Cutting down costs and maximizing profits is one of the key elements of a restaurant’s success. However, in order to know what costs to cut, a business owner or a manager must first understand all the initial and regular restaurant expenses. In this article, we’ll share information about the monthly expenses of restaurants and the initial costs of opening a food service business. If you’re considering taking on the journey of opening a restaurant, make sure to check our posts on writing a restaurant business plan and tips for a successful restaurant business.
Initial Restaurant Expenses and Costs
Renting costs include not only the rent itself but also a security deposit which can be substantial in some cases. Some restaurant businesses might also consider buying the property. In that case, a down payment of at least 10% should be taken into consideration when calculating startup restaurant expenses.
Equipment and Furnishing
One of the main startup restaurant expenses is related to equipment. That includes all appliances, furniture, and other equipment items such as shelves, sinks, and beverage equipment. Some venues are leased with all equipment included in the rent. However, that corresponds to much higher rent costs.
Based on the interior design and the type of the restaurant, often a renovation is required. It’s important for the remodeling to be done as fast as possible in order to start generating revenue. A lot of businesses start doing social media marketing for restaurants even before the place is opened. They can plan a soft opening or a grand opening party. These marketing and PR approaches can help a lot with customer acquisition and brand awareness.
Licensing and Regulations
These include things like business registration, alcohol license, and music license fees. Health permits and food handler’s permits should also be considered. Make sure to research the regulations in your state and area.
Businesses need various services like bookkeeping, accounting, and legal services.
Marketing and Advertising
Proper restaurant marketing is crucial for a starting business. Invest in signage, local advertising, and brand awareness campaigns on social media even before the place has opened.
Technology and Software
Ordering solutions like Revolution Ordering can help increase the revenue of a restaurant. Other initial restaurant expenses in that field include a POS system, inventory management software, and other solutions based on the type of eatery and the budget.
Initial Food Inventory, Labor Costs, and Other Restaurant Expenses
Restaurant businesses rarely become profitable as soon as they open doors. That’s why having money set aside for expenses during the first one or two months is crucial.
Key takeaway: Labor costs and food costs are the main restaurant expenses. In addition to them, managers need to take into account expenses such as utilities, rent, software solutions, and restaurant supplies.
Monthly Restaurant Expenses
There are hundreds of restaurant monthly expenses. However, they can be summed up in 5 major categories.
When calculating restaurant expenses in the labor category, you should take into account not only salaries but also health care, payroll taxes, bonuses, and paid time off. Labor costs make up the majority of the monthly restaurant expenses. On average, they account for between 28 and 33 percent of all costs.
Food and Beverage Costs
There are two key performance indicators related to calculating food costs. One is the plate cost. It shows the cost of making a single dish. If you divide that cost by the sales price of that menu item, you can find out the dish cost percentage. This metric can show you which items on the menu have the highest profit margins.
Period food costs are also an important performance indicator. You can calculate them by dividing the total restaurant cost of goods sold by the total food sales. Typically, food costs account for between 25 and 40 percent of all restaurant expenses.
Rent and Utility Costs
They can differ a lot based on the type of the restaurant as well as the location. Utility prices in some states can also be much higher. The main utilities in a restaurant are electricity, gas, water, and internet. When it comes to rent, places that are leased with all the furnishing and equipment included have a much higher rent compared to empty ones. Location is also a main factor for the occupancy cost.
Supplies and Non-Food Products
That category includes products like to-go containers, wholesale janitorial supplies, toilet paper, and all other non-food products that are needed for the day-to-day operations of a restaurant. In order to reduce restaurant expenses in that category, businesses can negotiate contracts with vendors and suppliers and get better wholesale prices.
Software, Services, and Marketing
Although restaurant labor costs and food costs are the two main categories of monthly expenses, a business needs various services and solutions like a POS system and food ordering software.
Restaurants in very competitive areas need to invest a higher percentage of their revenue in marketing and advertising as well. Social media is one of the main channels to increase a venue’s brand awareness. Traditional advertising like radio spots and billboards is also a must.
Frequently Asked Questions about Restaurant Expenses
Even seasoned restaurant owners and managers have difficulties getting a grasp of all restaurant expenses. The questions and answers below can help you on your journey to cut the costs of your restaurant.
What Is Restaurant Prime Cost and How It’s Calculated?
Prime cost is a key performance indicator for understanding how profitable a restaurant is. It is the sum of the cost of goods sold and labor costs. When divided by the total revenue, we will see what percentage of monthly sales is needed to cover the prime cost of running a restaurant.
The main reason why prime cost is an important indicator is that it combines the majority of restaurant expenses. Furthermore, unlike fixed restaurant costs and expenses like rent, the prime cost changes every month based on the amount of business. Thus, it can be a good indicator of the most profitable months or weeks of the year. If the prime cost of a restaurant is higher, there are various restaurant cost-saving ideas that can be implemented.
How Restaurants Can Cut Costs?
There are multiple ways for restaurants to cut costs. Cutting labor costs with the help of technology and minimizing food waste in restaurants are just two examples. Here are some additional cost-cut ideas.
- Improve inventory control. Tools like BlueCart can help establishments reduce over-ordering and establish accurate reorder points.
- Integrate restaurant technologies. There are various new technologies in the restaurant industry. Although solutions such as restaurant robots can be expensive, simple things like QR menus and pay-at-table devices can help restaurant managers increase the profits of their eateries.
- Consider inflation and the costs of products. Items in the catalogs of meat distributors and produce suppliers have risen in price in recent years. That’s why restaurants need to reevaluate their menu items and calculate the ROI based on actual costs of goods. Changing some menu items can lead to cost cuts and increase profits.
What Are Hidden Costs in a Restaurant?
Many unforeseen restaurant expenses can be considered similar to deceptive hidden costs. Here are some major costs that are rarely considered by business owners but are an important factor.
- Theft and pilferage. Even though they are not a typical operating expense, small thefts are common in the restaurant industry. The easiest way to tackle the problem is to implement a professional restaurant management system.
- Restaurant food waste. Inventory control is crucial in reducing food waste in restaurants. Furthermore, eateries can reduce the size of meals that are too big and customers often can’t finish them.
- High staff turnover rate. It’s better to invest in the well-being of your employees instead of having a high turnover rate. Constantly hiring new staff members to replace already trained employees who have quit can lead to multiple problems for a restaurant.