Your restaurant may have a great menu, loyal customers, and an unbeatable location, but without effective restaurant budgeting, none of those factors matter. A strategic and accurate restaurant budget plan is your establishment’s roadmap to success; In other words, it’s the most trustworthy guide to your profit.
Too often, managers and entrepreneurs don’t know how to budget for a restaurant. However, without this critical financial information upon which to act, it’s impossible to know whether you’re heading for a profit, a break-even scenario, or a loss.
The lack of a restaurant operating budget is a primary reason why 60% of restaurants fail within the first year and 80% within five years. Without a clear picture of your restaurant’s monthly expenses and other key financial metrics, it’s nearly impossible to understand your financial health, properly forecast, or enable yourself the ability to adjust on the fly when needed.
RASI’s complete financial reporting, including our budgeting expertise, is a significant factor behind our clients’ success; 91% of our first-year restaurants remain in business after year one when working with us! RASI’s hospitality-specific accountants utilize historical metrics enabling operators to build out more accurate budgets, increasing the precision of your forecasting. We understand the nuances of the restaurant industry and can apply that knowledge to actionable insights within a budget, allowing for the following:
- Understanding restaurant monthly expenses
- The opportunity to adjust for unforeseen circumstances
- Maintaining consistent profitability
- The ability to be proactive as opposed to reactive
- Flexibility in staff training
- Plan for rewarding teams with bonuses and wage increases
- The ability to provide the proper tools for their team’s success
- Understanding potential profit and how it relates to your debt servicing
- Stabilizing costs and increasing cash flow (with a restaurant budget vs. actual, i.e., a declining budget)
Why Are Restaurant Budgets So Important?
In the past, during new client reviews, we took a handful of financial key indicators – revenue, discounts, cost of goods (food and beverage costs), labor cost, gross profit, net profit, and cash flow – and compared them between clients who utilized a budgeting tool against those who did not. Restaurants that utilized a solid budget performed better in EVERY category identified above.
Overview of Restaurant Monthly Expenses
The foundation of every restaurant budget starts with restaurant monthly expenses. Here’s a restaurant budget breakdown of expenses that every operation should consider.
The two most significant restaurant expenses are your Prime Costs, which consist of labor (payroll) and COGS (cost of goods, basically your food and drink expenses). When formulating your restaurant operating budget, always think “big” first – literally – with Prime Costs.
Next, there are your Direct Operating Costs, which include items like the following:
- Linens
- Supply purchases
- Cleaning chemicals
- Entertainment (live bands, special events, etc.)
- Contract labor
- Fees & licenses
After your DOC (direct operating costs), don’t forget about Advertising & Promo Costs. Press releases, website ads, emails, and other promo-related expenses fall under this category. For example, if you’re creating buzz around your restaurant’s upcoming grand opening, consider that a single event, which might require extra room in your budget to cover all of your bases for marketing purposes.
The Final 3 Expense Categories Are:
General & Admin Costs – includes general overhead, admin expenses, etc.
Repair & Maintenance Costs – everything from interior décor to parking lot upgrades, along with equipment repair, etc.
Occupancy / Rent Costs
Note that there are other factors you’ll want to consider as well, such as:
- Retail
- Bonuses
- Owner related expenses
- Amortization & Depreciation
The Difference Between Fixed, Variable, and Semi-Variable Costs
Within each of the cost categories mentioned above, there are different rates at which they occur. This is considered fixed, variable, and semi-variable. The variances are as follows:
- Fixed costs: These are your expenses that remain stable because they don’t tie directly to your sales. An example of a fixed cost may be your rent (although some landlords allow for rent affixed to sales, that’s the exception, not the rule).
- Variable costs: These costs are just what the name implies, varying. An example of a variable cost is your COGS. Product pricing fluctuates greatly dependent upon many underlying factors that operators can’t control. Budgeting, however, can help mitigate these fluctuations.
- Semi-Variable costs: These costs are comprised of fixed and variable costs. Your labor can be deemed a semi-variable cost since you have both salaried employees (fixed cost) and hourly employees (variable cost).
How to Budget for a Restaurant Business: Restaurant Budgeting 101
There are 4 main factors that go into restaurant budgeting. Get these locked in – and accurately tracked – and you’re well on your way to ensuring your restaurant business budget works in tandem with your overall business objectives.
1. Figure out costs.
In other words, start with the necessary costs of running a restaurant. From monthly rent to special promotional advertising to taxes and more – write everything down, then figure out how much your restaurant spends on operating costs. We recommend weekly estimating for most costs, while others (like rent or utilities) are appropriate for monthly tracking. Using your Profit & Loss (P&L) statement is a great way to start with costs.
2. Project sales and labor.
Once costs are taken care of, it’s time to forecast sales and labor. It helps to have solid financial reporting tools to ensure your sales forecasting gives you a realistic snapshot of where you’re at – and where you’d like to go! Sales and labor forecasts go hand-in-hand with restaurant budgeting; the more accurate your budget is, the more successful your forecasting will be. The best forecasts are the most honest assessments of your current and future sales and labor needs.
3. Track sales against costs – and adjust as needed.
Real-time, actionable intelligence is key in this regard. Utilizing your POS system data is a great way to make your restaurant budgeting work in your favor. A practical, workable, sustainable budget starts with accurate, real-time data, and it’s critical to have a reliable point-of-sale integration in place to ensure your sales are always up-to-date and transferred directly into your restaurant accounting platform for analysis. For costs, our multi-unit inventory & theoretical costing tools help account for the other side of the equation.
4. Focus on a robust cash management plan.
Once you account for the above items, you should regularly review your restaurant budget plan in terms of a Budget vs. Actual; i.e., what you budgeted vs. what you’re spending. Additionally, you’ll want to ensure you have a strategic cash management plan that works for your current situation and is agile enough to anticipate turmoil and unexpected events down the road.
BONUS: Don’t forget restaurant incentive planning
Here’s a “cost” that you should recognize within your budget to benefit your restaurant in the long term. Well-planned and thoughtfully structured incentives for high-performance employees are the ultimate two-way street advantage. With proper restaurant incentive planning, your guests enjoy superior customer service, and your establishment experiences less turnover and a happy, productive workforce.
Remember, incentive planning can apply to your customer base as well! In this case, incentive planning revolves around loyalty programs. The outdated method of tracking loyalty programs – cards, stamps, and paper-based mediums – are a thing of the past. With a comprehensive accounting system and consistently tracking metrics, you’ll know exactly what your customers are spending, when they’re spending, and what will incentivize them to return to your restaurant.
CHECK OUT OUR RESTAURANT BUDGET SLIDE DECK IN THE VIDEO BELOW!
Restaurant Budget Plan: Frequency
To fully optimize your restaurant budgeting plan, RASI recommends weekly financial reporting. Fifty-two weekly budget tweaks per year may sound excessive, but given the current climate of highly variable expenses and volatile inflation, it’s always best to trust the frequent cadence of a regular budget than one that is always trying to account for past oversights and predict unknown variables in the near and long-term future.
Many companies enjoy better visibility on their restaurant budgeting by adopting a weekly reporting schedule. Just one benefit is tighter controls of prime costs, which allows greater flexibility to spend profits on as-needed initiatives.
Top 4 Restaurant Budgeting Lessons:
1. Stay the course
Operations that budgeted costs were in line as compared to their budgeted revenue figures. They were able to make adjustments for unforeseen circumstances and maintain consistent profitability (i.e. they allowed themselves to become proactive restaurant operators as opposed to reactive restaurant operators… big-time bonus to tipping the profit scale in the right direction).
2. Budget efficiently
Operations that did not budget consistently, consistently ran into a cash crunch that stemmed directly from a lack of knowledge on when to purchase equipment, pay for advertising or other marketing services, or miscalculate their tax obligations.
3. Budgets matter no matter your restaurant size
Whether a restaurant did 1 million or 5 million in sales, the percentage of decrease in costs and retained earnings was almost the same. Simply stated, there is just as much money left on the table in large organizations as there is in small ones.
4. Budgets can help reduce turnover
For restaurants that budgeted properly, turnover was lower, significantly lower! Now don’t get confused here; this isn’t about forecasting or scheduling. This is about understanding how much the operation is spending on hiring, training, and providing for their employees.
3 Reasons That Restaurants Don’t Budget
There’s always an unglamorous reality check involved in these types of reviews as we discuss our analysis results with clients who don’t have a budget. When asked why they didn’t have a budget in place, the top three reasons, in order, are outlined below:
1. Bad habits and routine
Most operators stated that routine consistently won the battle over what’s best for the business.
2. Paralysis by analysis
Some operators mentioned that they would spend too much time focusing on too many non-critical areas of their operation and they simply got lost in the analysis of all the numbers.
3. Lack of discipline
Even though they agreed to the importance of a budget, some operators admitted that they felt that budgets are too hard to update on a regular basis, or they did not have enough time to spend updating it correctly.
A budget is as critical to a restaurateur as a lighthouse is to a sailor. Both can be the key element between you surviving or dying during rocky times.
Ask yourself these questions and allow your answers to determine your next action:
- How much profit do you believe you can realistically earn from your operation in the next year?
- What are 3 areas that can potentially have the greatest impact on reducing your costs?
- How will the reduction in costs for these areas impact the guest experience?
- How will they affect your employees?
- What are the 2 ideas that you have for increasing your revenue?
- How will these ideas increase your bottom line without affecting your guest and your employees negatively?
Operational budgets can seem like a total beast if you don’t know where to start. However, they do not have to be complicated!
Restaurant Operating Budget Best Practices
Now that you have a general idea of restaurant monthly expenses, it’s time to build your budget! Depending on your restaurant’s current status, budgetary priorities can vary drastically from month to month. To cite just one example, the costs associated with opening a restaurant are much different from a firmly established restaurant consistently tweaking and perfecting its budget. That said, no matter the size or status of your restaurant, it’s a best practice to consistently review your budget and ensure you’re on track with both expenses & profit projections.
Always remember, even the most robust restaurant budget needs to account for inflation and unexpected expenses. Your budget should foster a proactive approach rather than a reactive stance. In other words, your budget should be the ultimate anti-fragile resource for your restaurant!
Lastly, your strategic budget should always be SMART:
- Specific
- Measurable
- Attainable
- Relevant
- Time-Bound
LISTEN TO OUR RESTAURANT BUDGET PODCAST EPISODE BELOW!
Contact RASI Today for Assistance with Budgetary Requirements and More
A budget is just one part of your restaurant’s path to success. Not sure how to create a restaurant budget? With RASI’s multi-tier industry expertise in every aspect of the restaurant, you can request a demo to see our ERP solutions in action and get started on your journey toward growth!
