What’s the real cost of running a restaurant? A restaurant that attracts a steady stream of customers and gains a reputation for high-quality food at reasonable prices can be a source of great satisfaction for its owner. This success is the result of careful planning, hard work, and the ability to pay attention to every small detail.
But high sales volumes do not necessarily guarantee an adequate level of profit.
If your restaurant is not making as much money as you think it should, it may be time to study your costs. How much are you spending on food purchases? Are your labor costs at par with other similar restaurants? Here we will address those questions.
The Cost to Run a Restaurant
How much should I spend on food and labor?
Every restaurant owner should keep a close watch on payroll costs and food purchase expenses. As a general rule, your food costs should not exceed 28% to 32% of total food sales. If you are spending more than this percentage, you need to reconsider your purchase practices. You may want to renegotiate prices or look for an alternate supplier.
After food, your next biggest expense would be the payment that you make to your workers. For most restaurants, total payroll costs should not exceed 25% to 30% of food sales. A restaurant that spends more on its workers on a regular basis would find it difficult to make a profit.
How much am I making and how much am I spending?
It is important to know the gross margin that you make on your sales. The best way to do this is to add up your sales for a certain period of time, say, for a week or a month, and then deduct the expenses that are directly connected with those sales.
You can arrive at the cost of the food purchases for the selected time period and also factor in the payroll costs. This will help you calculate the gross margin that you are making.
Consider this example:
|Weekly food purchase cost||$3,000||30%|
|Payroll for the week||$2,500||25%|
In this illustration, you are making a gross margin of $4,500 on sales of $10,000. As a percentage, your gross margin is 45%. If you want to increase your profitability, you can try to decrease food costs or reduce the amount that you spend on your workers.
If you have an insufficient gross margin, there will be little money left over to pay for fixed expenses. Consequently, your profits would fall. If expenses continue to mount, you could be looking at a situation where you would be making losses.
How can I cut down on costs?
- Are there any dishes returned by clients on a regular basis? Maybe there is a problem with the preparation, but probably you just need to strike that dish off your menu.
- Are you making your food purchases in the right quantity? You need to buy enough to maximize the bulk discount, but you also need to ensure that food does not become stale.
- Do your workers have enough to do? Consider giving them alternate tasks that are usually neglected during rush hour.
Costs can vary with the type of restaurant
As a final consideration, keep in mind that every restaurant will have a unique cost structure. For example, a food truck would usually have relatively low worker costs. If you run an establishment that offers table service, you should expect to have higher payroll expenses.
Regardless of the type of restaurant that you run, you must keep a strict control on each of your expenses. This will help you to compete with other restaurants in the area and ensure that you remain profitable.
We hope these simple tips help you track and control your restaurant’s expenses, boost your profit, and give you more confidence to operate your business. For more tips to successfully run your restaurant, click here.