Knowing a good restaurant cost breakdown and managing your expenses is one way to reduce losses in your restaurant. With many benefits, such as reducing food waste, achieving targeted results, and maintaining a long-term business, learning to manage your restaurant expenses and costs well should be applied from the beginning of your restaurant opening.
Understanding the distinction between restaurant expenses and costs is crucial. This knowledge empowers you to make informed decisions and effectively manage your restaurant’s financial health.Restaurant expenses and costs are different because their functions and objectives have their focus. Restaurant costing is the cost incurred by the company as the basis or foundation of a restaurant. Restaurant costs also include operating expenses, food and beverage costs as supply, and total labour costs aimed at workers and staff who work in restaurants.
However, expenses are advanced costs from costing costs that seek to maximize marketing to get more profitable results. For example, the cost of promoting through campaigns and marketing, as well as other professional fees, according to the needs of a restaurant.
Breakdown of restaurant costs
Variable costs
Variable cost means flexibility in spending depending on a restaurant’s situation and conditions. Variable costs are used for various things such as ingredients and beverages, card fees, and maintenance, whose arrival we cannot predict in advance.
Fixed costs
In contrast to variable costs, which are changeable and unpredictable, fixed costs are needed from the beginning and run for a fixed time. For example, restaurants have fixed licensing fees, staff salaries, mortgage payments, and other fixed and variable costs that impact profitability. These costs cannot change because they have an initial agreement and are needed.
Semi-variable
Semi-variable costs combine variable and fixed costs because the cost is predicted but can change over time according to the restaurant’s needs. For example, utilities such as electricity and hourly labour will increase when the restaurant is busy, impacting the overall operating costs and expenses for your restaurant. In addition, marketing costs can suddenly be required if the restaurant does not make the desired profit.
Restaurant operating costs breakdown
Food costs (COGS)
Food cost is an expense that occurs when you buy all kinds of functional ingredients for menus and serving food to customers. Because it requires a relatively large cost for food, it is necessary to track the cost of food in your restaurant so that the money spent on food is not wasted and follows adequacy.
Labor Costs
Restaurant labour cost means the cost incurred for labour in your restaurant. Labour costs are the money you use to pay salaries, give bonuses, and provide health insurance to all staff. This applies to full-time staff, kitchen staff, marketing division, and part-time employees. Calculating your labour costs must be fixed initially and usually does not change.
Hiring costs (postings, background checks, etc.)
Hiring costs include recruiting new staff for your restaurant, such as posting vacancies and background checks. By doing the staff hiring process, of course, we aim to get the best-qualified staff, so we need to do hiring costs to check whether the staff we are looking for is by the restaurant’s needs.
Rent, lease, mortgage, repairs
Owning a restaurant means that you must be responsible for rent, lease, mortgage, and repair costs that are likely to occur frequently. These costs are usually included in fixed costs, but it would be better to prepare these costs every month, especially for rent and utilities. The cost of repairs also needs to be considered because it usually requires a lot of money and is situational, depending on the type of repairs.
Utility costs
Owning a restaurant certainly means having large utility costs, which can be managed better with regular maintenance. Restaurants require rent and utilities, as well as electricity costs, water costs, and other utility costs that must be paid, just like home utilities, all of which contribute to the overall labour and food expenses. The costs incurred can vary, but if you want to provide the best service to customers, you need to pay more.
Equipment costs and maintenance
Equipment is one of the most needed items in a restaurant. Besides being a tool for serving food, having quality equipment also determines the average food quality of the dishes served. A tremendous amount of investment in costing equipment is needed to provide the best results and can be used in the long run to help manage operating costs for your restaurant.
Cleaning and Janitorial
Having a restaurant facility with a clean environment can also make customers feel at home and comfortable, making it possible for them to return to your restaurant again. Therefore, the best service and details to make your restaurant look comfortable are essential. Keeping the restaurant clean is necessary for hygiene and customer experience. In this case, costs include cleaning supplies or outsourcing to a janitorial service.
Insurance costs
Insurance is essential for restaurants to prevent and protect their businesses from risks like fire, theft, accidents, or staff injuries. Common types of insurance include public liability, workers’ compensation, and property insurance, essential for managing restaurant operating costs.
Marketing and advertising
Marketing and advertising costs are also essential, especially in this era, to increase the restaurant’s visibility and strategies to attract many customers. The price can vary depending on what kind of marketing is done. However, investing in digital marketing and advertising on social media as mobile marketing is something that restaurants might want to try as it has many beneficial features.
Licenses and permits
Restaurants must obtain various legal permissions to operate, which can also impact their operating costs for your restaurant. This includes food service licenses, liquor licenses (if alcohol is served), health and safety permits, and local council approvals. These are mandatory and often require yearly renewal fees, which can contribute to the overall costs 101 of running a restaurant.
Inventory storage
Having many needs, such as storing ingredients and items needed in a restaurant, means having space for storage. Moreover, it would be better if the inventory storage area was well-maintained and spacious enough for suppliers, freezers, and dry storage shelves. Maintaining these facilities also includes utility costs (electricity, maintenance) and pest control.
Technology and software costs
There are so many technologies and software costs that really need to be applied as the main cost of the restaurant, such as POS systems or point-of-sale systems, online ordering platforms, reservation software, tools needed for accounting and data entry, and inventory management systems. Of course, by using tools and utilizing technology properly, work can be done more effectively and easily monitored.
Accountants
Sometimes hiring an accountant or bookkeeper helps restaurants manage cash flow, payroll, taxes, and financial statements to save on labor costs. It can be an ongoing monthly fee or an occasional service. With bookkeeping in place, restaurants can track profits and losses to evaluate future processes and save money in your restaurants.
Lawyers
Legal services and fees may be required for contracts, labour issues, compliance, or lease agreements. Many restaurants use legal assistance to avoid costly legal disputes. Legal services are needed to maintain the security and protection of the restaurant business so that it can be safe and long-lasting while adhering to minimum wage regulations.
Uniform and cleaning costs
Using the same uniforms and aprons creates branding and can distinguish it from other restaurant brands, enhancing the overall customer experience and total sales. In addition, uniforms keep staff looking attractive and neat, which can positively influence the number of hours worked by employees. Some restaurants outsource this to a uniform service that charges weekly or monthly.
Waste disposal
Restaurants generate a lot of waste, from food scraps to packaging, which can affect the average food cost percentage if not appropriately managed. Waste management services charge fees based on the frequency and volume of collection for general waste, food waste, recycling, and oil disposal.
Banking and transactions
Processing card payments involve transaction fees (usually 1–3% per sale). Other banking costs may include account fees, POS terminal rentals, or loan interest if the restaurant is financed.
Tips for reducing restaurant costs to get higher profits
If you find it difficult to manage restaurant costs and expenses, these tips might help you reduce restaurant costs and earn the profit you expect.
Buy seasonal ingredients
Seasonal menus or menus that are present in a specific period and are often in demand by a customer because of the limited time to offer (LTO). However, besides attracting many customers because this menu is only available for a limited time, you also get other benefits because buying seasonal ingredients tends to be cheaper and fresher, thus increasing the quality of your food. For example, during the winter season, you can buy cranberries that are sold at a lower price than usual and customize the cranberries with your menu or create a new one.
Negotiate with suppliers
There is no need to hesitate to negotiate with suppliers because if you negotiate well, you will get many times the profit, positively affecting the cost of goods sold. Sometimes, many suppliers deliberately increase the price, and if you bargain well, you can get the minimum price possible, which is very helpful for managing restaurant finances.
Conduct a menu engineering analysis
Menu engineering Analyzing menu items for greater profitability is one way to manage costs under control effectively, particularly regarding labour and food. For further explanation, menu engineering is a methodical strategy that focuses on analyzing and improving restaurant menus by utilizing data. It helps uncover which dishes are best-sellers and most profitable, guiding the right choices on setting menu prices, positioning, and promoting them effectively.
Embrace plant-based dishes
Providing menu options that use plant-based ingredients as the basic ingredients is a good way and beneficial for both restaurant owners and customers, as it can help lower the average food cost percentage. For the owners, using plant-based ingredients certainly requires less than meat prices, helping to reduce the overall food cost percentage. Data shows that meat prices were 7.5% higher in August 2022 than the previous year. However, the benefit for the customer is that menu options are available for vegans and that they have healthy nutrition.
Reduce employee turnover
High employee turnover in a restaurant is certainly not a good thing because it will hamper a restaurant’s selling and management process. Some things that restaurant owners should pay attention to are considering their employees as the greatest assets by paying them a high wage and offering bonuses. In addition, cross-training employees to learn many things is a good thing because it makes the staff become more multi-tasking, so there is no need for many customers for costing.
Minimise food waste
Minimizing food waste is a must because the more food waste in a restaurant, the greater the losses. Restaurant owners must analyze food waste and track each waste item with regular monitoring to record what needs to be reduced in the future. By controlling food waste, you will reduce food waste little by little.
Care for your restaurant equipment
The main investment a restaurant spends on equipment, especially equipment in the kitchen, is very high cost. Therefore, ensure that the person in charge of the equipment uses it wisely and adequately to ensure that the quality remains the same and can be used for a long time, minimizing costs under control through regular maintenance. An effective way to keep the equipment in good condition is to train the staff to maintain, care, and use the equipment properly, which can help reduce semi-variable costs and ensure regular maintenance is performed.
Identify savings in your technology partnerships
One of the technology partnerships, such as the best online ordering system, is a long-term investment that restaurant businesses should consider to help manage running a restaurant effectively. By using partnerships with web apps such as Doordash and other apps, you can easily get more customers and drive more sales by launching sponsored listings, showing your restaurant’s visibility with ads, optimizing Doordash menus, and setting up online ordering.
Frequently Asked Questions
What are the two most significant costs in a restaurant operation?
The two highest costs in a restaurant are food and labour. These two expenses are prime costs and typically comprise most of a restaurant’s operating budget, often accounting for 55% to 70% of total revenue.
What is the most common expense in a restaurant?
The most common and consistent expense in a restaurant is labour, which can be managed to reduce labour costs. Staffing is essential for day-to-day operations, and costs can include hourly wages, salaried positions, overtime, training, and employee benefits. Because restaurants rely heavily on human labour to deliver customer service, prepare food, and manage the business, labour costs often represent restaurant owners’ most significant ongoing financial commitment.
What is the average profit margin for a restaurant?
The average profit margin for a restaurant is relatively low, usually ranging from 3% to 6%, which is influenced by the food cost percentage. This narrow margin is due to high overhead costs such as food, labour, rent, utilities, and marketing, contributing to the overall labour cost percentage. However, this profit can vary and depends on what type of restaurant you are running.
Conclusion
Effectively managing restaurant expenses is crucial for profitability and long-term success, especially considering the average food cost percentage. By diligently tracking expenses, implementing efficient strategies, and leveraging technology, restaurants can navigate the complexities of cost management, improve their bottom line, and ultimately thrive in a competitive market. Consistent monitoring and adaptation are key to remaining profitable and competitive in the ever-evolving restaurant industry.
