Welcome to an exploration of effective cost-saving strategies within restaurant management. In the ever-evolving industry of dining establishments, achieving a harmonious equilibrium between culinary satisfaction and financial stability is paramount.
This article compiles 20 practical and proven tips from actual cases designed to assist restaurant owners and managers in addressing various financial challenges.
What are the most common restaurant expenses?
High restaurant expenses are one of the top restaurant problems on the road to success which affects how much money do restaurant owners make. The success of any dining establishment hinges not only on the taste of its dishes but also on its ability to navigate a complex web of expenses.
Every aspect of running a restaurant comes with a price tag, from sourcing the freshest ingredients to ensuring impeccable service. And if you’re new to the restaurant industry, you can expect many restaurant startup costs that will significantly impact your revenue.
Here are some of the more common restaurant expenses businesses have to deal with:
- Food Cost: food costs include purchasing and preparing ingredients for menu items.
- Total Labor Costs: Salaries, wages, payroll taxes and employee benefits, including chefs, servers, cooks, and other employees.
- Rent or Lease Payments: The cost of renting or leasing the restaurant space.
- Utilities: Also known as restaurant operating costs, which include expenses for electricity, water, gas, and other essential services.
- Marketing and Advertising: Restaurant costs associated with promoting the restaurant and attracting customers.
- Equipment and Supplies: Expenditures on kitchen equipment, utensils, tableware, and cleaning supplies.
- Insurance: Coverage for liability, property damage, and other potential risks.
- Credit Card and Payment Processing Fees: Charges imposed by payment processing providers for card transactions.
- Loan Interest and Repayments: Payments for loans used to start or expand the restaurant.
- Waste Disposal: Restaurant expenses for garbage removal and waste management services.
- Licensing Costs: Every restaurant owner must pay for their own restaurant licensing, which usually includes a food handler’s permit, liquor license costs, outdoor seating license, and much more
To even out the rising food cost percentage, ongoing restaurant operating costs, and labor cost percentage, business owners have decided to act.
- 87% of U.S. restaurants have raised menu prices to help save on restaurant food costs
- 32% are now closing on days they were formerly open to reduce restaurant operating costs
- 48% have trimmed hours on days when they are open to reduce labor costs and save money
Source: Restaurant Business Online
What can you do to reduce restaurant expenses?
Whether you’re a seasoned professional with a successful restaurant or just starting your restaurant operation, managing the restaurant costs involved in running a business while maintaining quality is crucial for sustainable success. From streamlining operations to optimizing purchasing, here’s the restaurant cost breakdown with critical approaches to consider when looking to reduce restaurant expenses:
1. Menu Analysis
Regularly scrutinizing your menu’s performance data is akin to a financial health check for your restaurant. By assessing sales data, customer preferences, and item popularity, you can identify underperforming dishes that may be dragging down your profit margins.
Streamlining your menu by removing or revamping items that aren’t resonating with customers allows you to focus resources on dishes that drive revenue and maintain customer satisfaction. Managing your menu pricing aligns your culinary offerings with profitability, optimizing the use of ingredients and reducing preparation time for low-demand items.
2. Ingredient Sourcing
Choosing suitable suppliers and sourcing high-quality ingredients is more than a culinary choice; it’s a financial strategy. Partnering with local suppliers supports your community, minimizes transportation costs, and reduces the environmental footprint associated with long-distance deliveries.
Seasonal ingredients not only please palates but also contribute to cost savings by being readily available and often more affordable. By incorporating fresh, locally-sourced produce and items, you enhance the authenticity and appeal of your dishes while contributing to a leaner cost structure.
3. Inventory Management
An efficient inventory management system is akin to a well-tuned engine that propels your restaurant forward. Implementing one ensures a clear view of stock levels, enabling you to order ingredients in optimal quantities. You minimize food wastage and associated costs by accurately gauging demand and reducing over-purchasing.
Additionally, a well-organized inventory system reduces the risk of running out of key ingredients during peak hours, preventing revenue loss due to unfulfilled customer orders.
4. Portion Control
Portion control is both an art and a science, intricately balancing customer satisfaction with cost efficiency. Establishing consistent portion sizes across your menu ensures a uniform dining experience and helps manage food expenses and wastage.
Over time, small variations in portion sizes can lead to significant ingredient and cost discrepancies. Training staff to adhere to precise portioning guidelines safeguards against inconsistencies and prevents the unnecessary consumption of costly ingredients.
5. Supplier Negotiations
Supplier relationships are a cornerstone of cost-effective restaurant management. Building rapport with your suppliers and negotiating favorable terms can lead to discounts, extended payment terms, and other cost-saving advantages.
Consider discussing volume-based incentives, as committing to larger orders over time can lead to more attractive pricing. Strong supplier partnerships reduce procurement costs and foster reliability and trust, ensuring a smoother flow of goods into your kitchen.
6. Energy Efficiency
Embracing energy saving appliances is not just environmentally responsible; it’s financially prudent. Replacing outdated appliances with energy-efficient alternatives can lead to substantial long-term savings on utility bills.
Installing LED lighting, utilizing programmable thermostats, and turning off equipment during downtimes are simple yet effective ways to lower energy consumption and restaurant operating costs. Additionally, promoting an environmentally conscious approach can resonate positively with customers who increasingly value sustainability.
7. Labor Optimization
Efficient staffing is the backbone of a cost-effective restaurant operation. Analyze historical data to determine peak hours and schedule staff accordingly. Minimize overstaffing during slower periods to control costs without compromising service quality.
Cross-train employees to handle multiple roles, ensuring you can adjust staffing levels as needed. A versatile workforce improves operational efficiency and mitigates the impact of unexpected employee absences.
8. Cross-Training Staff
Cross-training your staff fosters a culture of adaptability and resourcefulness, allowing team members to transition between various roles seamlessly. This flexibility reduces dependency on specialized roles, helping you optimize staffing levels and prevent unnecessary labor expenses.
Cross-trained employees can step in during busy times, ensuring smooth operations without requiring additional hires. This strategy enhances teamwork, minimizes disruptions, and enhances overall service quality.
9. Waste Reduction Programs
Waste reduction initiatives go beyond environmental consciousness; they directly impact your financial bottom line. Implementing programs like composting, recycling, and responsible disposal minimizes waste removal costs.
Additionally, these initiatives contribute to your restaurant’s image as a socially responsible business, attracting environmentally-conscious customers.
Analyzing restaurant waste patterns allows you to uncover opportunities for improvement, fine-tune purchasing decisions, and ultimately reduce unnecessary expenses associated with waste management.
10. Regular Equipment Maintenance
Just as a car requires regular maintenance to run smoothly, your kitchen equipment demands similar attention. A well-maintained kitchen ensures consistent food quality and prevents costly breakdowns that could disrupt operations.
Implementing a maintenance schedule for appliances, refrigerators, and other essential equipment can extend their lifespan, reduce the likelihood of emergencies, and avoid having to pay for regular kitchen equipment costs.
11. Menu Engineering
Crafting an effective menu is akin to composing a symphony, with each dish contributing to the overall harmony of profitability. Menu engineering involves strategically positioning high-margin items, specials, and popular dishes to capture customers’ attention and encourage choices that maximize revenue.
This can be done manually or with the help of free menu templates, which help you effectively highlight menu items with enticing descriptions, appealing visuals, or even slightly higher pricing; you can subtly guide customer decisions while boosting the restaurant’s overall profitability.
12. Technology Integration
In the digital age, technology is a powerful tool for cost optimization. Utilize the best restaurant POS systems (learn what is a POS system and how much does a pos system cost) and restaurant management software to track sales, monitor inventory, and gather customer insights.
Data-driven decisions enable you to identify trends, streamline ordering processes, and optimize menu offerings. Furthermore, a restaurant reservation system and online food ordering software can reduce the risk of order errors, enhancing customer satisfaction and minimizing the cost of refunds or remakes.
ordering in 5 minutes
13. Online Presence
An effective online presence is a window into your restaurant’s offerings and a cost-effective marketing channel. Engaging with customers through social media, your restaurant website, and online reviews helps attract new patrons without the hefty price tag of traditional advertising.
Leveraging these platforms to showcase your menu, highlight special events, and share behind-the-scenes content fosters a sense of community, further enhancing your restaurant’s reputation.
14. Staff Training
Comprehensive staff training is an investment that pays dividends in operational efficiency, service quality, and customer satisfaction. Well-trained employees are equipped to handle various situations, reducing errors that could lead to food wastage or customer dissatisfaction.
Training also boosts morale, contributing to staff retention and minimizing the costs associated with high turnover rates. Continuous training ensures that your team remains up-to-date with industry best practices, maintaining a consistent standard of excellence.
15. Streamlined Menu
The age-old adage “less is more” holds in the restaurant industry, where a streamlined menu can lead to increased efficiency and reduced restaurant costs. Offering a concise selection of dishes simplifies kitchen operations and reduces the complexity of managing inventory.
Fewer menu items mean less waste, as ingredients are utilized more efficiently. A focused menu also enables your culinary team to excel in preparing a smaller range of dishes, ensuring consistency and optimal utilization of resources.
16. Health and Safety Compliance
Strict adherence to health and safety regulations is a non-negotiable aspect of running a restaurant. Beyond ethical and legal considerations, maintaining a clean and safe environment prevents potential fines, penalties, and reputational damage that could affect your business’s financial stability.
Prioritize regular staff training on hygiene and safety protocols to prevent incidents, reduce the risk of foodborne illnesses, and ensure smooth operations.
17. Water and Utility Management
Responsible water and utility management reflects your commitment to sustainability and contributes to cost reduction. Conserving water through efficient practices, fixing leaks, and utilizing low-flow fixtures can substantially reduce water bills.
Energy-efficient practices, such as using programmable thermostats, turning off lights when not needed, and properly insulating your establishment, contribute to lowered utility costs. Regularly monitor energy and water consumption to identify areas for improvement and cost-saving opportunities while also playing your part in preserving natural resources.
18. Regular Supplier Review
The landscape of suppliers and their offerings is ever-changing. Periodically reviewing your supplier relationships ensures you obtain the best deals on quality ingredients and products.
Stay competitive by exploring alternative suppliers, negotiating pricing, and assessing the value they bring to your operations. An ongoing evaluation of suppliers helps you identify cost-effective options that align with your restaurant’s requirements and budget.
19. Batch Cooking
Just as efficient time management is essential, so is effective kitchen management. Implementing batch cooking techniques reduces energy consumption and labor costs by preparing larger quantities of certain menu items during slower periods.
These pre-cooked portions can be quickly reheated and served during peak hours, ensuring faster service while optimizing ingredient usage. Batch cooking conserves resources and improves kitchen efficiency, allowing your staff to focus on providing quality service during busy times.
20. Community Partnerships
Collaborating with local businesses creates a mutually beneficial ecosystem that promotes your restaurant and reduces marketing costs—partner with neighboring establishments for joint promotions, events, or cross-marketing campaigns.
By tapping into each other’s customer base, you can attract new patrons without investing heavily in traditional advertising. Cross-promotion can range from special discounts for customers of partner businesses to hosting joint events that draw attention to your restaurant and your collaborators.
- Before setting prices, thoroughly analyze ingredient costs, preparation time, and overhead expenses to ensure accurate pricing.
- Understand your target audience’s preferences, demographics, and spending habits to tailor menu offerings and pricing accordingly.
- Strategically place high-profit items on the menu to attract attention and balance out lower-margin dishes.
- Use pricing techniques like charm pricing (ending in 9) or tiered pricing when pricing menu items seem more appealing to customers.
- Focus on pricing menu items based on marketing techniques that work, such as creating value-driven bundles, combos, or prix fixe menus that offer savings compared to ordering individual items.
- Stay up-to-date with market trends, inflation, and ingredient cost changes to ensure your desired gross profit margin remains competitive.
- Based on popularity and profitability, apply menu engineering principles to categorize items as stars, plowhorses, puzzles, or dogs.
Frequently Asked Questions (FAQ)
Fixed costs for restaurants remain relatively constant regardless of business activity or sales changes. These restaurant costs do not vary significantly in the short term, even if the number of customers served or the amount of food prepared fluctuates.
Fixed costs are associated with the ongoing operation and maintenance of the restaurant and are essential for its day-to-day functioning. Some common examples of fixed costs for restaurants include:
- Rent: The monthly cost of leasing the restaurant’s physical space is fixed.
- Salaries and Wages: Fixed minimum wage rates for staff, such as managers, administrative personnel, and other non-hourly employees.
- Utilities: Certain utility costs, such as rent for the location’s landline telephone or internet services, may remain consistent regardless of usage.
- Insurance Premiums: Insurance costs to protect against property damage, liability, and other risks typically remain constant.
- Loan Payments: If the restaurant has loans or financing arrangements, the fixed monthly payments associated with those loans are considered fixed costs for restaurants.
- Lease Payments for Equipment: Payments for leased equipment, like commercial ovens or refrigerators, are generally fixed.
- Property Taxes: The property tax on the restaurant’s physical space is usually a fixed annual cost.
- Depreciation: The allocation of the cost of long-term assets (such as kitchen equipment and furniture) over their useful lives is a non-cash fixed cost.
- Licenses and Permits: The cost of ownership and permits required for the restaurant’s operation remains consistent.
A restaurant expense refers to the costs incurred by a restaurant in operating its business. These expenses encompass a wide range of financial outflows necessary to run the establishment and provide customers with goods and services. All the costs a restaurant business has to cover can be categorized into two main types: fixed and variable costs.
Variable expenses, also known as direct costs, fluctuate based on the level of business activity or sales volume. These costs increase or decrease as the restaurant serves more or fewer customers. Examples of variable expenses in a restaurant include:
- Cost of Goods Sold (COGS): This includes the cost of ingredients and raw materials needed to prepare meals and beverages.
- Hourly Wages: Payments to hourly staff like servers, bartenders, and kitchen staff vary based on the hours worked.
- Commissions and Tips: Payments to staff based on sales performance or customer tips.
- Food and Beverage Packaging: Costs associated with containers, utensils, and packaging for takeout or delivery orders.
- Credit Card Processing Fees: Fees charged by payment processors for processing credit and debit card transactions.
Fixed expenses, also known as indirect or overhead restaurant costs, remain relatively constant regardless of changes in sales volume. These expenses are necessary for the restaurant’s ongoing operations and are not directly tied to the number of customers served. Examples of fixed payments in a restaurant include:
- Rent: The monthly cost of leasing the restaurant’s physical space.
- Salaries and Wages: Fixed salaries of permanent staff members, regardless of fluctuations in sales.
- Utilities: Consistent monthly payments for electricity, water, gas, and other utility services.
- Insurance Premiums: Regular payments to maintain insurance coverage for the restaurant.
- Lease Payments for Equipment: Leased restaurant and bar equipment remains stable over time.
One of the most common and significant expenses in a restaurant is the “Cost of Goods Sold” (COGS). The COGS represents the direct restaurant costs of producing the food and beverages served to customers. It encompasses the expenses related to the ingredients, raw materials, and packaging needed to prepare the menu items.
COGS is a variable expense that directly correlates with the volume of sales. The COGS increases accordingly as the restaurant serves more customers and prepares more meals. Conversely, when sales decrease, the COGS decreases as well.
In a restaurant, expenses can be categorized into four main types based on their nature and impact on the business. These categories help restaurant owners and managers understand and manage their financial outflows effectively. The four types of expenses in a restaurant business are:
- Cost of Goods Sold (COGS): COGS represents the direct food costs of produced food and beverages sold to customers. This category includes expenses such as raw ingredients, spices, produce, meat, seafood, dairy products, and drinks.
- Labor Costs: Labor costs encompass all costs related to the workforce employed by the restaurant. This includes wages and salaries for servers, cooks, chefs, bartenders, hosts/hostesses, and other staff members.
- Operating Expenses: Operating expenses are indirect costs necessary to keep the restaurant running smoothly. This category includes various costs that don’t directly relate to producing the menu items but are essential for the restaurant’s overall operation.
- Non-Operating Expenses: Non-operating expenses are restaurant costs that are not directly related to the core activities of the restaurant. These expenses often have a more specific or infrequent occurrence.
The second-largest expense for a restaurant, after the “Cost of Goods Sold” (COGS), is often “Labor Expenses.” Labor expenses encompass all restaurant costs associated with the restaurant’s workforce, including wages, salaries, benefits, and other employee compensation.
This category covers a range of positions, such as servers, cooks, chefs, bartenders, hosts/hostesses, management, and administrative staff. Labor expenses can be significant due to the labor-intensive nature of the restaurant industry. Factors that contribute to the size of labor expenses include:
- Staff Size: The number of front-of-house and back-of-house employees directly impact labor costs.
- Hourly vs. Salaried Employees: The mix of hourly and salaried employees affects the variability of labor expenses. Hourly employees are directly tied to business activity, while salaried employees have more fixed compensation.
- Staffing Levels: High staffing levels during peak hours or seasons can drive up labor costs. The need for additional employees during busy times can lead to overtime and increased hourly wages.
- Benefits and Compensation: The benefits offered, such as health insurance, retirement plans, and paid time off, can significantly impact labor expenses.