Managing your restaurant expenses will always be an integral part of running a restaurant operation. A restaurant’s main goal is to lower expenses as much as possible and find ways to increase profitability.
In this article, we will be talking about the different types of restaurant expenses and some tips on how to reduce restaurant expenses.
Restaurant Costs: Difference between Fixed Cost vs. Variable Cost vs Semi-variable Cost
All restaurant operating expenses fall into these three categories: fixed cost, variable cost, and semi-variable cost. The sum of these three expense categories are your total operating expenses for your restaurant. This is the total wherein you subtract to your total sales to get your net profit.
This type of cost usually includes restaurant monthly expenses and stays the same as they are not dependent on sales. Fixed costs are easier to plan for since they do not change.
Examples of restaurant fixed costs are:
- Rental expense
- Professional retainer fees
- Internet expense
- Pest control retainer expense
- Business permits and licenses
- Security guards expense
- Depreciation expense
Some restaurants categorize their fixed costs to controllable or uncontrollable. Fixed costs are termed controllable when you can change terms in an instant. For example, security guards expenses are controllable due to the fact that you can add or reduce the number of guards on a monthly basis. On the other hand, rental and depreciation expenses are considered uncontrollable because it is something that you cannot change while your restaurant is operating.
On the other hand, variable costs are restaurant expenses that change on a monthly basis. Some variable costs are directly proportional to the amount of sales you get.
These are the types of variable costs you’ll usually see in a restaurant:
- Food cost
- Beverage cost
- Packaging cost
- Electrical expense
- Water expense
- Third party delivery commission expense
Most variable costs in a restaurant can be controlled. For that reason, a restaurant owner or manager must be fully aware of the peak and lean seasons of their restaurant. Peak season means more purchases of raw materials while lean seasons means less.
Third party delivery commission expenses are variable costs that’s been added to restaurants recently. The amount you’ll pay will vary, depending on the amount of sales you generated from their platform. For example, a restaurant using GrubHub earns $100,000 with a commission rate of 25%. The total amount you have to pay them is $25,000. Note that this only applies to one delivery partner. If a restaurant has multiple delivery partners, simply add all the commission rates you’ll pay to them and that’ll be your total third party delivery expense.
These types of costs are also called mixed costs. It is a combination of both fixed and variable costs. The way this type of cost works is that there’s usually a base rate in which you’ll pay a fixed cost. If it exceeds that number, there’s a bracket in which you’ll have to pay extra.
The most common examples of semi-variable costs are:
- Labor expenses
The reason why labor expenses are a semi-variable cost is because they have fixed income earners (monthly salaries) and hourly income earners (no work, no pay). In addition, the labor government benefits of a restaurant’s employees will depend on the salary they earned during a certain period.
4 Most Expensive Parts of Running a Restaurant
There are four expensive and typical restaurant operating expenses that you can expect monthly:
- Kitchen Costs
- Labor Costs
- Occupancy Costs
- Marketing and Advertising Costs
Let’s talk about these restaurant expense categories in a more detailed way and understand some practical ways of reducing them.
Food costs, or kitchen costs, are an important metric to track if you want to be successful in your restaurant. Knowing these numbers will help you price your menu items properly. In addition, you can also do menu engineering in your restaurant when you know which items give you the highest margin. So, how do you calculate your food costs?
Actually, there are two types of food costs that a restaurant can compute: the per dish cost and food cost per period. Since we’re discussing restaurant expenses in this article, let us continue on how to calculate a restaurant’s food cost per period.
Here’s the list of data that you’ll need:
- Beginning Inventory amount for all food related items.
- Total food purchases.
- Ending inventory amount for food.
- Total food related sales.
Once you have these data, compute your restaurant’s cost of goods sold using this formula:
(Beginning + Purchases) – Ending
Once you have your cost of goods sold, divide it by your total food sales. Multiply the result by 100% and you’ll get your food cost percentage. Remember, all these data must be for the same period of time. If you want to compute for January, make sure all inventory, purchases, and sales are from January.
One of the biggest expenses that a restaurant will have is their labor expenses. This will include the salaries of all types of employees – monthly salaried employees and hourly salaried employees.
In addition to employee salaries, there are also other payables that are included in a restaurant’s labor expenses. These are your employee benefits (social security and medical), overtime pay, rest day premiums, holiday pay, vacation leaves, sick leaves, bonuses, and payroll taxes.
Similar to food costs, calculating for your restaurant labor cost percentage is important so you know if you’re spending the right amount.
In order to calculate for your labor cost percentage, here are the data you’ll need to get:
- Total labor related expenses
- Total sales
Remember, you’ll be computing for a certain timeline so make sure that all the data will be for that period. To calculate for your labor cost percentage, simply divide all labor related expenses by the total sales for a certain period. Get the result and multiply by 100 to get your labor cost percentage.
For example, Ohayo! Ramen bar’s labor expenses for January is $20,000 and their total sales for the same period is $65,000. Divide $20,000 by $65,000 to get .3076 then multiply by 100. Ohayo! Ramen bar’s labor cost percentage for the month of January is 30.76%.
Food and labor will always be the bulk of your restaurant expenses. However, occupancy costs like rent, electricity, water, and internet fees also take out a significant chunk out of your income. Out of all occupancy costs, rental expense is the biggest of them all.
A restaurant’s occupancy cost is dependent on the size of the commercial space. The bigger your space is, the higher the expenses are. Lessors usually price their property according to square meters so obviously, the bigger the space the more rent a lessee will have to pay.
Marketing & Advertising Costs
As restaurants, it is important you do things to market your brand. Marketing is your friend when it comes to increasing your reach and making people aware of your brand. Restaurants typically allocate around 5% of their sales to marketing. The reason is once the sales volume of your restaurant goes up, the marketing should go up along with it.
Marketing channels that restaurants can use are social media marketing, email marketing, billboard advertising, influencer marketing, events, and many more. Restaurants need to decide which marketing channels they’ll use and stick to the monthly budget so they won’t overspend.
Tips on How to Reduce Huge Restaurant Expenses
A restaurant should always set targets on their major expenses. If an expense is becoming too costly, it might be time to find ways on how to control them. Let us go through some recommended tips on how to reduce cost in restaurant.
How to Reduce Kitchen Costs in A Restaurant?
Despite having a good percentage for your restaurant food expenses, there are still ways on how to lower them.
Use Seasonal Ingredients
Make sure that you check prices on these types of ingredients. Some ingredients are much cheaper when they’re in season. Take advantage of the season and use the ingredients for some of your menu items.
For example, January in the United States is a deep winter month. It is the perfect time to buy vegetables such as broccoli, cauliflower, kale, leeks, and lemons during this time. These will change when April comes as it will now be a different season.
Do your research and see if portion sizes are right for customers. If your customers leave food on their plates, it might be time to reduce portion sizes. This, in effect, will reduce your waste on food items. In order to be efficient, restaurants should also invest in a weighing scale to portion their food.
In addition, look to implement the FIFO method when it comes to your inventory. This will help reduce spoilage of your raw materials.
Look for the Best Supplier and Maintain a Good Relationship
There are lots of food suppliers out there in the market, you just have to find the right one. A good supplier who is timely and accurate in their deliveries should be your priority. In addition, a supplier who has reasonable pricing in their products should also be prioritized. Building your relationship with them can open possible ordering discounts in the future.
Use a Restaurant Management System to Help Forecasting Sales and Inventory Management
EagleOwl is a huge help for restaurants who are looking to increase their profitability and improve operational efficiency to help scale their business. Restaurant management solutions look to automate most of a restaurant’s repetitive tasks and streamline them to have efficient operations.
How to Reduce Labor Costs in A Restaurant?
In our example above, Ohayo! Ramen Bar’s labor cost for January is around 30%. This is typically okay for restaurants but did you know that there are still ways to reduce labor cost? And no, it is not removing employees! Less staff might lead to poor customer service and poor operational efficiency.
Reduce Employee Turnover
Prioritizing and investing on your current employees is more cost efficient than hiring new ones. New hires require training and the cost to do it is not cheap. Give your existing employees incentives, career growth opportunities, support, and bonuses so they feel like they’re being taken care of. These little things that you do go a long way in keeping them in your restaurant long term.
In some restaurants, automation has become a key clog in their operations. For example, QSRs look to purchase self-service stations in their restaurants in an attempt to reduce front of house staff. Another example is purchasing a commercial dishwasher to reduce the need for multiple dishwashers. Startup costs will be higher to start but operating expenses will be lowered in the long run.
There are foods that are harder to create than others and that’s why you need multiple personnel to create that dish. A sound strategy that restaurants do is toll processing some of their food items. It is the process of hiring a third party to create that specific product item and ship it out daily to restaurants.
How to Reduce Occupancy Costs in A Restaurant?
In most cases, renting a space is an expense that’s already fixed. However, other occupancy costs such as energy, water, and gas can still be lowered.
Be Energy Efficient
There are times during the day where the restaurant has little to no customers. Look to turn off the air condition and other appliances that take up lots of energy during these times. At the end of operations, double check which appliances should be turned off.
Re-Negotiating the Lease Contract
This strategy might not work for some lessees but it’s still worth a try. A standard lease contract is usually signed for a number of years with a base rate and an escalation of 5%. A restaurant can try to renegotiate the lease contract for a lower base rate or a reduced escalation by having the landlord empathize with you. Remember, the landlord does not need to give you a discount so talking to them nicely and explaining that you might need help cost-wise can help give you the discount you want.
How to Reduce Marketing and Advertising Costs in A Restaurant?
There are cheaper ways to market your restaurant. Gone are the days where it’s necessary to purchase a billboard space or to put ads on the radio. Here are some strategies that you might find useful in reducing your marketing expenses.
Go Digital over Traditional
Marketing with the help of the internet can help you save on some costs. First, having a social media presence means you have a free bulletin board on your restaurant. Take advantage of Facebook, Instagram, TikTok, and other networks to market your restaurant. Second, sign up your restaurants on restaurant review sites. These websites do not charge a fee unless you want to boost your listings.
Digital marketing yields a greater ROI than traditional marketing. First, the cost for paper and printing costs are relatively high. Second, restaurants would have to spend even more money on distribution. Lastly, television and newspaper ads are also very costly too.
Digital marketing is much more cost-effective, and your adverts and brand are seen by a much greater audience, meaning a lower portion of the budget brings in more business.
Restaurant expenses cannot be entirely removed from the equation but there are ways to keep them at bay. Keep an eye out for your restaurant cost percentages as these will serve as your baseline to see if your restaurant’s doing well.
Learn how to grow with EagleOwl. Our restaurant management system can help optimize your finances and increase your restaurant’s net profit by at least 25%. Contact us now to schedule a free demo!