8 Major Operating Expenses of a Restaurant Business

What are the ongoing operating expenses of a restaurant business? How do you reduce your expenses in a restaurant business? Here is everything you need to know.

Starting and managing a restaurant isn’t cheap, especially since operating costs add up fast. Coupled with the enormous investment that comes from simply opening your doors, there are also ongoing operating costs to contend with.

From fluctuating food prices to minimum wage hikes, cost management is definitely a skill that restaurateurs have to master if they (literally) want to keep the lights on.

Restaurant operating costs are costs you incur in the day-to-day process of running a restaurant. Restaurant costs can be categorized as a fixed cost, variable cost, or semi-variable cost. Fixed costs are those costs that mainly stay the same month-to-month because they are not tied to sales.

Rent falls under the category of a fixed cost. Variable costs are known to change according to output, which means they are less predictable and harder to budget for.

Food is an example of a variable cost. Semi-variable costs are composed of both fixed costs and variable costs. In a restaurant, labor tends to be considered a semi-variable cost because you have both salaried employees (a fixed cost) and hourly employees (a variable cost).

When you add up all of your fixed, variable, and semi-variable costs, you get the total operating cost of your restaurant. Howbeit, this number doesn’t tell the whole story. This is more like looking at the amount due on your credit card each month.

And although this number shows you what you owe, it doesn’t give you much insight into where your money went – you could have wasted $200 on luxury candles.

Therefore, if you are looking to manage your spending, you need to look more closely at what you actually bought. It is the same concept as your restaurant’s operating costs. Note that to fully understand where your money is going, you need to dive into each category of expenses.

Once you know exactly where your costs are out of control, you can start making changes to tackle those costs. While the magnitude of restaurant expenses varies from concept to concept and city to city, one thing is clear: it costs a lot of money to open and run a restaurant.

Ongoing Operating Expenses of a Restaurant Business

1. Labor Costs

Although it depends on whether or not an employee is salaried or working for an hourly wage, the associated labor costs can fluctuate, however, it is imperative to project how many employees you need per service, how much money you need to pay them per week and sticking to that budget.

Remember, what is important is anticipating how much you spend on labor per month and having several months’ worth of project payroll saved up prior to opening. Do not forget that your restaurant likely won’t be profitable right away, so put money aside beforehand to assure you can pay (and retain) your staff.

2. Rent and Building Fees

While how much you pay per month for your commercial space varies greatly depending on where you’re located and how much square footage you have, the monthly rent and building fees you agree to pay when you sign your commercial lease are unlikely to change.

Before signing a lease, have both an attorney and accountant look it over to find any potential red flags and see whether or not it fits into your set monthly budget.

3. Payment Processing Fees

Note that the amount you pay in payment processing fees will vary depending on your payment processing provider and their fees. For each transaction, there are typically three processing fees (usually a percentage of the transaction value). Here’s a quick breakdown:

Interchange fee: Each credit card brand has a percentage-based interchange fee that’s charged to a merchant every time someone uses their credit card as a payment method.

Card brand fee: Each transaction is subject to a percentage-based fee paid to the card brand network (Visa, MasterCard, American Express, etc.)

Payment processor fee: There are some payment processors who apply either a flat or percentage-based mark-up fee for routing money from the cardholder (the customer) to the card brand network to the issuing bank and finally, to the merchant.

Some restaurants avoid paying payment processing fees altogether by being cash-only, however, this can drastically reduce how many customers you serve.

4. License Fees

Although most licenses and permits have an initial cost, you may be required to renew some of them annually. When you are deciding which licenses and permits you need, factor in the initial costs and the fixed renewal fees as well.

5. Ongoing Marketing

Coupled with the marketing costs to get your brand up and running, you may want to put a fixed amount aside each month towards ongoing marketing. Social media ads, influencer marketing, events, PR outreach, you name it. However you decide to market your business, create a monthly marketing budget and stick to it.

6. Insurance Coverage

Insurance is a critical part of a functional business, especially for restaurants that want to be fully protected from liabilities. In an atmosphere that sees so many guests, and puts employees at risk of injuries in a busy kitchen full of dangerous equipment, adequate protection is critical. At the minimum, most restaurants will need:

1. General liability insurance, to protect against everyday accidents and incidents.
2. Product liability, in case any equipment malfunctions and causes injury.
3. Liquor liability, a special policy for restaurants that serve alcohol.
4. Workers’ compensation policies, to keep employees protected in case of injury.
5. Commercial vehicle insurance for any restaurant that offers delivery.
6. Restaurant insurance, a specific form of coverage that takes into account industry-specific risks.
7. Loss of income insurance, a specialty policy that can provide a safety net if something like a fire or robbery forces you to close temporarily.

Always remember that Insurance will vary based on size, function, and location, but most restaurant start-ups can expect costs of around $6,000 a year.

And even though low-principal plans with high deductibles may seem appealing, be sure you can afford to pay multiple deductibles simultaneously in case something like a kitchen fire resulting from product malfunction closes your restaurant and injures employees.

7. Utility Costs

Right before signing your commercial lease, ask if utilities like electricity and water are included in your costs. If not, find out what previous tenants paid and use that as a benchmark. According to reports, restaurant utilities cost around $3.75 per square foot annually. The bigger your commercial space, the more you will pay on gas and electricity.

8. Cost of Goods Sold

The cost of goods sold (COGS) refers to the cost of the ingredients and materials used to make a dish. Depending on what kind of food a restaurant serves, COGS can also vary greatly. If you are selling Ahi tuna steak, your COGS will certainly be more expensive than if you are selling cheeseburgers.

Note that for a restaurant to be profitable, its gross profits should stay around 70%, meaning that for every $100 a guest spends, $70 is gross profit. How much you charge for each restaurant item should take this into account; the higher the COGS, the higher the menu item’s price should be.

When pricing menu items, it is imperative you also take into account your fixed monthly costs. You need to make enough money each month to cover both variable and fixed costs (like labor and rent) and still have net profit leftover. To do that, you need to have menu pricing and restaurant profit margins down to a science.

In addition, if you need help pricing your menu items to account for your expenses (or figuring out what all your expenses are in the first place), then consider hiring a seasoned restaurant consultant with experience in the field. This is one area that directly impacts your bottom line long-term; it’s worthwhile to get it right from the get-go.

Indeed controlling your operating costs can be tricky. Keeping an eye on key calculations such as prime cost, labor costs, and food costs not only gives you an idea of where your money is going, but it also lets you know when you need to reign things in so you can stay out of the red.