How to Control Restaurant Costs

Running a restaurant can be greatly rewarding and fulfilling, but we all know it also comes with its fair share of headaches. Controlling costs proves to be one of the major headache-inducers. Since running a successful restaurant goes beyond serving great food, it’s important that you factor in strategic cost management. With rising food prices, labor shortages, and tight margins, cost control is more crucial than ever.

Before we begin, let’s just clear up something that can be confusing: the difference between restaurant and restaurant expenses. Costs are on-time payments on things like food. Expenses are recurring payments that generate revenue (e.g. payroll).

The Basics

So, what are the baseline things to look out for when cutting costs?

• Get the monthly operating costs stable:
  Rent and utilities should be roughly 10%. Food and beverages (discussed later) should be 28-35%. Labor should also hover around 28-35% (management should be 10%). Insurance costs vary depending on the provider.
• Analyze the data and your costs
  By tracking every ingredient and its cost, you can calculate margins down to the smallest sliver of a cent, and then adjust prices accordingly. And don’t forget to include miscellaneous things like breakage costs.
• Use accurate inventory management
  There are a few strategies here. You can implement par levels (they represent the minimum and maximum quantities of an item that a business should maintain in stock, FIFO (first-in-first-out) systems, and regular counts (weekly or biweekly). This helps spot waste, spoilage, and even theft.
• Engineer your menu and optimize specials
  An easy way to save money is to promote high-margin items. It’s also a good idea to tweak dishes with rising ingredient costs, and create specials using near-expiry items (this minimizes waste)
  • Pro tip: You can customize your menu to no end with our POS
• Negotiate with your supplier and look for alternative sources
  It’s important to keep food cost percentages in check. Compare vendor prices and consider buying in bulk, or buying local seasonal produce, to keep the costs down. Getting a prime vendor and a vendor agreement can simplify operations and lower food cost by 3–7%. Not bad.

Reduce Labor Costs

Labor accounts for a large percentage of operating costs. And labor is more than hourly wages and salaries—it also includes things like overtime and bonuses, payroll taxes, healthcare, vacation and sick days, and bonuses. Having a lean and agile staff will go a long way to profitability.

Pro tip: Don’t simply reduce the number of employees; that can harm customer-service endeavors. Instead:

• Set performance targets and track percentages
  Labor costs should hover around 28-35% of total revenue. Calculating this isn’t too difficult. It’s your total labor cost divided by total sales X 100.
• Optimize scheduling
  Use sales forecasting (which is estimating future sales revenue over a specific period) and historical data to help align staff numbers with the expected demand. This reduces idle time and unnecessary overtime. You can also implement employee scheduling software.
• Cross-train your staff
  If you want smoother operations, consider having more flexible roles for employees. That way, you’ll require fewer hires, and you can build teams skilled in multiple areas.
• Minimize overtime
  Monitoring labor reports can help you notice when someone works excessive hours, curtailing how much overtime you must pay.
• Improve employee retention
  The high turnover rates in restaurants is well documented. It also costs more to hire new employees than to retain existing ones. Do things like reward employees for good work, and provide growth opportunities. Employees will be more likely to stick around.

Reduce overhead and operating expenses

• Improve energy efficiency
  There are multiple ways to reduce how much energy you use. For one, you can use energy-saving appliances. Also, you can schedule routine HVAC and kitchen equipment maintenance, and reduce waste from disposables (reducing waste is a common theme).
• Review fixed, variable, and contract costs
  Understanding costs can be tricky. There’s fixed costs, like rent and insurance, and then you have variable costs, like utilities and marketing. Renegotiating these when possible can help. You can also look to remove unnecessary expenses and subscriptions.
• Automate with technology
  There are a few ways to reduce how much you depend on labor. Try using self-ordering kiosks, dishwashing machines, and automated supply ordering. If you have a manual clock-in system, try a digital one. And if you have the means, you can even look into robotic equipment.

Track Key Performance Indicators

• Calculate your prime cost ratio and your food/beverage ratios
  A “prime cost” is the sum of direct labor costs and the cost of goods sold. Cost of goods sold is the raw material cost of your beverages and food. Labor cost includes actual labor, employee benefits, payroll taxes, healthcare, and bonuses.
  
  The prime cost should be below roughly 60% of your total sales numbers. Food and beverages should hover around 28-35%.
  
  Food has two different types of costs associated with it: Plate cost and Period cost. Plate cost is the cost of a single dish. Period cost is the cost over a span of time.
  
  Tip: Prime cost does not include things like equipment and supplies, utilities, menu design, signage, decor or any other costs unrelated to producing your product.
  
  Your prime cost is a fundamental indicator of your performance.


• Break-even analysis
  A “break-even point” is the point at which a business's total revenue equals its total costs. To calculate this, divide fixed costs by the contribution margin (the revenue remaining after deducting variable costs from sales). This ensures operations are profitable.
  

In the end...

Running a restaurant should be a joy, not a headache. If you want your restaurant to run smoothly while maintaining profitability, it’s a good idea to keep track of expenses, minimize waste, and reduce how much labor costs you have to pay. It’s not a simple process, but it certainly is rewarding when it’s all working