flour, sugar.
19:57
Over time and space is much greater the saleability of
19:59
lettuce and tomatoes. So if you were going to use one
20:03
as money, you would want the item that's going to be less
20:08
perishable. Again, we're thinking about
20:11
cost, for example. So let's just again just to use
20:13
another example, if we were talking about wine, you have a
20:15
lot of restaurants that have incredible wine lists, but it
20:19
when COVID happened, most likely when they came back, that wine
20:23
still maintained its value, but everything that was perishable.
20:27
You you most likely had to discard it or give it away
20:29
because there was no way it was going to hold its value upon
20:32
your return unless you froze it or something like that, assuming
20:34
that the freezing wouldn't deteriorate the quality of it
20:38
Anyway, this was episode one. I just wanted to lay the
20:41
foundation. What is money?
20:42
Why you need to start thinking about money, especially if
20:44
you're running a restaurant operation, and why it's
20:47
important to think about this. On the next episode, we're going
20:50
to get into the formulas that you're going to be using, how to
20:53
calculate food cost. What the longer calculation is,
20:56
how to come up with menu pricing, what a theoretical food
20:59
cost is, strategies for inventory, and how to protect
21:03
yourself from the rising cost that we're all we're all facing
21:06
right now is as restaurant tours and chefs.
21:09
So anyway, if you don't want to listen to the next episode, just
21:12
remember this. Cost divided by sales is your
21:15
food cost percent. If that's all you needed, there
21:17
you go, cost divided by sales. If you want to support the show,
21:22
you know what to do. Make sure you leave five stars.
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If you're on YouTube, make sure you subscribe.
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psa.com. Buy yourself a happy cook hat if
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that's something that you like. We'll see you next week.
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