Whether you’re an established restaurateur or someone just entering the industry, mastering expenses is a key step toward running a thriving and profitable business, starting with variable costs for restaurants.
Below, we break down their components and explain why they matter. We also provide practical insights and strategies on how to keep variable costs down.
This will allow owners and managers to optimize their financial performance while offering top-quality service to their clients.
What Are Variable Costs for Restaurants?
Variable costs for restaurants are essential expenses that can significantly impact their financial health. These costs change in response to different factors. That makes them a critical element of day-to-day operations.
Understanding what they are and learning how to control them is crucial for success in the competitive restaurant industry. They encompass a range of spendings that change with the level of business activity, from food and labor expenses to utilities and marketing.
Understanding Variable Costs for Restaurants
Variable costs are a vital concept in business and financial management. They change in direct response to changes in a company’s production or operational activity. Variable costs rise as a business produces more and fall when production decreases.
This concept is particularly important in the context of restaurants. Their daily operations are influenced by factors like customer demand, menu changes, and staffing levels.
In a restaurant, various expenses fall under the category of variable costs. They have a direct correlation with how much the restaurant serves its customers. The primary variable costs for restaurants include the following:
Food costs
Among the many variable costs for restaurants, food costs are one of the most impactful. They are the expenses directly related to the ingredients, products, and materials required to create the dishes on a menu. These include:
- Ingredients. The actual price of the raw ingredients that go into each dish, including meat, vegetables, grains, and spices.
- Storage. Expenses related to storing food, including refrigeration, shelving, and packaging.
- Waste. The financial impact of food spoilage, trimmings, and other waste generated during preparation.
- Labor. The portion of labor expenses associated with the preparation, cooking, and plating of dishes.
- Overhead. Costs linked to the kitchen’s operation, such as utilities, equipment maintenance, and depreciation of kitchen equipment.
Beverage costs
If your restaurant serves drinks, the cost of alcohol, soft drinks, and other beverages is a notable variable expense. How many beverages you sell directly impacts these costs.
Understanding drink expenses is crucial for setting menu prices that align with market trends and customer preferences. By managing them properly, you know that their quality and selection meet customers’ expectations.
Labor costs
As you hire more staff to handle a growing customer base, labor costs increase. These expenses cover everything related to hiring, paying, and supervising your workforce. This typically entails:
- Wages and salaries. The actual compensation that is paid to employees. It includes kitchen staff, servers, bartenders, hosts, and managers.
- Benefits. Expenses related to employee benefits, including health insurance, retirement, and paid time off.
- Training costs. Expenditures for training and development programs, including onboarding and ongoing training.
- Overtime and bonus pay. Additional expenses for overtime hours worked and bonuses for high-performing workers.
- Taxes and payroll expenses. Payroll taxes and expenses related to hiring staff.
Utility costs
These costs encompass a wide range of expenses related to the essential services required for daily restaurant operations. However, the more you use these services, the higher your utility costs become. Here are some essential services.
- Electricity. The cost of powering lights, kitchen equipment, and climate control systems.
- Water. Expenses tied to the water you use for cooking, cleaning, and restrooms.
- Natural gas. The price of gas used in stoves, ovens, and heating equipment.
- Waste disposal. Expenses for garbage removal, as well as any recycling services.
- Maintenance and repairs. Costs associated with maintaining and repairing utility-related equipment and infrastructure.
Marketing and advertising
Variable costs in this category may include promotional materials, online marketing, and promotional events. The more you market and promote your restaurant, the more you spend in this area.
Effective marketing can help the restaurant stand out in a crowded market. A strong strategy helps build and maintain a recognizable brand. So, what are the most common expenses for branding and marketing?
- Digital advertising. Expenses related to online advertising, social media, and website maintenance.
- Print and promotional materials. Even with a modern AI picture editor, costs for designing and printing menus, brochures, flyers, and promotional merchandise remain.
- Event promotion. Expenses tied to organizing and promoting events, such as happy hours, themed nights, or live entertainment.
- Paid advertising. Prices for placing advertisements in newspapers, magazines, on billboards, or radio or television.
- Public relations. Payments related to PR campaigns, media outreach, and reputation management.
- Marketing staff. Salaries and benefits for marketing personnel or marketing agencies hired by the restaurant.
How to Keep Variable Costs for Restaurants Down
Variable costs fluctuate due to factors like customer demand, menu adjustments, and staffing variations. To excel in the competitive restaurant sector, it’s essential to minimize these expenditures.
Here, we gathered some of the most effective methods to aid you in handling and reducing these expenses.
Monitor and analyze costs
Cost tracking provides a clear picture of your financial landscape. It helps you understand where your money is going and where potential savings lie.
By recognizing trends and discrepancies early, you can take proactive measures to control and minimize expenses. To effectively monitor and analyze expenditures:
- Use financial tools
- Divide your costs into categories
- Perform regular financial audits
- Establish targets and closely monitor your progress
- Compare your expenditures to industry benchmarks
- Analyze the variance between actual costs and budgeted ones
- Keep meticulous records of all transactions
Menu engineering
Menu engineering is a strategic approach that goes beyond just listing dishes on a menu. It’s a blend of psychology, marketing, and culinary expertise aimed at optimizing profitability and customer satisfaction.
At its core, menu engineering involves the careful selection, pricing, and placement of dishes. It’s about leveraging customer behavior, preferences, and cost analysis to design a menu that balances creativity and profitability.
The process often involves categorizing menu items into sections depending on their popularity and how profitable they are.
Inventory management
It’s about ensuring you have the correct quantity of products or materials in storage. In simple terms, it involves keeping track, arranging, and supervising the movement of goods.
When a restaurant masters inventory management, it can lower storage expenses, cut down on waste, and fulfill customer needs.
Labor management
Labor management encompasses a range of practices aimed at boosting productivity. What can you do to improve the workflow?
- Optimize staffing levels to match customer demand.
- Cross-train employees so they can handle multiple roles.
- Use scheduling software to minimize labor costs during slow periods.
Energy efficiency and reducing waste
To reduce utility costs, think about investing in energy-efficient equipment and incorporating energy-saving practices.
Regular maintenance and training employees in energy-conservation methods are also crucial for achieving substantial savings.
Within the kitchen, it’s beneficial to implement strategies that minimize waste, such as recycling, composting, and improving food preparation techniques. These actions can result in substantial cost reductions.
Marketing ROI
Evaluate the return on investment (ROI) for your marketing efforts. Focus your resources on advertising channels and promotions that yield the best results. Consider reducing spending on less effective strategies.
Supplier negotiations
Build strong relationships with your suppliers. Negotiate to get better deals on ingredients and beverages. Your suppliers can be valuable partners in managing food and beverage expenditures.
Portion control
Ensure that portion sizes are consistent and not excessive. Overly large portions can lead to increased food costs and more waste.
Smaller, well-controlled portions help restaurants optimize ingredient usage. It reduces food expenses without compromising quality. This practice also limits over-serving.
Portion control aligns with both cost efficiency and customer satisfaction. That makes it a win-win strategy for restaurant owners and diners.
Customer feedback
Listen to customer feedback and improve your operations based on their suggestions. Satisfied clients are more likely to return and spend more.
That will ultimately increase revenue and offset costs. In the age of customer empowerment, you can stay competitive by using customer feedback as a secret weapon.
Summing Up
In a nutshell, knowing and controlling variable costs for restaurants is crucial for long-term success. Whether it’s saving money on food, staff, utilities, or advertising, it all helps the restaurant stay financially healthy.
By keeping a close eye on expenses and making smart decisions, restaurant owners can make sure they’re both profitable and give customers a great dining experience.
This article is a guest post.
Author bio:
Roy Emmerson is the co-founder of TechTimes.com, a B2B SaaS platform helping businesses stay up-to-date on the latest tech trends. With more than a decade of experience in the technology industry, Roy is a thought leader passionate about helping companies embrace new tech to improve operations and drive growth.
