Opening a restaurant is a high-stakes game simply because there is a considerable investment of effort, time, and money. While there are multiple challenges, keeping the monthly restaurant operating costs in check is arguably the biggest.
What is the Difference between Restaurant Operating Costs and Restaurant Expenses?
Restaurant cost is a term for one-time purchases of tangible resources such as cutlery, equipment, etc. Restaurant operating expense is used to designate revenue-generating recurring purchases like marketing, rent, or utilities.
Fixed costs: Costs that are not tied to sales and stay the same month-on-month.
Variable costs: Costs that are linked to output. The greater the output, the greater the input required, and hence, the greater the costs incurred.
Semi-variable costs: Costs that have both fixed and variable elements. There could be costs with a minimum fixed part, and anything over and above is considered variable
Breakdown of Restaurant Operating Costs
Labor costs include hourly wages and salaries, overtime, taxes, bonuses, etc. Labor cost is highly dependent on external factors such as minimum wages, unemployment, etc.
While food cost is the major component, it also tends to be highly volatile. Externally, climate and price fluctuations can affect food costs. Internally, food wastage can make a massive difference, whether through uneaten food or unmanaged inventory.
Rent and Utility Costs
Typically, rent and utilities account for 5% to 8% of the total revenue. A mortgage will replace it if the place is leased or owned. In more prominent locations, rent gradually increases, putting pressure on cost control. However, traffic also directly depends on location.
Kitchen Equipment Costs
Everything falls under this category, from smaller items like kitchenware to bigger machines like fryers and ovens. There are also replacement items like crockery that you might have to pay for after a certain period.
Point-of-sale System Costs
Point-of-sale or POS budgets are tricky to account for since multiple cost elements are involved. POS costs typically involve hardware or setup fees, subscription fees, support and maintenance charges, and payment or transaction fees, if any.
How to Calculate Your Monthly Restaurant Operating Costs?
To calculate operating costs, you can use a three-step formula. First, keep your costs, purchases, and inventory details ready beforehand.
Step 1: Calculate the Cost of Goods Sold (COGS) using the formula
COGS = Beginning inventory + Purchases – Ending inventory
Step 2: Calculate Prime Cost using the formula
Prime Cost = Cost of Goods Sold + Labour Costs
Step 3: Calculate Total Operating Cost (TOC) using the formula
TOC = Prime Cost + Fixed Costs
5 Ways to Control Your Restaurant Expenses
Everything begins with being on a tight budget and following it strictly. Restaurant expenses breakdown can give you a more detailed picture of the same. It is essential to review budgets and adjust if required periodically. Another good way is to make everyone responsible for cost control and to stay budget-driven.
Managing the inventory of raw materials and food items is critical to controlling costs. Items are purchased in bulk to get a price advantage, but if consumption is less than purchase, it will lead to food wastage. Therefore, inventory management becomes critical in maintaining the right quantities and keeping variable costs for a restaurant in check.
Reducing Food Wastage
Any food waste adds to costs and reducing it will need a more practical approach. Keeping portions in check, using common ingredients, having itemized cards, and updated labeling can prevent food waste.
Improving Employee Efficiency
Training your staff to increase efficiency can greatly reduce costs, errors, redundancies, breakages, and food waste. If you can also cross-train your employees, substitution in case of absences will become easier.
Restaurant operations that are repetitive and not skill-specific should be automated. Such automated efforts will increase speed, reduce costs in the long run and help in having better control over restaurant performance.
How KNOW Can Help
Operating costs vary based on many factors such as location, model, type, etc. Understanding cost structures for your business is highly advised. You can then look at taking steps to reduce operating costs. It is here that technology can be a strong ally. Automating standardized operations can help achieve business objectives much more effectively. With KNOW’s Restaurant Management Software, you can keep track of your daily operations and training. Click here to learn more about it.
Frequently Asked Questions
1. What is the difference between setup and operating costs?
In a restaurant, setup costs refer to the expenses incurred during the initial setup of the business, such as purchasing or leasing a location, purchasing equipment and furnishings, and obtaining any necessary licenses or permits. These costs are typically one-time expenses that are incurred before the restaurant begins operations.
Operating costs, on the other hand, refer to the ongoing expenses incurred during the day-to-day operation of the restaurant, such as payroll, utilities, food and beverage costs, and marketing expenses. These costs are ongoing expenses that are incurred on a regular basis as the restaurant is in operation.
It’s important for restaurant owners and managers to carefully track and manage both setup costs and operating costs in order to ensure the financial success and profitability of the business. This may involve creating and managing budgets, monitoring expenses, and implementing strategies to reduce costs where possible. By carefully managing both setup costs and operating costs, restaurant owners and managers can help ensure that their business is financially sustainable and successful in the long term.
2. Is there a metric to evaluate labor costs?
There are several metrics that can be used to evaluate labor costs in a restaurant. Some common metrics include
Labor cost percentage: This metric reflects the percentage of total sales that is spent on labor costs. To calculate this metric, divide total labor costs by total sales, and express the result as a percentage. For example, if total labor costs for a given period are $50,000 and total sales for that period are $100,000, the labor cost percentage would be 50%. A higher labor cost percentage may indicate that labor costs are too high relative to sales, while a lower labor cost percentage may indicate that labor costs are being effectively managed.
Labor cost per seat: This metric reflects the average labor cost per customer served. To calculate this metric, divide total labor costs by the number of customers served during a given period. For example, if total labor costs for a given period are $50,000 and the restaurant served 10,000 customers during that period, the labor cost per seat would be $5.00.
Labor cost per menu item: This metric reflects the average labor cost per menu item sold. To calculate this metric, divide total labor costs by the number of menu items sold during a given period. For example, if total labor costs for a given period are $50,000 and the restaurant sold 5,000 menu items during that period, the labor cost per menu item would be $10.00.
3. What does prime cost signify?
Prime cost refers to the total cost of labor and food (also known as “cost of goods sold” or COGS). Prime cost is a key metric for restaurant owners and managers, as it represents a significant portion of the overall operating costs of the business. By carefully managing prime costs, restaurant owners and managers can help ensure that the business is financially sustainable and profitable.
To calculate the prime cost, add the total labor cost and the total cost of food (including ingredients, supplies, and other food-related expenses) for a given period. For example, if total labor costs for a given period are $50,000 and the total cost of food for that period is $30,000, the prime cost would be $80,000.
It’s important to track and monitor prime cost on a regular basis, as it can fluctuate significantly based on factors such as the cost of ingredients, the number of employees on the payroll, and the overall volume of business. By analyzing prime cost over time, restaurant owners and managers can identify trends and make adjustments to manage costs more effectively.
4. Which measure can help me identify how much money would be required to stay afloat?
In the restaurant business, one measure that can help you identify how much money would be required to stay afloat is the breakeven point. The breakeven point is the point at which the total revenue of the business is equal to the total costs of the business. At this point, the business is not making a profit, but it is also not incurring any losses.
To calculate the breakeven point for a restaurant, you will need to determine the total fixed costs of the business (such as rent, utilities, and insurance), as well as the variable costs of the business (such as food and labor costs). You can then use this information to determine how much revenue would be required to cover these costs.
For example, if your total fixed costs are $50,000 per month and your variable costs are $20 per customer, and you serve an average of 500 customers per month, your breakeven point would be $50,000 + (500 customers x $20 per customer) = $70,000. This means that you would need to generate at least $70,000 in revenue per month in order to cover your costs and stay afloat.
By tracking your breakeven point, you can get a better understanding of how much revenue you need to generate in order to stay financially viable. This can help you identify areas where you may need to cut costs or increase revenue in order to stay afloat.
Total Operating Cost (TOC)
TOC is another metric that can be used to help identify how much money would be required to stay afloat. TOC represents the total cost of operating a restaurant, including both fixed costs (such as rent, utilities, and insurance) and variable costs (such as food and labor costs).
To calculate TOC, you will need to add together all of the costs associated with operating your restaurant, including fixed costs, variable costs, and any other operating expenses. For example, if your total fixed costs are $50,000 per month, your variable costs are $20 per customer, and you serve an average of 500 customers per month, your TOC would be $50,000 + (500 customers x $20 per customer) = $70,000.
Tracking TOC can help you get a better understanding of your overall operating costs and identify areas where you may be able to cut costs or increase efficiency. By managing TOC effectively, you can help ensure that your restaurant is financially sustainable and profitable in the long term.