The costs of operating a restaurant can be overwhelming. Here we consider the five most relevant expenses you’ll face and some tips on handling them.
Unfortunately, too many restaurants fail within five years of opening. However, many of those failures have nothing to do with the popularity or quality of the restaurant but rather with mistakes in financial management.
Even a poorly run restaurant can survive for a while with enough customers. But if you don't keep a close eye on your bottom line, failure lurks right around the corner. Avoid financial pitfalls and find sustainable success by understanding your costs.
Identifying your costs
Restaurant costs do not include the costs of opening a restaurant but instead the costs of managing the day-to-day operations. Operating costs include everything it takes to run your restaurant. Begin by arming yourself with the right information and then apply that data on a macro and micro basis to get your costs as a percentage.
Let's take a look at the five most important restaurant costs and how they affect your business.
1. Cost of goods sold - keeping on top of the COGS!
The cost of goods involves all the things used to keep the restaurant running. The COGS covers items such as the ingredients used to create your meals, along with beer, wine, beverages, and mixers.
You might sell £5,000 in steak dinners each month, but if those steaks cost you £4,000, you have a big problem. Start by knowing your target cost percentage and then prepare to make ongoing adjustments to take account of fluctuating prices.
When making menu choices, price point calculations are just as crucial as restaurant concepts. Allowing the hard data to influence your options will help drive profits up and risks down. Of course, costs can vary depending on the type of restaurant you have and the grade of alcohol you serve.
The average cost percentages based on sales for most full-service restaurants are:
Food: 28% to 32%
Bottled beer: 24% to 28%
Draft beer: 15% to 18%
Wine: 35% to 45%
Spirits: 18% to 20%
2. Don't forget the additional supplies
Supplies are everything else used in your restaurant to serve your customers. Although the initial expenses for items used to set up your kitchen and dining room will come out of your start-up cost budget, these products will break down with normal wear and tear, and the costs to replace them needs consideration. Some of these include:
3. Look after the staff looking after your business.
Labour costs include wages and salaries, benefits, and payroll taxes. Next to the cost of goods, payroll costs are the major expense you'll incur. The average labour costs are around 30 - 40% of total sales, depending on the type of service provided.
Similar to COGS, you can break down labour costs on a micro-scale. Calculate your expenses by positions, such as:
Back of house
Front of house
Labour is of course one of the most important aspects of your business. Good performance by chefs, managers and front of house can make or break a business. But labour costs can quickly get out of control if managed inappropriately. Good communication and negotiations can avoid many problems.
4. Premises and utilities.
Restaurant occupancy costs are those expenses related to occupying a space, including rent or mortgage payments, property taxes, insurance, and utilities. Most of these expenses are fixed and determined before opening, but the average cost of utilities will vary from month to month.
This expense ranges from 8% to 10% of your total revenue. If you pay more than that, the only solution is to increase revenue. Occupancy is one of those hard lines where there's not much room to decrease costs once you're in the building.
It's imperative to understand how to calculate occupancy costs by square footage during the start-up period and then work to meet or exceed that percentage as you grow. In most cases, full-service restaurants need to generate at least £100 of sales per square foot to turn a profit.
Marketing includes anything a restaurant uses to get guests in the door. It typically accounts for 3% to 5% of your total revenue. Allocate these funds proportionally to your sales volume, which might vary monthly. Restaurant marketing expenses may include:
Social media posts, monitoring, and campaigns
Print and digital advertisements
Loyalty program promotion
Marketing agency or third-party fees
Tips for improving business efficiency.
Managing expenses are among the top challenges facing restaurants and can be what's standing in the way of high-profit margins. However, there are several ways to ensure efficiency without compromising quality. Here are some suggestions:
1. Hire the right staff
Employees can make or break you financially and building the right team takes time and attention. An employee retention policy is a great idea, but you can also improve staff relations by:
Hiring a qualified and experienced manager, laying out clear expectations, and always holding them accountable.
When hiring friends or family members, it can get complicated if they aren't up to par, so be cautious.
Training, encouragement and communication will help retain staff. Rewarding the hard workers and identifying and dealing efficiently with any problem areas will help boost morale, loyalty and service.
2. Choosing your suppliers.
Once a supplier has your business for an extended period, they tend to become friendly and familiar. Don't allow yourself to get comfortable. Shopping competing suppliers may be a pain, but costs can vary significantly. You might find that buying from your buddy is costing you much-needed profits.
3. Take advantage of specials
Buy in bulk when it makes sense. Take advantage of the "buy one, get one free" deals- but don't leave yourself short financially. If you can't make payroll because you spent too much on vodka, you may be the only one left mixing the cocktails.
4. Keep on top of inventory and control portions
Little things can add up to a whole lot of costs, so tracking expenses is essential. Taking proper inventory and paying attention to your portion sizes can make a huge difference. It's not just the missing bottles of vodka, but that over large portion affecting your bottom line.
5. Make technology work for you
With easy-to-use restaurant software, you can save yourself hundreds of hours and thousands of pounds. Also, learn about the things you already have. Your point-of-sale (POS) system can help with forecasting future sales, calculating labour costs, and managing your inventory.
Look after the pennies to help your business grow.
So, growing your business isn't always about increasing revenue. Often it's just a matter of understanding and controlling your expenses. So, as the saying goes, look after the pennies, and the pounds will look after themselves!