Owning and operating a restaurant isn't for the faint of heart—in addition to the substantial investment that comes from simply opening to the public, there are also those ongoing operating costs to handle. From fluctuating food prices to changing labor costs, restaurateurs must master cost management to (literally) keep the lights on. That’s why understanding your restaurant cost breakdown is so essential.

While some financial aptitude and an expert accountant may help keep your books balanced, any restaurateur can benefit from knowing how to run a few relevant calculations. To help you keep tabs on your spending, we've created the ultimate guide to the costs of opening and running a restaurant, which includes:

• Restaurant opening costs
• Restaurant operating costs
• Food costs
• Labor costs
• Rent costs

An introduction to understanding restaurant cost breakdown

Your total restaurant cost breakdown depends on factors such as location, size, and concept. We can categorize costs across two categories—restaurant startup costs and operating costs.

When reading this article, keep the following in mind:

• Some costs may not apply to you. For example, you may choose to rent and not accrue construction costs.
• The expense to sales percentages are only suggestions, and your percentages may be different.
• Many startup costs will be one-time costs, but some may be annual renewals.
• Some restaurant costs are defined as both startup and operating costs, like food costs. Food costs are running costs, so you should budget for beginning inventory before opening your restaurant to the public.

Restaurant expenses versus restaurant costs

It's essential to distinguish between this often misused set of terms—restaurant costs and restaurant expenses. Depending on the context, the difference can get pretty technical, but in general:

• A restaurant cost is a one-time purchase on a tangible resource such as liquor, food, cutlery, kitchen equipment, or plates.
• A restaurant expense is a recurring purchase that creates revenue, such as rent, utilities, marketing, or payroll.

An introduction to restaurant opening costs

Your total restaurant opening cost will differ depending on whether you own or lease the space, what kind of equipment, furniture, and decor you need, how much you plan to spruce up or renovate, and more. However, restaurant startup costs tend to be pretty static. Here's what kind of costs you can expect:

• A down payment of 10 to 20% if you're buying the space
• Accompanying construction or renovation costs (varies by location and contractors)
• A security deposit of $2k to $12k if you're leasing (varies by location)
• Licensing costs, including:
• Liquor license costs of $50 to $300k (varies by state and license type)
• Business registration fees of $100 to $1k plus renewals (varies by state)
• Music license fees (from a PRO like BMI, ASCAP, or SESAC) of $200 to $2k per year
• Health permits, zoning permits, building permits, food handler's permit, and alcohol tax permit
• Professional consulting services like accounting or bookkeeping (varies by consultant skill level and location)
• Kitchen equipment costs of $100k to $300k (varies depending on the brand, whether it's new or used, or whether you're buying or renting it)
• POS costs beginning at $600 for hardware (varies by brand, solution, and number of devices)
• Marketing costs pre-launch like advertising and signage
• Beginning food inventory
• First month's wages, salaries, and rent

An introduction to restaurant operating costs

Restaurant operating costs are the costs accrued in the daily process of running a restaurant. These costs can be categorized into fixed costs, variable costs, or semi-variable costs. The difference between fixed, variable, and semi-variable restaurant costs are:

• Fixed costs: Fixed costs stay mostly static month-to-month because they aren't attached to sales. For example, rent falls under this category.
• Variable costs: These costs fluctuate according to output, making them more unpredictable and difficult to budget for. For example, food is a variable cost.
• Semi-variable costs: These costs are comprised of both variable and fixed costs. Labor is an example of a semi-variable cost because you likely have salaried employees (fixed costs) and hourly employees (variable costs).

When you add up fixed, variable, and semi-variable costs, you end up with the total operating costs needed to run your restaurant. However, the costs don't end there. To fully comprehend how you're spending your money, you must dive into each expense category.

Let's dive into the three most significant restaurant operating costs—food, labor, and rent, and what strategies you can employ to keep these costs down.

1. Food costs

Food costs are a massive part of running your restaurant, and unfortunately, these costs can vary wildly due to a wide range of factors. Climate events such as bad weather can drive up the costs of specific ingredients, or prices can fluctuate due to the popularity of a particular food (like avocados or truffles.)

Additionally, internal food waste can impact your food costs. According to a report, 84.3% of untouched food in American restaurants ends up in the trash. Since food costs usually end up being 28-35 percent of restaurant sales, dealing with food waste can make a massive difference. Restaurateurs that fail to manage their inventory may end up over-ordering food, too, which translates to wasted food and money.

For these reasons, it's essential to control your food costs closely, so you can continue to appropriately price your menu and be aware of when you need to raise those prices. The most efficient way to do this is by calculating your food cost percentage or how much your restaurant sales are dedicated to your menu ingredients. Every restaurant will have a different percentage, usually falling somewhere between 20-40%—for example, a sushi restaurant may have a food cost percentage of 35%. At the same time, a New York pizza slice shop that uses cheaper ingredients, like bulk cheese and sauce, might be closer to 20%.

How to reduce food costs

• Improve inventory management: Use an inventory management system to track ingredient costs to price your menu closely correctly
• Decrease spoilage: Employ the first-in, first-out method (FIFO), conduct frequent inventory checks, and create specials with excess stock
• Foster relationships with vendors: Build relationships with multiple vendors so you can pinpoint the best market prices for all the ingredients you need
• Create seasonal menus: Buying seasonally typically means lower prices for those ingredients
• Go high and low with your menu pricing: Make sure your menu contains a mix of high and low-cost items to control costs for ingredients while also giving customers a variety to choose from
• Reduce waste whenever possible: Conduct waste audits, serve smaller portion sizes, compost, and find creative ways to upcycle food scraps

2. Labor costs

Labor often accounts for the most significant expense in a restaurant operation, and total labor costs include hourly wages and salaries. Still, it doesn't stop there—you also have to pay costs associated with overtime, payroll taxes, bonuses, sick days, vacation days, and employee benefits.

To discover if you're spending too much or too little on labor costs, use this formula to calculate your labor cost percentage:

(Total labor costs for the period / Total sales for the period) x 100 = Labor cost percentage

Most restaurants attempt to keep their labor cost percentage under 30%, but according to a recent study, the average percentage across restaurants has risen to 31.6%. This increase is partly due to the rise of the minimum wage and tipped minimum wage across the US—and more states are updating their minimum wage rates in the not-so-far future. Additionally, restaurants grapple with the shrinking pool of workers. With a low unemployment rate in the US, restaurants are becoming more difficult and expensive to attract, train, and retain employees.

With labor taking up such a substantial portion of a restaurant's operating costs, many restaurants are searching for new ways to reduce their labor costs:

How to reduce restaurant labor costs

• Keep employees happy: The restaurant industry is known for its high turnover rate. Increase employee retention by investing in your current employees by offering incentives for satisfactory performance or providing growth opportunities to encourage them to stick around
• Use software to schedule shifts: Don't risk costly mistakes using a manual scheduling system. Implement a POS and scheduling software to plan your schedule more efficiently.
• Boost employee efficiency: Training staff properly can save you money in more ways than one. Consider cross-training staff so they can take on different roles when needed. After all, an efficient staff means you can improve customer service and operate with a leaner workforce.
• Use technology to your advantage: Many restaurants still hire staff to carry out roles that can be done with technology, like self-service kiosks or mobile applications for ordering.

3. Rent

The last significant operating cost to consider when running a restaurant is rent (or a mortgage if you own your space.) Rent and utilities should account for no more than 5 to 8 percent of a restaurant's total revenue, so these costs could potentially impact your profitability depending on monthly sales.

The rising cost of rent is becoming a major concern for many restaurants. In most big cities, restauranteurs face sky-high rent prices for high-foot traffic urban areas. Even restauranteurs who operate in less-desirable, gentrifying neighborhoods are priced out of the area just a few years after opening. Rent is an element of your operating budget that you should pay close attention to.

How to reduce rent costs

• Renegotiate your lease: Talk to your landlord about negotiating lease terms if you pay month-to-month. If you commit to a longer lease duration, you may be able to lock in a long-term lease that can protect you against rent increase in the future.
• Sublease your restaurant: When you're not operating outside of business hours, consider renting the space for events, pop-ups, catering companies, food trucks, and more, so they can use your kitchen while you're not.
• Think about downsizing: In some instances, you can save money on rent by finding a smaller space and using it in creative ways, such as partnering with mobile takeout apps or setting up counter or patio seating.

Ready to streamline your inventory management and accounting so you can keep on top of operating costs, track your spending, and increase your revenue? MarketMan provides an all-in-one solution for restaurant management tasks, whether you run one restaurant or 100. Sign up for a free demo with MarketMan.