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 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

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.

Food Costs

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

Restaurant Staff

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 Inventory

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.

Adopting Technology

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.

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