Last Updated On May 26, 2021 / Written By Cynthia Vespia

Guide to Restaurant Operating Costs

What are Restaurant Operating Costs?

Opening a restaurant has initial start-up costs. Running a successful restaurant means dealing with ongoing operating expenses. As a restaurant business owner it's important to know the specific costs associated with running a restaurant.

The start-up costs of opening a restaurant can be categorized into one-time costs and recurring costs. One time expenses include a purchase made only once. This can include security deposits, renovation costs, or business licensing. A recurring operating expense is continuous and involves paying property taxes and mortgage; staff salaries; food and beverage delivery; and utility costs.

Recurring expenses will break-off into more categories depending on fixed cost or variable costs associated with business operations. Fixed costs involve payments that don't fluctuate like rent or a loan payment. Variable or controllable costs are adjustable payments like food and labor. Marketing costs would also be considered variable.

Understanding all that operating costs include will help keep the financial health of the restaurant in positive alignment with its goals.

Business Expenses of Opening a Restaurant

The success of a restaurant comes down to research, planning, and knowing how to navigate the expenses with clarity. Here are a few of the expenses to watch out for-

  • Food Expenses
Food and beverage can be a top expense for restaurant owners. Food costs should be no more than 28% - 38% of sales. If food costs are higher, adjustments need to be made. Using a different supplier or an automated tracking system to control expenses will help avoid excess food expenses.

  • Labor Expenses

Another high cost most restaurant owners face is labor expenses. Total labor shouldn't go over 25% - 30% of sales. Managing labor costs will help keep a restaurant profitable.

  • Equipment Expenses

A lot of the costs of opening a restaurant falls to equipment. They also require continued maintenance making equipment expenses high on the list for over operating costs. Many first time restaurateurs overspend on equipment. One way to cut costs is to look for second-hand equipment in surplus stores. They work just as well at half the cost.

  • Rent Expenses

Real estate is where the location of the restaurant will be. Prime locations will end up costing more in rent. Finding a balance between sustainable rent and an ideal location takes time and effort. Rent cost shouldn't exceed 6% of sales. that rent should not exceed 6%-10% of sales.

  • Utility Costs

Utility costs make up 5% of sales for most restaurants. This includes electricity, internet, or phone bills. Minimizing utility costs will help maintain a balanced budget over time.

Varying Costs
Each restaurant will have its own unique operating expenses. High end service restaurants will have higher expenses than casual dining or fast food service. Maintaining control over expenses will help a new restaurant remain competitive in the marketplace.

Tracking expenses and profit efficiently will help in knowing where adjustments need to be made. Decreasing major costs can be effective at curtailing unnecessary spending.

If expenses supersede profits it can cause complications. Getting on top of business expenses early will help a new business owner maintain a positive profit margin.

  • Food
  • Labor
  • Equipment
  • Rent
  • Utilities

Understanding Operating Cost Calculations

Fixed Costs
A fixed cost is an operating expense that doesn't change. An example of a fixed cost would be rent for the space where the restaurant is located. Other examples are taxes and insurance. Some labor costs can also be considered a fixed cost. Management, accountants and others who have a dedicated salary usually fall within these parameters.

In calculating expenses, overhead costs are the only fixed costs that will be factored. Expenses of business operating costs with no direct impact from food sales.

Variable Costs
Variable costs fluctuate and are linked to direct sales. The variables are in the shifting need due to supply and demand. Variable costs can include food and beverage, including utility purchases such as napkins and containers. Food and labor costs are the pricier variable costs.

Cost Percentages
When a small business is running well, the cost percentages stay consistent. Even with profit numbers shifting weekly or monthly the cost percentages will stay within a specific margin wit consistent calculations.

To establish a cost percentage the cost of an item is divided by sales with a resulting percentage. The calculation formulas therefore look like this-
cost percentage = cost total sales
food cost percentage = cost of food total sales

labor cost percentage = cost of labor total sales
overhead cost percentage = cost of overhead total sales

Interpreting Cost Percentages
Once the cost percentages are established, they are effective at performance evaluation of a specific product or time of year. They can be used to compare restaurant performances.

For example, fast-food restaurants will have a higher food cost percentage based on the food items they purchase. However, their labor expenses are much lower than most dine-in restaurants. The profit from these establishments comes from high volume turnover while maintaining low labor costs.

A fine-dining restaurant will have a higher level of service which creates higher labor costs. Here the food cost percentage may be lower because their prices offset the spending on those products and ingredients. Profit here would come from dollar per sale where as fast food is focused on higher volume.

These calculations can easily be managed using electronic POS systems and inventory equipment which automatically collects data to be reviewed.

Examples of Operating Costs

Restaurants have high overhead with most of the operating expenses coming from food and labor. Most expenses can be divided into specific categories. Examples of operating costs include-

Salaries and Other Labor Costs

As mentioned, labor costs are a high expense for most restaurants. These costs are made up of staff salaries and benefits. They also include any unemployment taxes and service commissions. In some establishments, uniform cost will also fall into this category.

Labor expenses can be variable costs as the amount of staff on hand can be adjusted based on business needs. Therefore, in order for a restaurant manager to keep labor costs down they will need to have tools to predict staff scheduling importance.

Cost of Goods Sold
The cost of goods sold (COGS) is relative to food and beverage costs and its the second highest operating expense restaurants face. Kitchen equipment used to prepare foods can be another example of cost of goods sold but often isn't included on an income statement. The reason is the value of these items has depreciated. A percentage of 33% food cost from food sales is average.

Marketing and Advertising Expenses
Marketing is an important for small business restaurants to reach customers. Theses expenses include website hosting; advertisements; and other means to draw attention. The most important marketing expense will be menu engineering. Each item on the menu will dictate the other purchase needs for the restaurant.

Real Estate Expense
Having a place to open the restaurant requires the leasing of real estate. Any expense related to the physical location will fall under a real estate expense. This includes rent, insurance, property taxes, and utility cost.

Repairs and Maintenance
Repairs and maintenance are necessary for any small business. In a restaurant environment it is especially important to stay up-to-code. Most maintenance will be for the kitchen and food prep areas and equipment. The dining area, service stations and restrooms will be equally important to maintain.

Administrative Costs
Administrative costs will mostly include supplies for the bookkeeping. Office supplies, computer software, and even telephone charges are part of the admin costs. Beverage licenses and the health department fees will also be considered administrative costs.

  • Salary and Labor
  • Cost of Goods Sold (COGS)
  • Real Estate
  • Marketing and Advertising
  • Repairs and Maintenance
  • Administrative Costs

How to Reduce Operating Costs

Owning and operating a restaurant comes with unique expenses. With ingenuity and practice curbing higher expenses can help streamline profitability.

Here are a few ways to reduce restaurant operating expenses-

Budget Planning
Having a strict budget in place can structure the needs of restaurant operations. This puts together hard numbers to understand where costs can be minimized. Creating and following a budget is a true way to gather specific information that shows where spending is going. Track, adjust and adhere to a budget to keep things profitable.

Optimizing Inventory Management

Raw materials and other food products are the bulk of expense during each month a restaurant is operational. Optimizing inventory management is the best way to keep these expenses from getting out of control.

Inventory should be done at the same time of day at least once per week. Accurate records of each product on hand will be valuable in knowing what needs to be ordered in the next delivery. Automated inventory management tools can aid in keeping records with very little error.

Reduce Food Waste

On average, restaurants waste 75,000 lbs of food each year. When food is wasted it can add up in cost. Reducing food waste takes a practical approach. Use ingredients in several menu dishes to maximize potential. In essence, if an item can be reused it should be. Another way to reduce food waste is by having an itemized prep card for staff to follow. Having this in place minimizing wasted product by having only specific product made. Labeling products with dates ensures they do not spoil and go to waste.

Embrace Technology

Technological advances make daily tasks easier. A small investment in technology up front will save money in the long run. Optimizing restaurant operations like inventory management, staff scheduling, and sales can keep things on track by reducing human error.

Streamlining a restaurant is as simple as choosing which technological systems to implement. Where the greatest need lays the use of technology can make a significant impact at reducing costs and keeping cash flow positive.

How Technology Impacts Restaurant Operating Expenses

Technology has become a major influence on how restaurant owners do business. It can be applied to almost every area of business operations from front-of-house to back-of-house. Here is how technology is impacting restaurant operating costs.

Inventory Management Systems

Using a digital system to track inventory is a more efficient way to do inventory control. These systems are often integrated within a POS system and keep track of inventory with detailed information. One glance lets the staff know which items are in stock and which need to be replenished. This small change to inventory management will save time which directly saves money. A bonus factor is in tracking possible theft through detailed inventory reports. This keeps food costs way down.

Food Transport Systems
When dealing with suppliers and food distributors, the risk of food spoilage for perishable items used to be a factor. Now, the technology of refrigeration has made it to trucks to keep foods fresh upon arrival. Because spoiled food and waste costs restaurants a great sum of profit, having this addition to their suppliers is cost effective. Additional lower costs can be found when fuel costs are lowered. When food suppliers can decrease their spending they often are open to lower price negotiations.

Genetically Modified Foods
Genetically modified foods are meant to be more sustainable. They are also said to be pest resistance and endure harsher climates. Still in its controversial stages, genetically modified cows, pigs and chickens are said to produce a greater quantity of meat which is meant to lower the cost of meat sales.

Trend Monitoring
Business owners in all industries track trends through sophisticated technology. This helps predict what will be profitable in the future and where to invest money. The fast food industry relies heavily on this type of trend monitoring. They'll often look at sales figures for a specific time period and approach the food prep with this in mind. Preparing just enough food creates less waste and reduced loss in profit.

5 Innovations to Navigate Operating Costs

Five innovations that are being used to enhance customer satisfaction, reduce cost, improve restaurant operations, and increase revenue.

1. Online Ordering
Most of the world's population is online in some form. Taking advantage of that fact, many restaurants, fast food chains, and food trucks have taken their businesses online as well. By having presence via an online platform it makes ordering more convenient for customers. When they have that sense of convenience, it makes them more likely to put in an order with an online system rather than choosing a food establishment that doesn't have one

2. Digital Point-of-Sale System
Point-of-sale systems are standard in most food establishments. The POS is a digital, cloud-based system used to effective pass orders from wait staff to the kitchen. Once the meal is prepared, the customer can then pay at the POS as well.

3. Scheduling Software
Having scheduling software creates a more harmonized way of tracking staff hours. The manager can create a digital version of the schedule and send it out to the staff. Once the employees have their schedule they can put in for time-off requests or schedule shifts and the changes can be made easier. This type of software cuts down on confusion so there is no overlap in staffing or gaps in the schedule.

4. Mobile Apps
Mobile apps incentivize customers by offering built-in reward points for orders. Push notifications from apps can remind customers of upcoming specials and events. The mobile apps are not only a convenient method of ordering but are also highly effective marketing tools. Apps can also offer mobile payment options which allows for a smoother transaction. This is especially advantageous for a busy lunch crowd.

5. Dish Sanitizing Technologies
Health codes must be met at all times for food service industries. The implementation of dish sanitizing technologies offers an atomized method of keeping dishes and supplies clean. They run continuously, so products are always clean, sterilized and ready to use.

Conclusion to Restaurant Operating Costs

  • Operating costs include many different things depending on the type of restaurant, its location and goals for profitability.
  • Restaurant Technology can be used to manage food safety, inventory, and operations to effectively cut costs.
  • Owning and opening a restaurant takes an understanding of how to manage operating costs and reduce spending.
  • Technology can help reduce spending and increase profit when integrated into a restaurant's daily tasks.