Did you know that 80% of restaurants fail within the first five years? While so many factors can affect a restaurant’s success, it largely comes down to a business‘s financial health. As a restaurateur, you want your business to succeed long term, which means getting a handle on the average operating costs for a restaurant.
Where is your money going? You need a granular look at your expenses so you can make better decisions for your bottom line. Let’s look at the average operating costs for a restaurant as well as seven ways you can lower them.
Operating costs include everything you pay to keep your restaurant running. This includes fixed expenses that are the same from month to month, like:
Rent
Debt payments
Marketing
Insurance
If you recently opened a new restaurant, you also have to account for one-time and/or fixed costs of opening like:
Business licenses and license fees
Liquor license
Equipment
You’ll also have to account for variable expenses that change from month to month, including:
Taxes
Food
Labor
Utilities
Payment processing fees
Third-party delivery fees
Repairs and maintenance
When you add up all of your fixed and variable costs, you’ll get your total operating costs for the month.
While there are so many expenses associated with running a restaurant, the biggest line items are labor, food, and rent.
Labor is usually a restaurant’s biggest expense. You can expect to spend between 20% and 35% of your gross sales on labor costs. This includes a variety of expenses like:
Hourly wages
Employee benefits, like PTO and healthcare
Uniforms
Training
Payroll taxes
You can use this formula to calculate your labor cost percentage for the month:
(Total labor costs / Total sales) x 100
So, if you spent $20,000 on labor last month and made $60,000 in sales:
($20,000 / $60,000) X 100 = 33%
In this case, your labor cost percentage is 33%, which would put you within the expected 20% to 35% range.
The second-biggest expense you’ll pay as a restaurateur is food prices. This is the price you pay for the raw ingredients you use to create your dishes. These costs account for an average of 28% to 35% of gross sales, but this depends on the type of restaurant you own. For example, these costs could be as much as 40% for fine dining restaurants.
You can use a calculator to determine your food costs, but it won’t tell you everything you need to know. The best option is to calculate food costs by using the formula for cost of goods sold (COGS):
(Beginning Inventory + Purchased Inventory) - Final Inventory = COGS
Next, you’ll need to use COGS against your sales with this formula to determine your food cost percentage:
COGS / Food Sales = Food Costs
COGS takes into account your current inventory levels, how much inventory you’ve purchased, and what you sold over that period, so it’s a more effective way to understand profitability.
Rent is the third-biggest operating cost for restaurants. Profitable restaurants’ rents are usually 5-8% of their total revenue. Rent is tough because, unlike food and labor costs, it’s harder to negotiate the terms of your lease. Even so, it’s an essential expense you should budget for.
The problem is that your average restaurant operating costs can change from month to month. This makes budgeting difficult for a small business but not impossible.
Remember, every restaurant is different. Regardless of your current restaurant expenses, there are a few approaches you can try to reduce expenses and boost profitability. Try these seven tips to reduce your operating expenses.
You could always reduce labor costs by staffing fewer employees, but that’s not going to give your diners the best experience. If you want to boost sales, operate with a smaller staff, and give your employees more breathing room, introduce a self-service kiosk to your front-of-house.
All you need is a tablet, Square payment hardware, and KioskBuddy to add a convenient ordering option to your restaurant for very little overhead.
It might be simpler to buy from just one supplier for all of your ingredients, but you won’t always get the best deal. So, it’s a good idea to shop around for the best deal on ingredients.
For example, if you use a lot of eggs, but your provider is jacking up the price of eggs, look for a cheaper vendor. This will add more moving parts to your restaurant business, but if you’re saving money, it’s worth managing relationships with multiple suppliers.
Unless you’ve negotiated flat-rate utilities with your landlord, your water, power, and gas costs will fluctuate from month to month. Try to keep your costs as low as possible by:
Installing low-flow toilets
Using LED lighting
Reducing lighting at night
Regularly cleaning appliances like grills, refrigerators, and vent hoods
Purchasing Energy Star-rated kitchen equipment
You want to strike a careful balance with employee scheduling. You need just enough employees to keep customers happy, but scheduling too many employees will needlessly increase your labor costs.
If you‘re using Square as your point-of-sale (POS) system, use Square’s team management feature to gather data on your employee schedules, diner demand, and high-demand hours. This data will help you maximize your scheduling, so if there isn’t a ton of demand on Wednesdays at 10 a.m., you know you can operate with a leaner crew to keep costs low.
Plus, your point-of-sale data can help you retain staff by optimizing everyone’s hours in a clear, fair way.
Do you really need a gigantic menu? A bigger menu requires stocking more inventory, which can lead to food waste. If you need to cut costs, consider removing less popular menu items.
If you still want to give diners the novelty of new dishes, think about rolling out seasonal specials. Seasonal ingredients tend to be cheaper, so you can still delight diners while managing your food costs.
You can also consider reducing portion sizes. Check plates as they come back from tables; is there always food left over? If so, consider trimming portion sizes to cut food waste and your total costs.
As we noted earlier, rent can eat up as much as 8% of your total revenue. While this is a tough cost to negotiate, it’s worth trying!
Ask your landlord if they’re able to offer you better terms. This might mean signing on for a longer-term lease in exchange for a lower monthly rent. If you have no plans to move locations and you get along well with your landlord, this can be a good way to reduce your rent costs.
But there are other ways you can lower rent, too. Consider reducing your restaurant’s square footage and switching to a takeout-only model. If you have the funds, you can also consider buying a space outright so you don’t have to worry about monthly rent ever again.
Food costs have a big impact on your profit margins, so you need inventory management to prevent food waste. If Square is your POS provider, use the included inventory management feature. This will help your kitchen team keep tabs on your inventory levels, ensuring you order at exactly the right time. The system can even help you avoid ordering too much food.
The average operating costs for a restaurant will change from month to month. While restaurant owners can’t eliminate certain expenses entirely, it’s possible to trim food, labor, and rent expenses with the seven creative approaches outlined above.
Even with a successful restaurant, it’s a good idea to maximize profits as much as possible. Go with a self-service kiosk to make the most of your resources. All you need is a tablet, Square payment hardware, and KioskBuddy to add an easy ordering option without a lot of overhead. Sign up for KioskBuddy now to get started.