How much does it really cost to run 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 to 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 business is not making as much money as you think it should, it may be time to study your restaurant expenses. How much are you spending on food purchases? Are your labor costs at par with other similar restaurants? Are you overspending on some items?
Here we will address those questions.
A Detailed Breakdown of Restaurant Expenses
Restaurant expenses on food
Every restaurant owner should keep a close watch on 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. An excellent tool is the food cost formula. It’s the best way to keep your expenses under control and to know how much you should spend on food.
Restaurant expenses on labor
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 could find it difficult to make a profit.
Restaurant expenses on equipment
When you start your restaurant business, equipment costs are likely to eat up a big chunk of your budget. You have to be prepared to spend on various gadgets like stoves, steamers, fryers, and freezers. You’ll also need dishwashers, a coffee machine, and cooking utensils. Don’t forget about plates, spoons, knives, and furniture. In fact, the list is almost endless.
A mistake that many entrepreneurs who are in the restaurant business make is to overspend on equipment. They think that nothing but the best will do. Their line of reasoning is that it’s okay to choose the most expensive options as everything they buy is going to last for years. However, this is the wrong attitude. Instead of splurging on equipment, it’s advisable to conserve your funds.
How can you cut down on equipment costs? 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.
Find out how to buy cheaper and better kitchen equipment
Restaurant expenses on repair and maintenance
Although buying equipment is a one-time expense, you will have to consider repair costs when you calculate your restaurant’s profits.
It’s essential that you 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 equipment. You will have to make replacements less often.
It’s advisable to set some money aside to take care of unexpected repair expenses. If a freezer stops functioning, you may have to pay a significant amount to get it into running condition again.
How much should you budget for repairs and maintenance? About 1% to 3% of sales is usually considered sufficient.
Restaurant expenses on rent
There’s an oft-repeated quotation in real estate circles — “There are three things that matter in property: location, location, location.” The same could be true about restaurants. If yours is located at a place that has higher footfalls, your chances of success are much greater.
But prime locations command more rent. Entrepreneurs have to achieve a balance between finding a suitable place and paying the least possible rent for it.
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. If you include property-related expenses like real estate taxes, common area maintenance, and occupancy expenses, the figure can go up, but it should not be allowed to be more than 10%.
Restaurant expenses on utilities
Electricity costs, phone bills, and internet expenses can eat into your restaurant’s profits. As the owner of the restaurant, you should set an example and try and minimize these expenses. 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 or a little less.
Costs can vary with the type of restaurant
Keep in mind that it’s difficult to generalize restaurant costs. Every different type of establishment will have a unique cost structure. For example, a food truck would usually have relatively low worker costs. On the other hand, 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 strict control over each of your expenses. Even seemingly insignificant sums can add up over a period. Cut down on unnecessary expenditure wherever possible. It will help you to compete with other restaurants in the area and ensure that you remain profitable.
How much am I making and how much am I spending?
It’s essential to keep track of your profitability. The best way to do this is to add up your sales for a certain period, say, for a week or a month, and then deduct the expenses that are 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
|Payroll for the week
|Amount set aside or spent on repairs and maintenance
|Rent inclusive of property-related expenses
|Amount remaining for miscellaneous expenses and profits.
In this example, you can see 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 provided above also considers several other expenses — repairs and maintenance, rent and related expenses, and utilities. After accounting for these, the amount remains is $2,700. That’s 27% of sales revenue. This sum could be used to pay for miscellaneous expenses. The remaining amount will be profit.
If you want to increase your profitability, you can try to decrease food costs or reduce the amount that you spend on your workers, as these are the major expenses. Reducing the other costs is more difficult, and the impact on your profit will be relatively less.
Remember that if you have an insufficient gross margin, there will be little money left over to pay for other 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 my restaurant expenses?
Here are some ways to reduce expenses and improve profitability:
- 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. Learn here how to do a menu audit.
- 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.
- It’s possible to learn how to reduce your production costs in any business. In the restaurant industry, even a small reduction in food costs can result in significant savings. That’s because your food purchases account for a large portion of your total budget.
- Do your workers have enough to do? Consider giving them alternate tasks that are usually neglected during rush hour.
- Focus on how to reduce your labor costs. It’s possible to save on the salaries and wages that you pay without compromising on the quality of service that you provide to your customers. Consider outsourcing some tasks. Is there any way that you can cut down on your overtime expenses?
A business loan can help you face the costs of running your restaurant
Experienced restaurant owners know that having the ability to access funds when they are most needed can give their business a big 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 buy inventory or pay for the repair of your furniture.
Where will you turn to for cash?
At Camino Financial, we specialize in restaurant loans. Many of our members are restaurant owners, and we have a high degree of expertise in this segment. If you need money quickly, request a quote today for a business loan.
We can offer you the best financing solution for your needs. Our minimum requirements are easy to meet. Your restaurant should have been operating for at least nine months and generating sales of at least $30,000 annually. If you are eligible, we can provide funds in as little as two days.
We hope that this advice can help you track and control your restaurant’s expenses, increase your profit, and give you more confidence to operate your business.