Say you’re opening a fast-casual Mediterranian spot, a sit-down bistro known for remarkable steak frites, or a speciality food truck preparing world-famous empanadas. At some point, you’ll need to sit down and figure out your weekly budget.
We know. Budgeting might not be fun. But it’s an integral part of restaurant setup — and a key factor in how to maximize restaurant profits and safeguard your restaurant’s financial health. This blog post contains a few pointers to get you started.
Determining your food costs
The first order of business for any fresh restaurateur is, of course, the food. And it’s not an easy one: for 52% of restaurant professionals, controlling food and operating costs are an ongoing challenge. You can get (and stay) ahead of food costs by building them into your budget plan from the get-go.
Think about the number of ingredients necessary for just one of your dishes. Let’s say you’re serving chicken tikka masala. Yes, you need chicken breast, yogurt, and garam masala. But you also need a wealth of seasonings, from black pepper to cumin, paprika to cayenne, lemon to ginger.
The more sophisticated and complex your menu items are, the more sophisticated your ingredient list will be — so accounting for all of the hidden costs in, say, the cayenne, and testing them within your budget before you finalize a menu is the best way to keep them from creeping up on you later.
Sourcing also comes into question when it comes to determining food spend. It’s important to find local purveyors you can really rely upon — and relentlessly track and optimize your spending. We’d recommend weighing all purveyor options and comparing prices at the outset. Once you have a handle on pricing, see if you can cut costs further by buying certain items in bulk — and increasing inventory management to reduce food from spoiling or being stolen. Small adjustments can add up to big savings!
Pricing out your menu
As you start lining up your menu, you’ll also need to decide on a food cost percentage — the portion of sales spent on food. This is one of the most important measures of any restaurant business, and having the right tools and formulas to calculate it quickly, easily, and regularly is key to smooth and successful operation. If you don’t know how much of your sales you’re spending on food, all of your other budget items can become skewed, and can lead you dangerously close to the red — without you even realizing it.
At most restaurants, food cost percentage falls somewhere between 28-35%. Here’s how to calculate yours: Add up your ingredient costs for each standard menu item. Then divide the raw food cost by your ideal food percentage.
This food cost calculator can help, but in another way to describe it is this: your food cost percentage is your cost of goods sold (COGS) — the amount of money you’ve spent on ingredients and inventory in a determined time period, divided by your sales. If your result seems unreasonably high or low, you may have made an entering error, so check each item and try again.
Clearly, sales volume is a big part of this equation. It can be impacted by restaurant hours, estimated number of covers (e.g. the people you’re feeding), and how many pickup and delivery orders you’ll fill — in addition to your on-site service. Projecting sales volume can help inform a lot of financial decisions, and if you’re not happy with your food cost percentage, finding a way to increase your sales volume can be a big help.
Visualizing and quantifying your team
When it comes to putting together a comprehensive budget, another major consideration is labor costs. Think about who you’ll want and need on your team. How many servers for Saturday night? What about Sunday brunch? A slow Tuesday evening? Will you need a receptionist, sommelier, bartender, barback? Quantifying your team is a delicate balance. While labor costs go up with each employee you hire, they also boost overall efficiency, productivity, and time to sale.
Now think about your back-of-house staff: a head chef, line cooks, your bussers. How many do you need to meet the bare minimum of operation, and how many more to speed things up? These choices are all up to you, your projected sales, and what sort of restaurant environment you’re hoping to create. Once you do settle on a starting point for your team, add up their hourly wages, and determine your total labor costs — then factor that into your budget plan.
It might be that you create a short-term plan, and a long-term plan as you expand. But while you quantify your team, don’t forget to qualify it. You want the right people at your restaurant, that love what they do and believe in your restaurant’s overall mission. Building a team you care about — and that cares about your restaurant — may take some time. But ensuring that all of your hires are within budget will take away the added stress of hidden labor costs, and let you focus on what matters most: finding the best person for each job.
Accounting for rent
Rent is going to be a main factor in determining a location for your restaurant. A budget can help you determine what you can afford, and where you should be cutting costs elsewhere to better accommodate your rent — or vice versa. One rule of thumb suggests that your rent should never exceed 10% of your restaurant’s gross sales. Following this as a guide can help you keep an eye on all of the moving parts that affect your sales, and ensure that your location isn’t doing your establishment more harm than good.
Ideally, your restaurant location should be an asset, helping you cater to your target market, bring in customers that are excited and passionate about your food, and put you on the map in a place where the word can easily spread. But, of course, working within your square footage needs and your allotted budget are necessary concerns — especially if you want to make it through slow patches without your rent becoming a threat to your business.
So, finding a location that allows you to reach your target market, but still meets your square footage needs and your budget — even when sales may be down — is key. And accounting for all of this from the start is the best way to keep the food cooking and the doors open.
Continuing to monitor your budget
When it comes to budgeting, the main thing to keep in mind is that while all of these costs are significant on their own, their added value is what really counts. Adding up your desired or forecasted costs for each — and then tracking them along the actual costs, is the best way to stay ahead of your budget. Give our budget calculator a try to determine if the costs of running your restaurant line up with your projections.
For more handy restaurant business tools, check out our restauranteur’s guide for all things financial, The 2nd Course: Financing Your Restaurant and Projecting Profits.