Restaurant Costs: The Essential Guide for Owners and Managers

Whether you're a seasoned restaurant owner looking to refine your operations or an aspiring entrepreneur stepping into the industry, understanding and managing restaurant costs is essential.

From food and labor expenses to rent and utilities, restaurant costs can quickly spiral out of control if left unmonitored. But with the right insights and tools, you can turn your cost challenges into opportunities for growth and profit. 

Master the financial side of your business, streamline processes, reduce waste, and boost your bottom line—all while delivering exceptional value to your customers—with our guide to restaurant costs.

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Restaurant expenses vs. restaurant costs: What's the difference?

Understanding the difference between restaurant expenses and costs is a good starting point—whether you're opening a new restaurant or looking to run your business more efficiently. When opening a new restaurant, understanding your restaurant startup costs is crucial for effective financial planning down the line.

Costs typically refer to anything directly related to making and selling food, whereas expenses cover broader operational and overhead costs. 

Let’s take a closer look:

Restaurant costs

Restaurant costs generally fall under three categories:

Operating costs: Opening a restaurant means you’ll have numerous one-time purchases—for example, a stove, fridge, freezer, and cooking utensils. You’ll also have to pay ongoing operational costs for utilities, kitchen supplies, maintenance, and software to help your restaurant run smoothly.

Food and beverage costs: Whether you sell high-end steak or dollar tacos, you’ll need to factor in the price paid for ingredients, beverages, and other food and drink supplies. 

Labor costs: Consider how much you’ll need to pay restaurant employees, taxes, and benefits while ensuring you stay inside federal and local labor laws.

Restaurant expenses

Restaurant expenses include fixed and variable costs, overhead, and non-operational costs. For example, lease or mortgage payments, marketing and advertising campaigns, insurance, and other professional fees. Understanding your restaurant's fixed, variable, and semi-variable costs is essential for maintaining financial health.

What are COGS (Cost of Goods Sold)?

The cost of goods sold is the cost for a business to produce or purchase goods it’s selling in a specific period. For example, the cost of ingredients, beverages, and items for preparing and serving food and drinks.

What should food costs be at a restaurant?

Food costs are a component of your COGS. They are the cost of ingredients used specifically to prepare dishes on the menu—for example, raw ingredients, beverages, and any other supplies directly used in food preparation.

Food costs are calculated as a percentage of total revenue, and the average restaurant food cost per month will differ depending on the type of restaurant you own. Tracking your food cost percentage is important for calculating both plate and period costs, helping you implement cost control strategies and impact overall restaurant profitability.

By tracking food costs, you can price menu items appropriately, control food waste, and make the most out of every dollar spent on ingredients.

Here are a few examples:

• Casual dining restaurants might aim for food costs closer to 30%-35%, as they often serve higher volumes at lower price points.
• Fine dining establishments could have slightly higher food costs, even around 35%-40%, due to the use of premium ingredients.
• Fast food or quick-service restaurants tend to lower food costs to 25%-30%, thanks to standardized, lower-cost menus.

How to reduce food costs in a restaurant

Reducing food costs increases profitability by lowering the amount of money spent on COGS, which leads to higher profit margins and improves cash flow. 

Here’s how to reduce food costs:

• Standardize portion sizes to ensure consistency and prevent over-serving
• Use portion scoops to ensure accurate serving sizes.
• Train kitchen staff to avoid excess plating, especially for expensive items (e.g., proteins or seafood).
• Conduct a regular inventory system to closely monitor stock levels and identify slow-moving or excess inventory that could lead to spoilage.
• Use inventory management software to track product usage, manage reorder levels, and reduce waste.
• Use FIFO (first in, first out), which helps use older products first to prevent spoilage and waste.

3 Types of restaurant costs

There are three categories of restaurant costs. Keep these in mind, both for planning and tax purposes.

• Variable costs can change depending on the market, your use, and more. Variable costs include utilities, maintenance, ingredients, and credit card fees.
  
  
• Semi-variable costs are predictable but can change. Hourly labor is a great example of a semi-variable cost, as it can fluctuate based on how much your staff works.
  
  
• Fixed costs won't change. Restaurant fixed costs include mortgage payments, loan payments, salaried staff, and licensing fees.

What are the fixed costs of a restaurant?

For restaurants, the most common fixed costs will include:

• Salaries: Employees on salary will have fixed costs, at least until a raise.
• Permits and licenses: Business permits will have fixed costs for at least the year.
• Technology: Any software cost, like HR software or a POS system, is largely fixed.
• Custodial contracts: Any professional cleaning services will likely have a fixed-rate contract.
• Loan payments: If you have any business-related loans, these will come with a fixed cost.
• Equipment leases: If you don't own your equipment, you will have a fixed lease payment to factor in.
• Insurance: Your restaurant will have at least one type of insurance payment associated with it, if not more.

Restaurant operating costs breakdown

A number of items make up your total restaurant operating costs and staying on top of these costs is critical to longevity. Remember that your operating costs can vary depending on the type of restaurant you’re running and its location.

Food costs (COGS): These are expenses for ingredients used to prepare dishes, such as meats, vegetables, dairy, spices, and sauces. For example, if you purchase chicken, vegetables, and seasonings to make a dish, those costs fall under food costs.

Labor Costs: Labor costs include wages, salaries, and benefits for staff, such as head chef, servers, and dishwashers. For example, paying an hourly wage to kitchen staff or offering health insurance for full-time employees are part of your labor costs.

Hiring costs (postings, background checks, etc.): Hiring costs are expenses related to recruiting and screening new employees. This includes posting job ads, conducting background checks, and any recruitment agency fees.

Rent, lease, mortgage, repairs: These are costs associated with the space, including monthly rent, mortgage payments, and repair costs like fixing plumbing or HVAC systems.

Utility costs: Utility costs include expenses for electricity, water, gas, and internet services needed for day-to-day operations. For example, the electricity bill for cooking equipment or the water bill for dishwashing.

Equipment costs and maintenance: This includes the initial cost of buying kitchen equipment (e.g., ovens and refrigerators) and ongoing maintenance or repairs to keep them functioning. 

Cleaning and janitorial: Cleaning and janitorial costs cover supplies and services to keep the restaurant clean, including cleaning products (like soap and disinfectants) and paying staff for cleaning duties.

Insurance costs: Insurance costs include premiums for policies such as liability, workers' compensation, property, and employee health insurance. 

Marketing and advertising: These are expenses related to promoting the restaurant, such as digital ads, social media campaigns, print ads, or events to attract customers. 

Licenses and permits: These costs cover the legal requirements to operate a restaurant, such as food handling permits, alcohol licenses, and health inspection fees.

Inventory storage: Inventory storage costs include maintaining proper storage conditions for food, such as renting space in a freezer or fridge to store ingredients.

Technology and software costs: This includes costs for the tools you use to run the business, such as POS, scheduling software, inventory tracking systems, and payroll.

Accountants: Handling accounting yourself, especially as your restaurant grows, is difficult. So, it’s likely you’ll have an in-house or third-party accountant that you have to pay.

Lawyers: Legal costs include fees for legal services, such as drafting contracts, dealing with disputes, or ensuring compliance with labor laws. 

Uniform and cleaning costs: These costs are for providing and maintaining uniforms for your staff. This includes purchasing shirts, aprons, chef coats, and the costs of cleaning uniforms regularly.

Waste disposal: Waste disposal costs cover the fees for removing trash, recycling, and food waste from the restaurant. This could include paying a waste management company to pick up garbage and compost food scraps.

Banking and transaction: Banking and transaction costs include fees for maintaining a business bank account, credit card processing fees, and any charges associated with money transfers or ATM usage. For example, paying credit card processing fees when customers pay with cards.

What is the biggest expense in a restaurant?

The biggest expense associated with opening or running a restaurant depends on your business, location, and other financial considerations. 

However, generally speaking, labor costs are a restaurant's biggest expense. This cost includes employee wages, salaries, benefits, and taxes, often accounting for 30-40% of revenue.

Run an operationally efficient restaurant with Homebase.

As a restaurant owner, you know how stressful running a restaurant can be. There are restaurant costs to manage, inventory to control, and customers to keep happy.

Save yourself time and headaches when scheduling your staff, running payroll, and managing your employees. Use Homebase’s restaurant management software designed for small business owners. Get started for free today.

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