Typical Restaurant Overhead Costs
Restaurant owners need to know how much things cost so they can be sure their business is profitable. This blog post will go over the typical restaurant overhead costs and expenses, including rent, utilities, labor wages for employees, licenses and permits, food cost percentages, and more. The information in this blog post will give you a clearer idea of what your budget should look like and help you make decisions about how to spend your money wisely.
Typical Restaurant Overhead Costs and Expenses
Overhead costs are your everyday expenses. Overhead costs refer to ongoing expenses such as advertising, utilities, and rent which make running an eatery possible in addition to raw materials and food for goods production.
There are several types of restaurants, and running a profitable restaurant is not an easy job, but the rewards make it worth all the extra arduous work that goes into opening and maintaining one. Sometimes, a steady stream of obligations can make a restaurant owner feel like they are drowning in paperwork or just moving from kitchen disaster to customer complaint without any time for themselves. But after everything settles down again, you get this overwhelming rush of pride knowing how far your business has come from its humble beginnings. Understanding your restaurant’s overhead cost is particularly important.
What Are Overhead Costs And Expenses?
Operating expenses, which are not related to production, are overhead costs. Even if the business is successful and receives many orders, these are still costs required for it to function. These costs include everything from expenses related to facilities and utilities, such as utility and maintenance costs, to items unrelated to production, such as supplies.
There are three types of overhead expenses, namely:
- Fixed overhead cost: Fixed costs are costs that do not fluctuate from month to month. The costs in this budget include the rent payments, the salaries, insurance, property taxes, and everything else. It is commonly done by way of an agreement, in which a deadline is set for when they cannot raise rates. A business’s prime cost depends on the costs that are associated with it.
- Variable overhead cost: Workload dictates variable costs. These expenses include all utility costs associated with production, such as power and gas, as well as employee wages, raw materials inventory, and sales commissions. A rising tide raises all boats. The importance of keeping these costs under control cannot be overstated.
- Semi-variable overhead cost: When fixed costs and variable costs are in balance, it is called semi-variable or semi-fixed costs. A fixed cost is incurred if no production takes place. With increased production, the expense increases as well. This includes depreciation of equipment, as well as wages, overtime, and the costs associated with running a cell phone.
Examples Of Overhead Cost
The overhead cost of your restaurant depends on the type of restaurant you run in the restaurant industry. For instance, a bar will have the following overhead costs:
- Alcohol licenses
- Business licenses
- Office supplies
- Property taxes
- Equipment repairs
- Business insurance
To calculate your overhead cost or total overhead cost, you add all costs not related to making drinks or food together. These include things like rent, utilities, salaries, etc. You should also calculate your overhead rate, which compares your overhead costs to revenue.
The overhead rate formula is:
Overhead Rate = Overhead Costs / Income from Sales
How To Calculate Overhead Cost?
To calculate overhead costs, let’s assume that the overhead cost of your bar restaurant consists of the following:
- Rent: $14,000
- Utilities: $8,045
- Taxes: $9,400
- Alcohol licenses: $1,000
To get your total overhead cost, you will add them up.
Total Overhead Cost = Rent + Utilities + Taxes + Licenses
Total Overhead Cost = $14,000 + $8,045 + $9,400 + $1,000
Total Overhead Cost = $32,445
Assuming your sales for last year were $235,000, you can calculate your overhead rate as follows:
Overhead Rate = Overhead Costs/Income from Sales
Overhead Rate = $32,445/$235,000
Overhead Rate = 0.138 or 13.8%
What this means is that you spent 13.8 cents on overhead costs for every dollar you made.
How To Lower Overhead Costs
Renegotiate Your Rent Bill
If you have something to offer in compensation, most property owners will be willing to renegotiate the terms of your contract. For instance, if you commit to remain in the location for an extended period, your property owner might be willing to cut your rent and assist you in making a greater profit. You can always sublease a portion of your venue and make money that way if they are not willing to cooperate.
Reduce Labor Costs
- Boost employee retention: In the restaurant industry, employee turnover is notoriously high, and retaining existing employees is more expensive than hiring new employees. Also, give your current employees rewards for excellent performance or an opportunity for career growth to keep them on board for a longer period. This should also include the hourly workers.
- Improve employee efficiency: Improperly trained staff can cost your restaurant in many ways. Make sure all staff receive employee benefits and are given proper training right from the start and consider cross-training staff so they can carry out multiple roles when necessary. A more efficient staff means you can operate with a leaner workforce without sacrificing customer service.
Reduce Production Cost
- Improve Inventory Management: Using an inventory management system or tracking things closely with a spreadsheet can help you determine ingredient-level food costs and price your menu accordingly.
- Get Friendly with Your Suppliers: Build relationships with multiple suppliers so you can find the best market price for the ingredients you need.
- Change with the Seasons: Keep an eye on the price of seasonal ingredients and quality ingredients and make sure your prices fluctuate accordingly.
- Go High-Low with Your Menu Pricing: Ensure your menu is made up of a mix of high-cost and low-cost items to control ingredient costs on your end while giving customers a sense of variety.
- Minimize Waste: Reduce the amount of food that ends up in the bin by employing green tactics such as reducing portion sizes and finding creative ways to reuse food scraps.
Reduce Equipment And Supplies Cost
- Lease equipment: Leasing usually involves monthly payments with some giving you a buyout option at the end of the period. The biggest advantage is that you immediately get the equipment you need without a large capital outlay. A big downside is that you do not build any equity.
- Buy used restaurant equipment to save money. You can purchase from resales stores, auction houses, private sellers, and online suppliers. But ensure you do your due diligence—otherwise, you may need to pay for repairs that cost more than buying the item new.
- Regular maintenance. View major equipment in the same way you would your car: Service it regularly to prevent a sizeable one-off repair that could cost you thousands of dollars.
- Minimize breakages. Broken glass is part of running a restaurant. However, you can minimize damage by training staff on proper glassware handling and ensuring glass racks are the right fit.
Reduce POS (Point Of Sale) System Cost
You can reduce your POS systems cost by researching and comparing the prices of various vendors. While we understand that you want to run a tight ship, ensure you do the research and that the company you choose is reputable (check reviews online) and has a solution that is right for your restaurant. A solution that provides only the features you need with the option to upgrade as you scale. In the end, that is far more important than cutting corners to reduce your actual costs. Find software that can offer these features:
- Inventory management
- Sales and labor reports
- Employee scheduling
- Staff management and communication
- Basic marketing
Review sites like Yelp, TripAdvisor, and Zomato can have a major effect on your business and help you bring in more customers to offset your overhead costs. Many people use online reviews to help them make decisions, which means that getting more reviews on your site’s page can result in more business for your establishment. Here are some tips to keep in mind with interacting with reviews:
- React appropriately to negative reviews. Among positive reviews, there are bound to be a few negative reviews as well. It is important to treat negative reviews the same as dissatisfied customers – by offering your apologies, a refund, or a free meal. Never delete negative reviews or try to coerce reviewers to give you a more favorable review, as this is more likely to have an adverse effect on customer service.
- Let the reviews come in organically and have your service and food speak for themselves. Asking for complimentary reviews can seem desperate and may make customers distrust your online ratings.
Overhead costs can eat away a substantial amount of your profits each month, but managing your expenses is possible, and it can help you boost profits. The most important thing to keep in mind to drive down your overhead costs is to consistently monitor and track your spending while keeping an eye out for cost-saving opportunities.
Use Low-cost Advertising And Marketing
Marketing does not need to be expensive to succeed, there are cheaper advertising solutions. The most direct and efficient way to save money is to do all the work in-house, but it takes a lot of time and effort to become skilled at effective marketing techniques, especially if you must do everything related to your business. This can be done using free ads, low-cost ads, and by contracting with small, low-cost marketing firms.
BNG Point-of-Sale are POS solutions that improve your bottom line. With a full selection of POS systems for bars, restaurants, and retail businesses, you’ll find the right tool to grow your business with the personalized support you need. Connect with us HERE to learn more.