How Much Does It Cost To Open A Restaurant? Breaking Down Restaurant Startup Costs
How much does it cost to open a restaurant?
Maybe you’re planning on starting your own business in the food industry. Or perhaps you’re ready to improve your profits by reducing expenses.
How much should you spend on food purchases? Should labor costs be at par with other similar restaurants? Can you avoid overspending on some items? Here we will address these questions.
If you need to improve your restaurant’s cash flow, a small business loan could be exactly what you’re looking for.GET A LOAN FOR YOUR RESTAURANT!
Restaurant Startup Statistics
One thing you can count on is that eating food is something everyone does. That’s why the restaurant industry is so successful.
The National Restaurant Association reported that in May 2021, eating and drinking places sales surpassed pre-pandemic sales volumes (Feb 2020) by 1.66%. This may not seem like much, but it is a huge post-COVID accomplishment.
This shows that despite all odds, the industry has a bright future.
But, an average of 17% of restaurant owners close their businesses in the first year of operation.
According to the U.S. Bureau of Labor Statistics, the main reasons businesses fail are:
- not having enough financing
- misjudging the local market trend
- having the wrong location
A restauranteur can make a good living as long as they know the restaurant startup costs upfront and plan accordingly.
Restaurant Startup Costs Breakdown
Here you’ll find average startup costs for restaurants.
To better help you understand them, we’ve divided them into one-time, fixed, and variable expenses.
Here, you’ll find a breakdown of expenses you’d ideally only have to make once.
Before starting your own restaurant, you should know that equipment costs will likely eat up a big chunk of your restaurant business budget.
Prepare to spend on various gadgets like stoves, steamers, fryers, and freezers. You’ll also need dishwashers, a coffee machine, and cooking utensils. Finally, don’t forget about plates, spoons, knives, and furniture.
The list is almost endless.
A mistake that many restaurant entrepreneurs make is to overspend on cooking equipment. They think that nothing but the best will do.
Their line of reasoning is that everything they buy will last for years. Yet, this is the wrong attitude. Instead of splurging on kitchen equipment, it’s advisable to conserve your funds.
How can you cut down on restaurant kitchen costs? First, explore the possibility of buying second-hand items. You can look for bargains with a simple Google search. Additionally, you don’t have to buy the most expensive item in each category.
Lease Security Deposit
Three things matter in property: location, location, location.
The same could be true about restaurants. But, again, if yours is in a place with higher footfalls, your chances of success are much greater.
But prime commercial space commands more rent and building fees. Balance finding a suitable place and paying the least possible rent for it.
You can expect to pay a security deposit fee averaging $2,000 to $12,000. A restaurant’s size and location are the main factors determining how much the building owner charges.
Buying The Location
To buy an existing commercial space for your restaurant, the average per square foot price is $178. However, this estimate goes up or down depending on the location.
Other variables such as the size and the quality of the materials used to construct the building affect the square foot price.
If the building needs large-scale renovations, your square foot price could be as high as $800.
#CaminoTip Keep in mind that you might have to spend on remodeling costs if the existing building doesn’t have the correct facilities. You should also consider the construction costs if you want to build it from scratch.
Consultants can point you in the right direction. It doesn’t matter if you need help with legal, accounting, marketing, or renovation advice.
These costs will vary depending on how much hands-on help you need.
On the low side, professional services cost anywhere from $1,000 to $50,000. But they could climb as high as $250,000 when making extensive renovations to a larger restaurant.
Decor, Building Improvements, And Renovations
The cost of decorating your dining room can vary widely depending on your restaurant concept.
You may need to change the floors and the lighting, add wallpaper or hang some art on the walls.
Even if you don’t want anything complex, you might still need to give the space a new coat of paint. This can cost from just a couple hundred bucks to $40,000.
And let’s not forget the exterior. Your restaurant will look more inviting if you spend on landscaping, awnings, shutters, patio dining, or exterior paint. Exterior costs average $1,000 to $40,000.
For example, an upscale restaurant will be more expensive than a traditional diner.
There are also other expenses you should consider:
- Accessibility for disabled persons: You will need a ramp and bathrooms to accommodate the needs of disabled diners. That can cost upwards of $30,000. For that reason, some startup owners opt to initially only take out orders.
- Signage: You should budget between $3,000 to $10,000 for a logo design, exterior sign, or window decals to advertise your restaurant.
Tables, Furniture, And Tableware
Restaurant startup costs gravitate upwards of $80,000.
That’s a lot, isn’t it?
But it actually may vary depending on how much you spend on quality furniture and tableware and other item purchases.
Growing a restaurant takes time before having a steady stream of regular diners.
Set aside at least six months of expenses to cover leaner times.
This can range between $20,000 to $250,000.
A POS system (point of sale) simplifies the ordering and payment process.
- Hardware costs start at $799. It can include a router, terminal, handheld device, card reader, kitchen display system, and printer.
- Extra printers and routers average $400 each.
- Software charges run between $79 to $150 per month, with monthly interchange fees averaging 1.3% to 3.5% plus 5 to 10 cents for each transaction.
- Payment providers also charge credit card assessment fees between 0.13% to 0.15% and may charge a flat rate or subscription price.
Business License And Permits
One of the first expenses you make is business licenses and permits.
Costs vary based on city licensing fees and liquor and compliance permits.
Local permits can cost between $100 to $300 each.Need A Loan To Start?
Restaurant Fixed Costs
These ongoing expenses will always be the same, so they’re easier to budget around.
Labor: Employee Salaries
After food, the most significant startup costs would be the employee wages. Total payroll costs should not exceed 25% to 30% of food sales for most restaurants.
A restaurant that spends more on its workers could find it challenging to make a profit.
Plan to pay an annual salary of $28,000 to $55,000 for a restaurant manager. A weekly amount of $1,300 to 1,800 for each head chef. $575 to $650 per week for cooks.
You can pay the minimum wage for waiters, though, since the service staff keeps any tips they earn.
And don’t forget about your salary as a business owner.
Rent / Lease
How much should you pay for rent?
That depends upon your luck in finding the right place and your negotiating skills. However, the conventional wisdom is that rent should not exceed 6% of sales.
Of course, if you include property-related expenses like real estate taxes, common area maintenance, and occupancy expenses, the figure can go up. Still, it should not be more than 10%.
Marketing And Advertising
At a minimum, a restaurant needs menus, fliers, social media marketing exposure, and advertising.
Marketing costs run between $100 to $35,000. The amount will depend on whether you do the work or hire a marketing and advertising consultant.
Restaurant Insurance And Permit Renewals
These overlooked costs are very important.
You need to purchase a business owner’s policy, worker’s comp, and liquor liability insurance. For all of this, you could pay an average of $4,300 per year, which varies based on coverage choices.
Permit renewals pricing varies per state and location, but business, food service, liquor, and food handler’s license renewals begin at $50+ each.
You may be thinking of opening a restaurant franchise. If so, you’ll also need to consider licensing costs. It can cost from $10,000 to $50,000 (or even more) to buy a franchise.
Variable Restaurant Expenses
These are the recurring costs that will be different every time. Thus, these restaurant monthly expenses might be harder to budget around.
Restaurant Food Cost
Every new restaurant owner should keep a close watch on food expenses. As a general rule, the restaurant startup costs of food should not exceed 28% to 32% of total food sales.
If you spend more than this percentage, you must reconsider your purchase practices.
You may want to renegotiate prices with suppliers or look for an alternate option. An excellent tool is the restaurant food cost formula. It’s the best way to keep your expenses under control and know how much you should spend on food.
Repair And Maintenance
Although buying equipment is a one-time expense, consider repair costs.
You must maintain your restaurant’s equipment in good condition. This will ensure that your appliances perform efficiently.
Preventive maintenance will also help to extend the life of your kitchen equipment. In other words, you will have to make replacements less often.
It’s advisable to set some money aside to cover unexpected repair expenses. For example, if a freezer stops functioning, you may have to pay a significant amount to repair it.
How much should you budget for repairs and maintenance? About 1% to 3% of sales can be enough.
Electricity costs, phone bills, and internet expenses can eat into your restaurant’s profits. As the owner, you should set an example and try and cut these expenses. Here are some examples:
- Switch off the lights when you don’t need them.
- Change over to energy-saving light bulbs if that’s possible.
For most restaurants, utility costs add up to about 5% of sales.
#DidYouKnow If you want a big restaurant opening event, you should spend around 20% of what you plan to spend annually on marketing.
Find out how to buy cheaper and better kitchen equipment
Startup Costs Vary Greatly With the Type of Restaurant
Keep in mind this average restaurant startup costs breakdown may vary. This is because every different type of establishment will have a unique cost structure.
For example, a food truck can have lower costs and save money, especially when it comes to worker expenses. But, if you run an establishment with table service, expect higher payroll expenses.
Regardless of the type of restaurant you run, you must keep strict control over your expenses. Even seemingly insignificant sums can add up over a period.
Thus, cut down on unnecessary expenditure wherever possible. It will help you compete with other restaurants and remain profitable.
Your business model will also affect costs and profits. For example, a fast-food restaurant might have fewer expenses than a french restaurant that has to import most of its ingredients.
How Much Does It Cost To Run A Restaurant? Profits vs Spending
If you open your restaurant, you must keep track of your profitability. The best way to do this is to add up your sales for a certain period, a week or a month, and then deduct the expenses connected with those sales.
Consider this example:
|Restaurant expenses structure and estimated profit for one week of a restaurant’s operations||$||Cost as a percentage of sales|
|Weekly food purchase cost||$3,000||30%|
|Payroll for the week||$2,500||25%|
|Amount set aside or spent on repairs and maintenance||$300||3%|
|Rent inclusive of property-related expenses||$1,000||10%|
|The amount remaining for miscellaneous expenses and profits||$2,700||27%|
This example shows that food and payroll expenses eat away almost half the sales revenue. The restaurant owner makes a gross margin of $4,500 on sales of $10,000. As a percentage, the gross margin is 45%.
The table above also considers several other expenses — repairs and maintenance, rent and related costs, and utilities.
After accounting for these, the amount that remains is $2,700. That’s 27% of sales revenue, which could pay for miscellaneous expenses.
The remaining amount will be profit.
Remember that there will be little money left to pay for other expenses if you have an insufficient gross margin. So, your profits would fall.
If expenses continue to mount, you could be looking at a situation where you would be making losses.
A business loan can help you improve your cash flow, invest in your business growth, and strengthen your finances.Get Approved For A Loan Today
How To Raise Funds For Restaurant Startup Costs
There are a few different ways to get the capital you need to start your business.
- Small business loan. Contact the SBA, local banks and credit unions, and online lenders for microloan or small business loans. Camino Financial can help you finance your business venture. We offer minimal requirements and competitive rates.
- Grants. Search available small business grants for restaurants available on grants.gov, the SBA, or find ones offered in your state.
- Business partners or investors. Be on the lookout for a business partner or investor with experience in the restaurant industry. They may provide funding for restaurants in your area.
- Friends and family. People close to you want to see you succeed. They need to be comfortable lending you money, knowing that your startup restaurant could potentially fail. Treat them as you would any investor and put the conditions in writing.
- Credit cards. Start with a small credit amount in your business name that you can comfortably repay each month. This will help you build a credit history to qualify for a future small business loan.
How Can I Cut Down On My Restaurant Costs?
A restaurant with a steady stream of customers and a good reputation can be a source of great satisfaction. This success results from 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, especially if you spend too much.
If you want to increase your profitability, you can decrease food costs or reduce the amount you spend on your workers.
However, cutting the other expenses is more complicated, and the impact on your profit will be relatively lower.
Here are some ways to reduce restaurant costs and improve profitability:
- Do clients return any dishes regularly? Maybe there is a problem with the preparation, but probably you just need to strike that dish off your menu. Learn here how to do a menu audit.
- Are you making your food purchases in the correct quantity? Of course, you need to buy enough to maximize the bulk discount, but you also need to ensure that food does not become stale.
- It’s possible to learn how to reduce your production costs in any business. In the restaurant industry, even a slight reduction in food costs can result in significant savings. That’s because your food purchases account for a large portion of your total restaurant business budget.
- Do your workers have enough to do? Consider giving them neglected tasks when it’s not rush hour.
- Focus on how to reduce your labor costs. It’s possible to save on the salaries and wages you pay without compromising the quality of service you provide to your customers. Consider outsourcing some tasks. Is there any way that you can cut down on your overtime expenses?
Tips To Start A Successful Restaurant Business
Use these tips to successfully start a restaurant and maximize growth potential.
- Make a business plan. Write a business plan to include long-term ways to improve your restaurant, a sample menu, business goals, a description of the restaurant, and how you intend to get new customers.
- Make financial forecasts. Base your projections on market research for your location, actual expenses, and predicted income.
- Don’t overspend on equipment. Buy good, used equipment to maximize your business’s profit margin. New equipment depreciates the moment it’s purchased.
- Pay attention to contracts. Always review employee, lease, supplier, and contractor agreements. Ensure they clearly define the business arrangement and your expectations.
- Follow your restaurant business budget and don’t overspend. Follow predetermined amounts set aside for food, remodeling, technology, and marketing costs. Then, when you establish your restaurant and it’s profitable, you can add expenditures.
- Don’t overhire. Regularly evaluate your staff needs and hire prudently based on sales growth and restaurant trends.
- Let quality and quantity drive your sales. People keep coming back for good food. Notice what foods they leave on the plate and which menu items are top sellers. It’s better to have 10 items that drive sales than 20 not-so-popular choices that cause sales to tank.
- Streamline your menu. If a menu item isn’t selling, research what food types sell in your location. Then, you can make adjustments to your menu to cater to what your customers want.
- Find a lender that understands your vision. It’s true, like anyone else, lenders are in business to make money. However, some go the extra mile to guide small business owners in the right direction to succeed. Camino Financial is one of those lenders.
A Business Loan Can Help You Finance The Average Start-Up Cost For A Restaurant
Experienced restaurant owners know that accessing funds can give their business an advantage.
You may get a new opportunity to increase your level of operations.
But this expansion could involve buying additional equipment or hiring more personnel. Or maybe your restaurant needs an urgent cash injection to purchase inventory or pay for furniture repair.
Where will you turn to for cash?
At Camino Financial, we specialize in restaurant loans. Many of our members are new restaurant owners, and we have a high degree of expertise in this segment. So if you need money quickly, request a quote today for a business loan.
We can offer you the best financing solution for your needs.
Compared to other lenders, we have fewer requirements that are easy to meet. Your restaurant should have been active and registered for at least nine months and generating sales of at least $30,000 annually.
If you are eligible, we can provide funds in two to ten days.
How to reduce expenses in a restaurant?
Invest in a restaurant food cost calculator to track which foods cost more and work with suppliers to reduce pricing.
Use the first-in, first-out method to use older ingredients first, and be mindful of ways to reduce overall waste.
Remove low-profit items from your menu and proportion ingredients ahead of time to speed up service and avoid running out of ingredients.
Use energy-efficient lighting and appliances and only run a full dishwasher to save on energy costs.
How to cut labor costs in a restaurant?
Labor startup costs can eat away at your restaurant business budget if you hire too many employees. Therefore, it’s essential to know your slow and rush hour periods to schedule the correct number of employees to cover those situations.
Also, hire people who are willing to learn, excited about what they do, and don’t mind growing alongside you as your business growth accelerates.
How to determine food costs for a restaurant?
The best way is to use the food cost formula:
Beginning inventory, plus food purchases, minus ending inventory, divided by food sales. Multiply that result by 100 to determine your food cost percentage.
The result should average 28% to 32% or less of your total food sales.
How much does a restaurant cost to open?
According to Sage, an accounting software company, the median cost per seat is $3,046 for a leased building and $3,734 for owning the building.
Is it profitable to open a restaurant?
Yes, it can be very profitable if you know how to keep your costs down. For example, restaurants’ average net profit margin is 15%, and the gross margin is 67%.
Can you start a small restaurant with 10,000 dollars?
It is possible to start a restaurant with limited funds. The best way to do so is to buy used equipment and find an affordable location. You should also consider starting a restaurant with no in-dining options, only takeout and delivery.
How hard is it to open a restaurant?
It can be. There are so many things to consider, and things can go wrong. But if you have a business plan that works like a planned route, the process could be considerably easier.
How much money do you make when you own a restaurant?
Depending on the type of restaurant and the size, you can make around $30,000 to $150,000 per year.
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