Restaurant Operating Costs | 6 mins read

A Clear Guide to Restaurant Operating Costs

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Hanh Truong

By Hanh Truong

Introduction to Restaurant Operating Costs

Consumer demand, minimum wage, and food supply prices regularly shift. Therefore, restaurant owners need to safeguard their bottom line. This entails proactive cost management and effective control of expenses. According to restaurant statistics from 2019, 52% of professionals in the dining industry state that high operating and food costs were their top challenge.

In order to successfully manage spending, eatery owners need to understand their restaurant operating costs. Doing so will drive them one step closer to reducing expenses and maximizing profitability. It will also provide them visibility into where their revenue is going and how they can spend smartly. These factors will ensure the restaurant operates seamlessly in the long run.

Restaurant Operating Costs 101

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Restaurant operating costs refer to expenses that eatery owners incur while operating the business daily. There are 3 different types of restaurant costs that restaurateurs should be aware of.

1. Fixed Costs
Fixed costs are expenses that are generally consistent each month because they are not associated with food sales. For example, rent and lease payments are a type of fixed cost.

2. Variable Costs
Variable costs are charges that will vary according to sales, external environments, or output. These types of costs are harder for management teams to predict and require strategic budgeting. A prime example of variable costs is food inventory.

3. Semi-Variable Costs
Semi-variable costs share elements of both fixed and variable costs. Restaurant operators often classify labor as a semi-variable cost. This is because managers will often have a salary, which is a fixed cost, while kitchen staff is paid hourly. Since shifts will have different set hours, their pay is a variable cost.

By accumulating all fixed costs, variable costs, and semi-variable costs, restaurateurs will have their total operating costs. The sum will give management teams a broad idea of how much they are spending to keep their business afloat. To get a clearer picture of what these costs are, owners will need to categorize their spending. This will make it easier to pinpoint where they need to improve. The following are the 3 key operating costs.

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1. Labor Costs

Typically, labor costs account for most operating costs. This includes employee salaries, hourly pay, payroll taxes, paid time off, bonuses, overtime, and employee benefits. To calculate how much a restaurant spends on labor, managers can use the labor cost percentage.

  • Labor Cost Percentage = (Total Labor Costs for a Given Period / Total Sales for a Given Period) x 100
For example, if a restaurant startup has a total labor cost of $13,000 for March and their total sales amounted to $40,000, their labor cost percentage would be 32%. According to a 2019 restaurant study, the average labor cost percentage for all types of establishments is 31.6%. This means the eatery will need to work on lowering its labor costs to maintain profitability.

Reduce Labor Costs

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Some best practices to reduce labor cost percentage include the following.

  • Improve Employee Retention - By investing in current employees, restaurant managers will not have to spend more money recruiting and onboarding new hires. To enhance employee retention, the company should provide growth opportunities, incentives, and employee benefits. This will keep staff satisfied and ensure they feel valued.
  • Optimize Employee Scheduling - Manually scheduling employees can result in mistakes and overstaffing slow shifts. Restaurants should use scheduling software to optimize their labor costs.
  • Efficiently Train Staff - Untrained employees can create costly mistakes to the business and sales. Management teams should thoroughly train their staff and ensure they understand their roles and responsibilities. Additionally, having a knowledgeable team means the restaurant can have a leaner workforce each shift.
  • Use New Technology - New restaurant technology, such as self-ordering kiosks, allows companies to reduce labor costs. These tools can carry out ordering and customer service, which means restaurants can focus on scheduling their staff for other tasks.

2. Food Costs

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The second key operating expense is food costs. Food costs will vary for each business, depending on the ingredients and supplies they need. Additionally, external factors, such as weather, natural disasters, region, and seasonality can impact the cost of food supply. Many restaurants will also experience high food costs due to over-ordering inventory. This results in food waste and unnecessary spending.

To monitor food costs, restaurants can track their food cost percentage. This measurement indicates how much sales come from menu items. The following is the formula for food cost percentage.

  • ((Beginning Inventory + Purchases) - Ending Inventory)) / Total Food Sales
For example, a full service restaurant begins its first week with $10,000 in inventory. They replenish their stock room by purchasing $5,000 of ingredients. At the end of the week, they have an ending inventory of $13,000 and total food sales of $8,000. Their calculations would be the following.

  • ((10,000 + 5,000) - 13,000) / 8,000
  • 15,000 - 13,000 / 8,000
  • 2,000 / 8,000
  • 0.25 or 25%
With a food cost percentage of 25%, the steakhouse falls within industry standards, in which the average food cost is 20-40%.

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Reduce Food Costs

In the case that a restaurant wants to lower its food cost percentage, they can consider the following best practices.

  • Improve Inventory Management - Restaurants should use modern inventory management software to track their ingredients. These solutions ensure owners are replenishing stock to optimal levels, which will reduce waste.
  • Foster Relationships With Suppliers - By having transparent and friendly relationships with suppliers, managers can ensure they are getting the best market price for their food supplies.
  • Adapt to Seasonal Changes - Some ingredient prices will increase due to new seasons. Menu pricing should reflect these new prices as they change.

3. Rent

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Lastly, rent is the third critical factor to restaurant operating costs. According to statistics, 5-10% of a restaurant's monthly sales go towards rent and utilities. Depending on the establishment's location, rent may be higher than average.

Reduce Rent Costs

Restaurants that want to lower their rent and utility costs can use the following techniques.

  • Renegotiate the Contract - Restaurant operators should negotiate their lease contract with the property owner. This can help both parties find a common ground with pricing.
  • Sublease the Space - Restaurant owners can sublease their establishment space to vendors, catering companies, and food trucks outside business hours.
  • Rethink Space and Size - It is possible to save money on rent by looking for a smaller location.

Key Takeaways to Restaurant Operating Costs

  • Restaurant operating costs are expenses that business owners accumulate while running their operations day-to-day.
  • The 3 types of operating costs are fixed costs, variable costs, and semi-variable costs.
  • To assess operating costs thoroughly, restaurant owners need to look at their labor costs, food costs, and rent.
  • By having a detailed look into restaurant operating costs, management teams can effectively understand where their revenue is going and how to optimize their profits.

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