Expenses for a Restaurant: Examples Of The Biggest Costs Involved

So you're opening a restaurant. Congratulations! The restaurant industry is lucrative, reaching $789 billion in 2021 [1].

Whether you're a first-time restaurateur or a seasoned veteran, there's always a lot to think about when starting up a new eatery. One of the most important things to keep in mind is your budget and what sort of expenses you'll need to account for.

Restaurants can be expensive ventures, with some of the biggest costs coming from rent, equipment, and staff.

In this guide, we'll go over some of the most common restaurant startup costs and restaurant expenses you'll need to consider when opening a restaurant, so you can be better prepared for what's to come.

Let's get started.

The costs of opening and running a restaurant

So how much does it cost to open a restaurant? It depends on several factors, including the type of restaurant you're opening, the size of your operation, and the location.

According to a recent report, the restaurant startup costs are around $175,500 to $750,000 [1]. Of course, this number can vary widely depending on the type of restaurant you're opening. For example, a fast food chain might cost less to open than a fine dining establishment.

The difference between fixed and variable cost

When budgeting for your new restaurant, it's important to understand the difference between fixed and variable costs.

Fixed costs are expenses that stay the same every month. Some examples of fixed costs include rent or mortgage payments. Variable costs, on the other hand, can fluctuate from month to month. Some of the most important variable costs include utility bills or food costs.

Both fixed costs and variable costs are important to consider when you're putting together your restaurant budget.

Understand And calculate your prime costs

Your prime cost is the total of your food and labor costs. It's important to keep track of your prime cost because it can give you a good idea of how much your restaurant is spending on its most essential expenses.

To calculate your prime cost, simply add up your food costs and your labor costs for a certain period of time (most businesses use a month as their timeframe, so this would be your monthly restaurant expenses).

For example, your restaurant spends $5,000 on food monthly and $3,000 on labor. Your prime cost would be $8,000.

Understanding and calculating your prime is a good way to keep track of your restaurant's most essential restaurant expenses and ensure you're staying within budget.

10 major restaurant costs that you should know

Now let's delve into the top ten restaurant costs restaurant owners need to consider before opening their doors to the public. These range from restaurant monthly expenses to one-time payments.

1. Food costs:

This is the cost of all the ingredients used to make the dishes served in your restaurant. Food sales can fluctuate based on seasonal changes and market prices.

To work out your restaurant food cost percentage, simply divide your total food costs by your total revenue. For example, if your food costs $10,000 and your total revenue is $50,000, your food cost percentage would be 20%.

Some more examples of food cost percentage include:

• A food cost percentage of 30% means that for every dollar of revenue, you're spending 30 cents on food.

• If a restaurant has a food cost percentage of 40%, that means it is spending $4 out of every $10 it generates in revenue on food costs.

Tips for calculating your food cost:

• Use a food cost calculator: There are many online food cost calculators that can help you work out your food cost percentage. All you need to do is enter your total food and beverage expenses and total revenue, and the calculator will do the rest.

• Track your inventory: Tracking your inventory regularly can help you keep an accurate record of your food usage and costs. This information can be helpful when it comes time to calculate your food cost percentage.

• Compare your food cost to industry benchmarks: Use industry benchmarks to see how your food cost compares to other restaurants in your area. This can give you an idea of where you need to improve.

2. Labor costs:

Labor costs include wages for all the staff working in your restaurant, from the front of the house to the kitchen. Labor costs can be a significant expense for restaurants, so it's important to ensure you're staff is productive and efficient.

To calculate your labor cost percentage, divide your total labor costs by your total revenue. For example, if your labor cost for a restaurant is $15,000 and your total revenue is $50,000, your labor cost percentage would be 30%.

Considerations for calculating your labor cost

• Wages: When calculating your labor cost, be sure to include all wages, including hourly wages, tips, and commissions.

• Overtime: If any of your employees work overtime, be sure to include those hours in your labor costs calculation.

• Benefits: Don't forget to factor in the restaurant cost of employee benefits, like health insurance and retirement plans. (find out more about the cost of restaurant insurance here)

• Productivity: Keep track of how productive your employees are during their shifts. This information can be helpful when it comes time to negotiate wages and set productivity goals.

3. Rent:

Rent is a fixed cost that needs to be paid whether your restaurant is busy or not. The amount you'll need to pay will depend on the size and location of your restaurant and whether or not your paying restaurant franchise costs.

Let's say you want to open a restaurant in a prime location in New York City. The average rent for a commercial space in NYC is between $100 per square foot up to $1000 [2]. In contrast, if you want to open up a food truck in Omaha, you'll likely only pay a fraction of that amount.

Tips for reducing your rent costs

• Sublet: If you have extra space in your restaurant that isn't being used, consider subletting it to another business. This can help offset your rental costs.

• Negotiate: When your lease is up for renewal, take the opportunity to negotiate with your landlord for a lower rent price.

• Move: If you're unhappy with your current rent price, consider moving to a new location. This is a big decision, but it could save you money in the long run.

4. Utilities:

Utilities are variable costs for a restaurant that can fluctuate based on usage. Common restaurant utilities include electricity, gas, water, and trash service.

To get an idea of how much you should budget for utilities, look at your past bills to see how much you've been spending. You can also contact your local utility companies to get an estimate of what your monthly bill might be.

Tips for reducing your utility costs

• Use energy-efficient appliances: Energy-efficient appliances can help you save money on utility bills. Look for appliances with the ENERGY STAR label, which means they meet strict energy efficiency guidelines set by the US Environmental Protection Agency.

• Educate your staff: Teach your staff about the importance of conserving energy. Encourage them to turn off lights and appliances when they're not in use.

• Weatherproof your restaurant: Make sure your restaurant is well insulated to prevent heat from escaping. This can help you save money on your heating and cooling costs.

5. Insurance:

Insurance is a must for any business, and restaurants are no exception. You'll need to ensure your restaurant is against things like fire, theft, and liability.

The insurance cost will vary depending on the size and location of your restaurant and the coverage you choose. Get quotes from different insurers to get an idea of how much you should budget for insurance.

6. Restaurant POS costs:

A restaurant POS system is a necessary expense for any restaurant. A POS system has a number of benefits, including:

• Allowing you to take orders and payments quickly and efficiently

• Helping you keep track of inventory

• Giving you insights into your sales data that help monitor restaurant pricing and minimize your restaurant prime cost (more on restaurant prime cost here).

7. Kitchen equipment:

Another necessary expense for any restaurant is kitchen equipment. The cost of kitchen equipment will vary depending on the type of restaurant you're running and the menu you're serving.

For example, if you're running a pizza place, you'll need to invest in a pizza oven. On the other hand, if you're running a more casual eatery, you might get by with just some basic appliances.

8. Decor and furnishings:

The cost of decor and furnishings will depend on the style of your restaurant. For a more upscale look, you'll need to spend more on things like tablecloths, art, and flowers.

Tips for reducing your decor and furnishings costs

• Shop around: Compare prices at different stores before making any purchases.

• DIY: Get creative and make some of your own decor. For example, you could paint your own artwork or repurpose old furniture.

• Bargain hunt: Check out garage sales, flea markets, and thrift stores for affordable decor and furniture.

9. Marketing:

Marketing is an important expense for any business, but it's especially important for restaurants. After all, you need to let people know about your restaurant to get them in the door.

There are a number of ways to market your restaurant, including online advertising, print advertising, and PR. Marketing costs will vary depending on the approach you take.

Budget-friendly marketing tips

• Get active on social media: Social media is a great way to reach potential customers without spending a lot of money. Create profiles on popular platforms like Facebook, Twitter, and Instagram, and start sharing your restaurant's story.

• Partner with other businesses: Look for opportunities to partner with other businesses in your community. For example, you could team up with a local farm to host a farm-to-table dinner.

• Host an event: Hosting an event is a great way to generate buzz for your restaurant. For example, you could host a cooking class or a wine tasting.

10. Licenses and permits:

Before you can open your restaurant, you'll need to obtain the necessary restaurant licenses and permits. The cost of these will vary depending on your location.

For example, in New York City, you'll need to pay for a food service license, which costs $280 [3]. You'll also need to obtain a liquor license if you plan on serving alcohol, which can cost anywhere from $3,000 to $14,000 [4].

Final thoughts

So there you have it. These are some of the most common restaurant expenses you'll incur when opening. Of course, this is just a starting point.

Every restaurant is different, so it's important to do your research and make sure you're aware of all the fixed and variable restaurant costs associated with starting and running your business - from operating expenses to cooking equipment.

With careful planning and a solid budget, you can open a successful restaurant that will thrive for years to come.