As restaurant owners or managers, many of you look at your business as a cash machine. We challenge you to look at your restaurant as an expense machine as well. Managing expenses is our contact page.to maximizing your restaurant’s profits. A “best practice” is to view expenses as belonging to one of two categories: “Variable Costs” and “Fixed Costs”.

Variable Costs

In most business models, two main areas of expense featured on the month-end financial report are Cost of Goods Sold (COGS) – also known as Cost of Sales (COS), and Labor expenses. In our business, they are the two largest expense items in the report.  These two areas offer the management team a lucrative opportunity to control the outcome of your month-end financial report . . . and preserve those profits!

Contingent on the restaurant’s menu mix, COGS can be anywhere from 28 to 38% of sales revenue. This represents the raw cost of the food and beverages you purchase to serve your guests. To calculate the true cost of goods sold, you must take a physical inventory of ALL food and beverages at least every month. Then it is a simple formula: Beginning Inventory Value plus Purchases, minus Ending Inventory Value. 

Beginning Inventory Value

+ Purchases for the Period

–    Ending Inventory Value

=           Cost of Goods Sold

The result will be your true product usage in dollars, representing your COGS. Then divide this dollar amount by your actual sales for the period, and you’ll arrive at COGS as a percentage of sales.  Do this in turn for each category: Food, Wine, Beer, Liquor, Mixes & Garnishes. Then compare food costs to food sales, wine costs to wine sales, the same for beer, then liquor sales to the cost of liquor plus mixes and garnishes. It sounds like a lot of work to do this each month, and some restaurants don’t do it.  But it will be the only way you can track and manage your costs. Common problems uncovered by this process are portion control issues, product theft, or just plain waste.

A simple Example of a COGS or COS breakdown

 

Labor cost is a primary consideration. Depending on local laws, labor costs can run as high as 38% after taxes.  Revenue allocated to other expenses (rent, utilities, etc.) could total 20-30%, again depending on the locale and your business model.

A Simple Example of a Labor Cost breakdown

 

The next category of costs we recommend owners and managers monitor is Supplies, Replacements, and Linen (SRL). Collectively, this should represent no more than 5% of gross revenue. The following types of costs are typically associated with each of these line items.

• Supplies: all things that are paper products, toilet tissue, wax paper, tin foil, hairnets, paper hats, and the like, as well as all cleaning products.
• Replacements: pots, and pans, glassware, plates, cups, knives, forks and spoons, brooms, mops – anything the restaurant opened with, or uses, and must be replaced if lost or broken.
• Linen: all things typically purchased or rented from a Linen Company, cloth napkins, tablecloths, bar towels, chef’s coats, aprons, floor mats, etc.

A Simple Example of a SRL Cost Breakdown

If costs are running high in supplies, ensure that they are stored in a secure storeroom and provisioned to staff only upon request. Replacements can get out of hand if you have no way of monitoring flatware finding its way to the trash bin (or lifted), or if the storage schematics in your service areas do not protect against breakage of glassware and plates. Again, security is a factor.  Ultimately, linen costs can spiral out of control if you do not establish guidelines for efficient use in the kitchen and maintain clean storage for all front-of-the-house purposes.

These costs are termed “variable costs” since they fluctuate based on numerous conditions. As a result, they require daily management.  You’ll want to sit down and build a budget.

Here’s how you can get started with this potentially daunting task:

• Estimate your income, month by month, including forecasting seasonal changes to your customer counts and guest check averages.
• Break the above down by week so that you’ll know what your estimated income is for each week in the year.
• Work with your Chef or Kitchen Manager to create a target food cost *.
• Work with your Bar Manager or Lead Bartender to create target beverage costs: Beer, Wine, Liquor, and Mixes & Garnishes *.
• Create a target Labor Cost – hourly employees only. Do not include salaried managers/chefs, etc. as they belong in the Fixed Cost category.
• Create workable hourly employee schedules and cost them out for the week.
• Check to see if your “Hourly Employees Cost of Schedule” matches your Target Labor Cost
• If your cost of schedule does not align with your Labor Cost target, convene a manager’s meeting and collaborate with your team to achieve alignment.
• Document your food and beverage purchases vs. your sales daily, and conduct product counts daily for your most valuable items. Monitor your “Month to Date” numbers to make your target.
• Document and monitor your actual hourly labor expenses “shift by shift” (based on timecards) to ensure you’ll meet your target at the end of the week.
• Ensure that your SRL is stored securely and handed out only upon need of the staff.
• Track all these costs as a matter of daily responsibility for all managers, both back-of-the-house and front.

* NOTE: it is essential to include your managers in defining your cost targets as they will be responsible for delivering those targets. If they are part of the process of setting targets, they will feel a higher degree of commitment to achieving the targets.

 How you run your business every day will determine how efficient you are in hitting your target cost percentages.

If your business’ financial report reflects the high end in these expense categories, you could see a minimal profit contribution of 0% to 1%, or even a loss. Much depends on your menu prices and your local market’s ability to support that pricing. If your market environment is highly competitive, you’ll need to aggressively manage these costs and that takes work. As of January 2022, a general guideline is that restaurant profit margins typically range from 3% to 5%, with some more successful establishments achieving higher margins.

Fixed Costs

When forming the business, many of the Fixed Costs are set at the outset.

Labor

Salaried (non-hourly) employees are generally the biggest cost in this category. Ensure that you have built an accurate income forecast – one that is achievable – and look at what you can afford for your managers and chefs. Consider opening with a smaller management staff, then grow your team as restaurant sales can justify it.  Budget 10% to 12% of your gross revenues.

Rent

Rent will be the next largest. We recommend independent restaurateurs make every effort to avoid a lease payment that includes a percentage of sales (ex. $2.75 per sq. ft. minimum rent, or 6% of gross sales – whichever is greater). Unless your selected location brings exceptional foot traffic of its own accord (such as a popular shopping mall), giving a landlord a “percentage of your business” is making them a partner. However, they will never truly be a partner as they are not sharing your risk.

Negotiate a flat lease based upon a competitive cost per square foot in line with the rates your neighbors pay. Try to get a minimum of 5 years on the lease, with multiple 5-year options to renew with rent increases based on the cost of inflation or market conditions. Work to pay 5% or less of your projected revenues. Remember that YOU are building your business with sweat equity and perseverance, not your landlord.

Utilities

With other larger expenses such as insurance and utilities, speak with established restaurant owners – neighbors or join a restaurant association. Engaging in conversations with other members will help you quickly gather information.

A little focus on utilities can save a business money every month. Have your utility provider conduct an energy audit. Negotiate rates with them and find out if there are alternate providers. Consider renewable energy sources. Seek out any available government incentives. Check your lighting and HVAC system to maximize efficiency. Ask about insulation and sealing windows and doors. Utilize smart technologies for lighting and temperature control. Install water-saving devices where possible and check for leaks. Even replacing worn gaskets and liners on cold- and hot-holding equipment will further protect your utility costs.

Insurance

Insurance. It’s a tangled web. General Liability, Property, Business Interruption, Workers Compensation, Liquor Liability, Commercial Auto. Bundle or not? Restaurant owners should work closely with a trusted insurance professional or broker to assess their specific needs. Keep in mind, you may have to adjust your policy as the business evolves or regulatory needs change.

Fees

Consider how you want your guests to use credit cards at your establishment.  Some restaurants still work on a “cash only” basis and let guests know when they reserve tables or when they arrive. This may not be realistic for you, so shop aggressively for credit card merchant services and try to get the best possible rate.  Giving up more than 2.9% +.30 for each transaction adds up quickly and could cost more than other significant cost categories.

Repairs

Repairs and maintenance are hit-and-miss expenses. We recommend you practice discipline and reserve a repair budget each month so that when something breaks in your business (and it will!), you have a ready pool of money to pay for it.

Technology

Software expenses are a growing category. Clever use of software aids in managing your costs, tracking sales, promoting your business, and managing your back office.

Your selected business model and theme will define how you treat some of the other cost categories.  Budgeting for live entertainment and decorations will vary considerably from restaurant to restaurant, as will printing and graphic expenses. Decide what is important to you and your restaurant and how it represents an opportunity cost of larger profits. There is without question a blend of art and science in building a popular and successful restaurant. Find your balance.

How it all comes together

A Simple Example of a Year-end Financial Report

Create a spreadsheet that estimates your expected revenues and expenses by month, from pre-opening through your first 12 months of operation.  Then do the same for two more years, with increases of revenue based on expected market conditions and your promotional prowess. Then work to minimize early operating Fixed expenses until your revenues truly begin to hit your targets. And don’t forget, have your team help you do the work of managing and tracking those Variable Costs. Not only will this bring valuable awareness to your team, but will assist in gaining buy-in from your team, which is critical to the continued successful management of your Variable costs.

by Tables of Content

Tables of Content is a company committed to providing restaurant owners and managers with continuing education and business management tools, thereby building profitability. The company is comprised of restaurant managers and IT folks all of whom have restaurant experience. We love the business, and we like to have fun. We can be reached at our contact page.