Smart Budgeting: The Key Ingredient to Any Restaurant’s Success

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What Is The Most Important Thing To Consider When Making A Restaurant Budget?

Whether you’re opening a new restaurant or trying to streamline your existing eatery’s operations, there’s one thing you must optimize before anything else: your restaurant operating budget.

If you’re new to the restaurant business, you can have everything lined up and ready to go: the perfect menu, ideal location, and a great clientele ready to serve. Yet there’s another ingredient that’s required for realistic, sustained success – a practical, precise budget. Why? Simply put, a budget assists operators in understanding their potential profits and maintaining consistent profitability.

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 Budget vs Actual Widget On Laptop In RestaurantRASI’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)

Restaurant manager looking at laptop report

Overview of Restaurant Monthly Expenses

The foundation of every restaurant budget starts with restaurant monthly expenses. Here’s a restaurant budget breakdown of expenses for which 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.

CHECK OUT OUR RESTAURANT BUDGET SLIDE DECK IN THE VIDEO BELOW!

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).

Restaurant team member smiling at camera

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 towards growth!

 

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