The Complete Guide to Restaurant Operating Costs

It takes a lot of resilience and dedication to own and run a restaurant. Besides the large upfront investment, one needs to open its doors, the ongoing restaurant operating costs require continuing attention. Food prices and labor costs are always changing, so it is extremely important that cost is managed well for your restaurant’s survival. It’s also important to understand the composition of these restaurant operating costs.

We’ve put together the ultimate guide to the operating costs involved in running a restaurant to help you track your restaurant expenditures.

Restaurant Costs Vs Restaurant Expenses

The terms ‘restaurant costs’ and ‘restaurant expenses’ are not exactly interchangeable. A restaurant cost breakdown includes one-time expenses on physical resources, from kitchen equipment down to food and beverages.

On the other hand, a restaurant’s expense breakdown will include recurring expenditures such as rent, payroll, utility bills, marketing, and so on—all of which contribute to its revenues.

Understanding Fixed and Variable Costs

Any restaurant operator who plans to manage the expenses of their restaurant needs to be aware of fixed vs. variable costs to ensure they hold a balanced view specifically when it comes to their finances.

Fixed Costs

Fixed costs are those expenses that remain the same, irrespective of the sales volume of your restaurant. In simple words, they are not crusaded concerning the production or business level of the entity. Examples are:

Rent: While you might lower your menu prices in case you have too few customers to raise more for meals, your space is rented by you for the same amount per month when you serve 50 or 500.

Insurance: These are premiums paid periodically by you in fixed sums for property, liability, and all other forms of insurance that your restaurant needs.

Examples of Fixed Costs:

• Depreciation: Long-term assets like kitchen equipment depreciate slowly and steadily over some time.
• Licensing Fees: Annual payment levied on permits to operate the restaurant and also health inspection.
• Loan Payments: Monthly repayment of loans availed to set up the restaurant

Variable Costs

Variable pricing, in general, is based on the number of items prepared and supplied by the restaurant. The variable costs rise during a business boom and fall during economic downturns when business goes south.

The variable costs are:

Ingredients: Food and beverages vary according to meal preparation and the quantity sold.

Labor: Hourly labor, such as waitstaff and kitchen staff, would be variable based on hours worked, which generally correlates to the number of customers.

Variable Costs in a Restaurant – Examples:

• Utilities: These would include electricity, gas, and water. These costs will be higher when usage is greater during the busy seasons.
• Supplies: Items such as napkins, to-go containers, and cleaning supplies are perishable expenses that change as customer volume changes.

Knowing and Calculating Your Prime Costs

Your prime cost is the sum of your direct labor and the cost of goods sold. Cost of goods sold refers to the raw material cost of your drinks and food items while labor cost includes paid labor, health care, bonuses, employee benefits, and payroll tax.

It consists of the exclusion of things such as equipment and supplies, utilities, menu design, signage, decor, and other items not directly related to production.

Prime cost is a critical key performance indicator for a variety of reasons.

• Major Expense Component: Prime costs include most of your largest restaurant expenses; as such, ensuring their profitability is paramount.
• Variable Nature: Prime costs change and, as such, must be tracked and monitored constantly, unlike fixed costs.
• Control Opportunities: You can make use of prime costs by applying effective labor, and F&B cost controls.
• Broad Impact: Prime costs affect almost every area of your restaurant’s operation.

How to Calculate Prime Cost

The formula is as follows:

Prime Cost = CoGS + Labor Costs

Step-by-Step:

Step 1: Calculate CoGS

Use this formula:

Cost of goods sold (CoGS) = Starting Inventory of F&B + Purchases – Ending Inventory

For example, if your opening inventory of food and beverages for April is $5,000; you have purchased additional inventory worth $3,000 during April, and your closing inventory value is $4,000, then your CoGS for April is $40,000 ($5,000 + $3,000 – $4,000).

Step 2: Calculate Labor Costs

Add up total salaries and wages for hourly workers. For instance, if   salaries come to $8,000 and wages for hourly workers come to $2,000, your total labor cost for April would be $10,000.

Step 3: Find Prime Cost

Add CoGS and Labor Costs. By the same above examples, this would be if your CoGS were $4,000 and labor costs were $10,000, so your prime cost for April would be $14,000.

Prime Cost Percentage

Now, make the prime cost figure more informative as a percentage of total sales.

Prime Cost Percentage = Prime Cost divided by Total Sales X 100

Assuming your total sales for April have been $30,000. Your prime cost percentage would be 46.67% ($14,000 ÷ $30,000 × 100). This means that 46.67 % of your revenue earned in April has been used to pay for your prime costs.

Mastering and Managing the 5 Essential Restaurant Operating Costs

Operating a successful restaurant involves mastering various critical expenses. Listed below are 5 of the important restaurant operating costs breakdowns that you should take into consideration.

1.    Control Restaurant Labor Costs

A restaurant’s labor cost is a vast investment that, if ill-managed or ill-controlled, may hurt profitability. Your labor costs mean more than just the wages paid; it’s overtime, bonuses, payroll taxes, healthcare, and more.

All these costs put together derive total labor costs.

For instance, if the total amount of salary and wages come to $15,000, other costs including overtime and bonuses come to $3,000, payroll taxes $3,000, health care $3,000, vacation, sick days, and bonuses $2,000, then the total labor cost will be $26,000.

Use this percentage of labor cost arrived at by multiplying the total amount of labor costs times sales and dividing by 100 as an efficiency indicator.

For example, if the sales are $95,000/year and the total cost of labor above comes to $26,000, then the % of labor cost would be 27.4%.

Keep monitoring this percentage for trends and compare it with the industry standards using a restaurant operating cost calculator.

Labor costs can be controlled by:

• proper training of the staff
• retention of employees by providing incentives and opportunities for growth
• audit and optimization of processes
• efficient scheduling software to manage the smooth operations

2.    Food Costs in the Restaurant

Food costs in the restaurant need to be controlled; there are two major food costs: plate cost, which is the cost of a single dish, and period cost, that is, costs incurred on food during a particular period. Knowing and ascertaining these costs properly is essential for menu pricing and the profitability of the restaurant.

How to Calculate Plate Cost?

Listing out and costing of ingredients will help to determine the Plate Cost of a particular item.

Now, in a Spaghetti Carbonara recipe, obtain Spaghetti, eggs, parmesan cheese, Pancetta or guanciale, and Black Pepper; the cost of each of the ingredients per portion.

To get the percentage of food costs, simply add these costs to the total plate cost, divide by the selling price of the dish, and multiply by 100.

Calculating Period Cost

The period food costs are calculated using the CoGS formula: Beginning Inventory + Purchases – Ending Inventory.

For instance, still in the example above, if the beginning food inventory for February is $4,000 and purchases stand at $20,000, subtract the ending inventory of $3,000 to determine total food cost. To get the food cost percentage take the above number and divide it by food sales for February, multiply by 100.

Maximum Allowable Food Cost Percentage

From 100, deducting the percentage of labor costs, overhead costs, and profit targets from total sales, find the maximum permissible food cost percentage.

 Cost Controls for Food Costs

Implement strategies to control food costs, such as:

• Monitor seasonal ingredient price
• Develop relationships with suppliers
• Inventory management controls
• Minimize food waste
• Maximize portion sizes
• Adopt zero-waste cooking and preparation practices
• Train staff on cost-conscious practices

Keeping close tabs on your food costs using these techniques will keep your restaurant running smoothly and profitably. This is in line with the average restaurant operating costs.

3.    Restaurant Utility Cost

Utility costs of restaurants are considered operating expenses. Examples are spending on water, electricity, natural gas, internet, cable, and cell phones. The determinants of the utility costs are:

• Geographical location: rates per kWh differ between different Cities and States.
• The size: the larger the restaurant, the more its power consumption.
• Climatic Condition: it regards heating and cooling, which changes depending on seasons and weather conditions
• Infrastructure and providers: it determines Internet, Cable, and Cell phone expenses.

While you can’t do much about the utility rate, there are ways to manage and minimize costs for these:

Negotiate Deals: Look out for Bundled Packages with service providers and negotiate your rates.

Monitor Usage: Delete unused services and optimize usage through occupancy sensors and energy-efficient appliances and lighting.

Implementation of these cost controls could go a long way in your restaurant’s profitability from reduced utility costs.

4.    Restaurant Kitchen Equipment Cost

Once a restaurant offers food to customers, the costs for equipment cover small wares like tableware, utensils, and bar equipment to larger kitchen appliances, such as ovens, refrigerators, freezers, and fryers. The size of the investment, the theme, and the size of the restaurant decide the equipment needs.

Breakdown of kitchen equipment costs

• Small wares: This includes tableware, utensils, glasses, takeout containers, and bar equipment.
• Kitchen Equipment: Items comprising ovens, refrigerators, freezers, and fryers.
• Furniture: Tables, chairs, shelving.
• After you are open be sure to budget for breakage replacements; such as glasses being broken. This is something you will learn over time and can create an average monthly cost.

How to Control Costs of Equipment and Supplies?

Rent equipment: It is possible to rent equipment with a monthly payment and the option to buy at the end of the contract. This will get you the equipment you need immediately without a huge upfront cost; however, you have no equity in the equipment.

Buy second-hand appliances: Shop second-hand selling outlets, auctioneers, and internet vendors are a suitable source for inexpensive appliances. An inspection before purchasing could be necessary to prevent expensive repair costs.

Proper servicing: It has been highlighted that equipment serviced regularly avoids costly repairs.

Avoid Breakages: Employees training on handling glassware and the correct storage solution can minimize breakages.

These strategies have the impact of the effective management of equipment costs to ensure that restaurant operating costs and financial stability are optimized.

5.    Restaurant POS System Costs

Well, today, with cloud computing and SaaS distribution models, POS systems become more pocket-friendly. But calculating your budget for a POS might be a little tricky.

Several vendors have sprung up, rendering different prices with options, usually “premium” or “basic” in their package deals.

To know, precisely, your real cost for a POS system, effectively:

• Understand all cost components involved in the buying of a POS beyond only hardware.
• Check your unique business needs so that you do not spend money on advanced features that are never going to be utilized.
• Bring to the front the affordable intervention that will meet your requirements to maximize your saving costs.

Costs for Point of Sale systems mainly include:

• One-time- Hardware fees for such things as cash boxes, display terminals, credit card readers, receipt and order printers, wifi routers, and workstations. Prices differ by vendor, the number of terminals, and add-ons.
• Monthly subscription payments for the software differ based on the number of terminals and/or the type of bundle subscribed to.
• Support/maintenance tends to be charged monthly or per service call.
• Installation is one-time, depending on the scope, vendor, and number of terminals.
• Training of personnel.
• Interchange processing fees.

It is critical to understand these cost elements, especially the Payment Processing Fees since they are very large in proportion and contribute significantly to yearly operating costs in high-end restaurants. In a transaction, payment processing fee-associated parties include the merchant, the payment processor, the card brand network, such as Mastercard or Visa, and the issuing bank.

Research and compare different vendors to help save more on POS systems. First, select a credible company whose solution fits your restaurant’s needs. Only choose relevant features for your business and upgrade when necessary as your business continues to grow. This means one saves by making a wise choice on a POS that will greatly help in the efficient running of your restaurant.

How KNOW App Can Help in Optimizing Restaurant Costs Effectively?

The Know app provides powerful tools to help optimize operations that reduce the average operating costs for a restaurant. Here’s how it can be of help:

Streamline Labor Scheduling: KNOW provides, in its app, tools to optimize scheduling, reduce overtime, and ensure the right number of labor all the time. It enables restaurants to bring down labor costs without sacrificing service by balancing their labor resources against peak hours and customer flow.

Regularly Maintain Equipment: This change in how restaurants run their operations can result in better planning and fewer breakdowns, which may lower average operating costs. KNOW enables scheduling and regular beeping for maintenance so that kitchen equipment or appliances are attended to at the right time. This can prevent potential breakdowns, extend equipment life, reduce repair costs, and facilitate continuous kitchen operations.

Food Safety Hygiene: There can be no compromise in restaurants when many of these food safety laws are enforced. KNOW helps restaurants implement high hygiene standards with customized checklists and reminders, so restaurants are assured cleanliness and hygiene protocols have been followed every time. This not only reduces the risk of a food-borne illness but also helps maintain customer trust and minimizes the threat of legal fees.

Checklists: Effective restaurants are process-driven and run to operational checklists. Know offers custom checklists for any restaurant activity—from opening and closing procedures to inventory management through compliance checks. Standardizing and tracking workflows brings operational efficiencies, better accuracy, and consistency in delivering the service experience.

The Bottom Line

Effective cost management is the embodiment of continued profitability and growth in today’s competitive restaurant business environment. From understanding prime costs to controlling labor costs and optimizing equipment investment, everything plays a big role in cutting down the operating costs of a restaurant. Book a demo today and see how KNOW App enables your restaurant with total operating cost control and operation efficiency.