Running a business involves managing numerous moving parts and external pressures, from supply chain issues, economic conditions, fierce competition and changing trends to weather events and sudden equipment failures, but one thing every business owner can control is expenses, particularly monitoring those expenses.
Running a business involves managing numerous moving parts and external pressures, from supply chain issues, economic conditions, fierce competition and changing trends to weather events and sudden equipment failures, but one thing every business owner can control is expenses, particularly monitoring those expenses. Restaurants, which have always struggled with thin margins, staffing issues, food waste and spoilage, fierce competition, and high operating expenses, all made worse throughout the Covid lockdowns and the recent economic downturn.
Measuring KPIs (key performance indicators) and benchmarks take on greater importance during tough economic times while managing expenses becomes crucial to your restaurant’s survival. Restaurants, like all businesses, need to maximize profits by increasing revenues while also containing expenses. This is a tricky balance because if expenses are cut too much it can have a negative effect on business, i.e., if wait staff is cut to save money, service may suffer, damaging the customer experience, jeopardizing online and word-of-mouth reviews as well as possibly limiting repeat patronage. In the following article we’ll discuss common fixed, variable and mixed expense types and to assist with tracking and measuring, we’ll make available a restaurant expenses spreadsheet for download.
Monthly Restaurant Expenses
Like many industries, labor is often the largest restaurant business expense, affecting, significantly, the bottom line by eating 20 to 30 percent of all income before expenses and taxes are deducted. But labor costs are far from a restaurant’s only expenses. Eateries carry lease or mortgage payments, upgraded, replaced and newly purchased kitchen gear, appliances and dining room equipment, POS terminals as well as various computers, handhelds and kitchen management software, licenses and permit renewal fees, marketing expenses, and day-to-day expenses such as repairs and maintenance. Expenses are typically categorized as fixed, variable and semi-variable and should be closely recorded and monitored to better your chances at success.
Typical Restaurant Operating Expenses
Fixed expenses
1. Rent and building fees for restaurants (Occupancy costs).
Rent is a major fixed expense faced by restaurant owners, determined by location, square footage and the deal you get on the lease. As a percentage of total sales, rent should be about six to ten percent of income before deductions (gross). Occupancy costs cover rent, common area maintenance (CAM) fees, property taxes and insurance. Restaurateurs who own their property and building will have mortgage costs to consider, and face increased risks in economic downturns, competition growth and ever-changing consumer eating trends, though long-term profits will be greater once a property is paid off.
Before signing a lease, have your lawyer and accountant scrutinize it in search of possible red flags and pitfalls and make sure your monthly budget can handle the costs involved.
2. License fees
Restaurateurs must consider various license fees when considering business expenses. These fees have initial and periodic renewal costs.
Business License
Your business license, one of many documents needed to go into the eatery business, allows you to run your business in a particular jurisdiction. Business licenses are issued by the state and may cost you a percentage of your total sales or a single yearly fee. If your restaurant sells liquor, you will need a federal business and state business license. If you’re not selling alcohol, a state license should suffice. Licenses and permits usually have an initial cost and annual renewal fees. When considering license and permit fees, don't forget both initial renewal expenditures.
Food Service Licence
Any establishment that prepares and sells food on-site must have a food service license. If your business includes a food truck, that requires a food vendor’s license. No matter what type of food you’re selling, all U.S. states require the appropriate permit. A food service or vendor's permit ensures that the eaterie or food truck adheres to local and state food handling and safety regulations. Because each state and locality put in place its own regulations, the U.S. Food & Drug Administration makes available its State Retail and Food Service Codes and Regulations by State.
Food Handler Certification
A food handler and food manager certification is issued to employees who prepare and serve food. Both types of certification require varying degrees of training and examinations, with the food manager permit more advanced and demanding. Like the food service license, food handling and management certification protect you and your customers by providing them with a clean, hygienic and safe establishment.
Certification costs vary from state to state, as do titles (i.e., food handler permit, license or certification), as do requirements, training, and examinations. Like food handling certification, food manager safety certification training and testing is done online or in the classroom, depending (like always!) on the state in which you do business (click here for a comprehensive state breakdown).
Restaurant Liquor License (General Liquor License)
Regulations, legalities and costs in obtaining a license to sell alcoholic beverages vary between states and locales but is a necessity for selling beer, wine and liquor in an establishment. Because some states limit the number of liquor licenses available at a given time, new restaurants and bars may be unable to obtain one. To complicate issues, there are licenses for onsite or offsite sales and consumption, as well as different standards for selling beer, wine and liquor and different licenses for restaurants and bars. Licenses for selling alcohol often require renewal after one to three years.
Liquor License Fees & Governing Agencies – State-by-State |
State | Department | Fees & other costs |
Alabama | Varies from $100 to $1,000, depending on the license type | |
Alaska | Application fees range from $48 to $500 , while the license fees range from $200 to $2,500 | |
Arizona | Between $100 and $2,000 | |
Arkansas | Prices vary from $100 to $3,000 | |
California | License costs range from $1,000 to $16,000 | |
Colorado | Local fees vary from $22 to $1,000 and state fees vary from $337 to $1,020 | |
Connecticut | Fees cost between $20 and $2,650 | |
Delaware | Office of the Delaware Alcoholic Beverage Control Commissioner | Fees vary from $150 to $2,000 |
Florida | The annual license fee for an alcoholic beverage retail license ranges between $28 and $1,820 | |
Georgia | The fee for the alcohol license for the full year is $5,000 | |
Hawaii | Fees vary from $15 to $1200 | |
Idaho | Fees Start at $50 for a beer license, $100 for wine. Liquor licenses costs are pegged to the population of the city they are issued for. | |
Illinois | Costs vary from $25 to $1500 | |
Indiana | Costs vary from $10 to $25,000 | |
Iowa | Costs vary from $32.50 to $7500 | |
Kansas | Costs vary from $25 to $6000 | |
Kentucky | Fees range from $30 to over $7,000 | |
Louisiana | Licenses range from $120 to $345 . | |
Maine | Fees range from $1500 to $5000 | |
Maryland | Fees range from $100 to $2000 | |
Massachusetts | $200 processing fee | |
Michigan | The initial and annual renewal fee for a Class C license is $600.00 | |
Minnesota | Fees range from $100 to over $2000 | |
Mississippi | Fees vary between $145 and $1225 | |
Missouri | Fees vary between $50 and $300 | |
Montana | Fees and renewals range between $400 and $20,000 | |
Nebraska | Fees range between $100 and $450 | |
Nevada | Fees run between $75 and $550 . | |
New Hampshire | Fees run between $45 and $3000 | |
New Jersey | New Jersey charges a $200 fee | |
New Mexico | Fees range from $1050 to $10,000 | |
New York | Fees range from $100 to $4352 | |
North Carolina | Permit fee is $1,000 | |
North Dakota | Fees are based on population - Over 500: $100. Under 500: $50. Renewals run from $50 to $200 | |
Ohio | Fees range from $100 to $20,000 | |
Oklahoma | Fees vary between $125 and $3000 | |
Oregon | Fees run from $10 to $1000 | |
Pennsylvania | Fees vary between $125 and $700 . | |
Rhode Island | Fees range from $400 to $2000 | |
South Carolina | South Carolina Department of Revenue Alcoholic Beverage Licensing | $200 filing fee |
South Dakota | Fees range from $300 to $500 | |
Tennessee. |
| Fees range from $270 to $2000 |
Texas | Costs range from $25 to $17,000 | |
Utah | Fees range from $125 to $10,000 | |
Vermont | Fees range from $25 to over $1,000 | |
Virginia | Fees range from $50 to $300 | |
Washington | Fees range from $100 to $2200 | |
West Virginia | Fees range from $150 to $22,650 | |
Wisconsin | Fees very between $15 and $30,000 | |
Wyoming | Licenses cost between $300 and $3,000 and must be renewed every year |
3. Insurance coverage
Restaurant owners invest time and money in their business, so carrying the right insurance can be crucial to protecting their investment. A business owners policy (BOP) packages general liability insurance together with commercial property and business interruption insurance. Because the insurance is bundled, it saves the restaurant money over individual policies, while offering protection for common restaurant and food service accidents. BOPs can include customized add-ons that cover food spoilage, alcohol liability and employee theft. Premiums vary but run less than $150 a month. Other important restaurant insurance includes:
Workers Compensation
Auto insurance (for company vehicles)
Professional liability insurance
Liquor liability insurance
Commercial property Insurance
Food and water contamination insurance
4. Marketing & Advertising
Like any business, restaurants depend upon marketing and advertising to bring in customers. Marketing campaigns include advertising, public relations, social media posts and ads, influencer marketing, email campaigns, websites and customized apps. Eateries are often involved in community events and sponsorships (i.e., local sports teams) and host local artists for music, readings or speaking events. Regardless of the marketing and advertising approach, it’s part of your monthly budget.
Variable expenses
1. Cost of goods sold
Cost of goods sold (COGS) is a crucial way of understanding your monthly spending on inventory. It’s a simple formula:
Beginning Inventory plus inventory Purchased over the month minus your Ending inventory (B+P-E).
Example: You start the month with $5k in inventory, additional purchase orders total $3k for the month, but you use $4K worth of inventory during the same period: $5000 + $3000 = $8000. Minus the $4000 inventory utilized and your cost of goods sold for the month is $4000. This is treated as a business expense and deducted from gross profit.
2. Utility costs
Electric, gas, internet, cable TV and water bills can be a significant cost of doing business. After labor and inventory (food, liquor, etc) utilities are the third largest expense a restaurant doles out. As the economy has soured while inflation has soared, energy costs are taking even bigger bites. Owners and managers must consider energy savings as a way of preserving profits.
3. Payment processing fees
Credit and debit card interchange processing fees cut into already slim restaurant profit margins. Credit card fees can take up to 2.87% to 4.35% of any customer purchase, along with additional service provider fees. Every transaction paid for with a credit or debit card is subject to the interchange fee as well as the smaller assessment fee charged the merchant to cover network operating costs. Considering that up to 75 percent of diners prefer using plastic when the bill comes, this is a significant bite into restaurant profits - so much so, that eateries are now assessing credit card users additional charges to mitigate processing fee costs (or offering a cash discount to discourage credit card payments).
Restaurant semi-variable expenses
Because restaurant labor comprises both hourly and salaried wages (i.e., variable and fixed expenses), labor falls under a semi-variable expense category. Aside from wages, labor costs include paid sick and vacation days as well as other benefits (health insurance, tuition assistance, volunteer days, professional training, free meals, etc.), bonuses, overtime and payroll taxes and represent the largest restaurant expense after food (inventory) and rent. Restaurants are well served by keeping a sharp eye on their labor costs!
Conclusion
Restaurants that fail to track and contain expenses will soon be a distant memory. It’s crucial to utilize a restaurant expenses spreadsheet and restaurant management software to optimize staffing, menu choices, inventories and more, giving you and your employees the best chance at success!