The Costs of Opening and Running a Restaurant-

The total cost of opening a restaurant differs between restaurateurs due to factors like size,
location, and concept. The upcoming section details these costs across two categories:
restaurant startup costs and operating costs.

Definition: 
What Does Startup Cost Mean?
A business is born with an idea, but a business has to be built around that idea. An individual
with the desire to start a business has to pay for many previous expenses long before it starts
producing any money. These expenses come from things like expenses incurred to plan,
register, organize and launch a new business or social venture legal fees, market research
reports, hiring staff, insurance, advertisement, training expenses and other costs that come
from organizing the business before it goes live.

The types of restaurant startup costs you will encounter are :

 Security deposit 
 Loan down payment of 10% if you’re buying a building.
 Construction and renovation costs differ by location and contractor.
 Licensing costs:
 Business registration fees

 Liquor license costs 

 Music license

 Building permit, health permits, food handler’s permit, zoning permit, and
alcohol tax permit

 Professional services like bookkeeping, accounting and consulting (varies by location

and the skill level of the expert)
 Restaurant equipment 
 POS cost
 Marketing costs before launch like signage and advertising
 Beginning food inventory
 First month’s rent, wages, and salaries

Operating costs or operational costs, are the expenses which are related to the operation of a

business, or to the operation of a device, component, piece of equipment or facility. They are
the cost of resources used by an organization just to maintain its existence.
For a commercial enterprise, operating costs fall into two broad categories:

 fixed costs A fixed cost is an expense that does not change as production volume increases
or decreases within a relevant range. In other words, fixed costs are locked in place as long
as operations stay within a certain size. Fixed Costs include items such as the rent of the
building. These generally have to be paid regardless of what state the business is in. It never
changes
variable costs Variable costs are production costs that change in proportion to the amount of
goods that are produced. In other words, for every good that is produced, variable costs
increase by the same amount. In any production process, manufacturers incur a variety of
costs.

Variable Costs include indirect overhead costs ( Overhead costs, often referred to as overhead
or operating expenses, refer to those expenses associated with running a business that can’t be
linked to creating or producing a product or service. They are the expenses the business incurs
to stay in business, regardless of its success level.Overhead costs are all of the costs on the
company’s income statement except for those that are directly related to manufacturing or
selling a product, or providing a service) such as Cell Phone Services, Computer Supplies, Credit
Card Processing, Electrical use, Express Mail, Janitorial Supplies, MRO, Office sufflies, Payroll
Services, Telecom, Uniforms, Utilities, or Waste Disposal etc.

Restaurant Expenses Vs. Restaurant Costs

One often confused (and misused) sets of terms are restaurant costs and restaurant expenses.
The difference between a cost and an expense can get very technical depending on the context.
In this guide we won't worry too much about the differences, but in general:
 A restaurant cost is a one-time expenditure on a material resource like food, liquor,
dishes or kitchen equipment.
 A restaurant expense is a recurring payment that generates revenue like services, rent,
payroll, or marketing

What is Restaurant Labor Cost?

Restaurant labor costs are typically the highest costs of owning a restaurant. Restaurateurs
commonly aim to keep labor costs between 20% and 30% of gross revenue. However, a full-
service, white-tablecloth restaurant will likely have a higher labor cost percentage than a casual
dining restaurant, since they employ more staff to provide a higher level of service.

So how do you control restaurant labor costs? Well, there’s no sure-fire, 100% correct way to
go about managing labor costs in a restaurant because every bar, restaurant, and coffee shop is
different, and that means that each unique place has a unique restaurant labor cost situation
that will need to be managed differently. You can start with keeping track of staffing via
your restaurant POS system, but after that point it’s all going to depend on the unique needs of
your restaurant. 

Dividing staff into groups shows you which positions cost the most. Assign front-of-house staff
such as servers, hosts, and bartenders to one group. Kitchen staff such as cooks and
dishwashers are another natural group, as are management staff. You can also divide your staff
by whether they’re paid by hourly wage or salary.

Once you have your staff all divvied up, you can compare what each team costs you and see if
you can tinker with the combination of staff you schedule during each shift to bring your
restaurant’s labor costs down. If bartenders are significantly more expensive than servers, try
replacing a bartender with two servers. If the job still gets done and the night goes off without a
hitch, you’ve found a way to reduce your labor costs already.

Labor cost is a financial term that's used interchangeably with "cost of labor" on financial
reports. This value is arrived at by calculating the cost of all employee pay and benefits. If
you're in human resources, finance, accounting professionals calculate to determine the direct
and indirect price that a company pays for labor. The direct cost of labor includes the cost of
wages and benefits for employees who are directly involved in producing the product or service
commodity. The indirect cost of labor refers to amounts paid for employees that support the
commodity but aren't directly involved in making it.

Direct labor cost example

Direct labor costs refer to costs that are derived directly from supply chain employees involved
in the production. This could be assemblers, manufacturers, heavy machinery users, fabricators,
craftsmen and artisans, delivery drivers and other logistical employees essential for getting
goods into consumer's hands.

One example of a direct labor cost is the hourly salary of a quality assurance inspector adjusted
to include healthcare benefits and short-term disability. Another example could be the annual
salary of a welder who works on the production line of a steel parts manufacturing company.
Yet another option for direct labor costs is the payment made to a logistics company
responsible for delivering goods across the country.

Indirect labor cost example

Indirect labor refers to any employee whose role is not essential to the direct production of a
product. These employees still play important roles like administration, supervisory roles and
finance but they aren't involved in the supply chain. An example of indirect labor costs is the
salaries of employees in the human resources department.

Another example of indirect labor costs would be the salary, benefits and bonuses of a chief
financial officer
Labor cost includes all labor-related categories:

 Employees’ wages and salaries

 Bonuses

 Payroll taxes

 Health care

 Vacation and sick days

 Overtime

Calculating your total labor costs, then, involves adding the total cost for each of the above
cost groups. For example:

 Salaries and wages: 130,000+

 Overtime: 25,000+

 Payroll: 20,000+

 Health care: 25,000+

 Vacation and sick days: 8,000+

 Bonuses: 10,000+

 Total labor cost = 218,000

Average Labor Costs by Restaurant Type

o Fast food restaurants: 25%.  “certain fast food restaurants can achieve labor costs as
low as 25 percent,” but that doesn’t mean that labor costs can’t (or shouldn’t) run
higher. If you think about it, it makes sense. Food moves faster, profit margins are
higher, and the labor is fairly unspecialized which means it costs less to deploy.
o Table service restaurants: 30%-40%. Where specific restaurants fall on this range
depends on “the menu and extensiveness of service,” Chron notes. “Food costs
(including beverages) for the restaurant industry run typically from the 28 percent to 35
percent range, depending upon the style of restaurant and the mix of sales.”
o Fine dining: Varies, but tends towards the higher end of the 30%-40% scale or
beyond. As Restaurant Business notes, “a fine dining restaurant with many components
on the plate and breads, pastries, pastas, and other products made in-house will have a
 much higher labor cost than a steakhouse selling high-end but relatively simple-to-
prepare food like steak, and baked potato.

How Is Labor Cost Calculated?

In order to calculate the labor cost of an employee per hour, you need to go through a simple
process of factoring in all expenses related to their employment. 

The simple labor cost per hour formula:

Labor cost per hour = (gross pay + all annual costs) / actual worked hours per year
Let’s break down each of these calculations into steps. 

We’ll use a hypothetical  employee, Maria, as an example. She is an hourly, non-exempt

employee, who works full-time in a company in California pizza with more than 26 employees.
She gets the minimum wage of 13. 

So, how do you calculate the labor cost for Maria? 

#1. Calculate the Gross Pay

The first thing you want figure out is the gross pay of an employee.  

Here is the formula:

Gross pay = gross hourly rate x number of hours worked for a pay period
In this case, let’s calculate Maria’s gross pay per year. The total hours that Maria is supposed to
work for the period of one year is:
Total number of hours per year = 40 hours per week x 52 weeks = 2080 hours
This means that her gross pay per year is: 
27,040 = 13 x 2080 hours

#2. Figure Out the Actual Worked Hours 

The total work hours per year are 2080 hours. However, every employee needs to take days
off. 

Let’s say that Maria did not work 12 days in that year. Here is how to calculate hours not
worked:
Hours not worked = 12 days x 8 hours = 96 hours
Then you can easily get the net hours worked:
Actual worked hours = total number of hours per year - hours not worked
This would mean, in this case:
1984 hours = 2080 hours - 96 hours
The actual hours that Maria has worked for a year are 1984 hours. 

#3. Determine All Annual Costs Per Employee

Next, you have to take into account all related expenses that you owe for Maria, such as taxes
and healthcare. They come on top of her gross pay. Only after you calculate them can you get
the actual labor cost per hour for a particular staff member, or the true cost per hour. 

Some typical labor costs besides the actual pay to the employee are:

Employee Benefits:

 Health insurance

 Additional insurance such as dental, life or disability

 Retirement plans

 Paid time off (sick and vacation days) 

 Meals at work

 Education and training 

Other Possible Expenses:

 Overtime pay

 Workers’ compensation insurance

 Work supplies

In Maria’s case, here is the breakdown of additional labor costs:

‍

 2,348.56 annual taxes

 3,120 health insurance

 1,200 benefits

 500 overtime 

 500 meals
Thus, the extra annual costs that you have to pay for having Maria in your team are 7,668.56.
Of course, this is just an example and these costs can vary greatly. 

#4. Calculate the Total Annual Payroll Cost

You are now ready to determine the actual annual payroll cost for Maria, or the total labor cost
for her. Here is how to do that:
Annual payroll cost = gross pay + other annual costs
In this example, the amount is:
34,708.56 = 27,040 + 7,668.56 {annual cost}
This is the total cost of Maria’s work for your business per year. 

#5. Calculate the Hourly Labor Cost

At last, you can figure out Maria’s cost of labor per hour. 

Her hourly labor rate (wage) is 13. However, you want to get the total cost per hour. Here is
how you can do that:
Hourly labor cost = annual payroll cost / actual hours worked
For Maria, our hourly labor cost calculator comes up with the following:
17.50 per hour = 34,708.56 / 1984 hours
Now you know the actual labor cost per hour for hiring Maria.

Determine Your Labor Cost Percentage

Knowing your labor cost expenses per employee is necessary for determining your labor cost
percentage, which shows you the relationship between your total revenue for a given period
and your labor costs during that time. 

The formula is:

Labor cost percentage = labor costs for all employees / total revenue 

Tips to Reduce Your Labor Costs 

Keeping your labor costs under control is a large part of the expense management for your
business. This does not mean reducing employee wages and cutting corners when it comes to
the extra labor costs. However, it does entail being observant and setting clear rules regarding
attendance, overtime and logging of worked hours.  

Get Time Tracking Right 

One of the most important tips for decreasing your labor expenses is to accurately track
employee hours. Mistakes in time tracking can have serious and costly consequences for your
business. 

Keep an Eye on Overtime Hours 

You cannot do much about reducing most of the additional labor costs, such as payroll taxes
and benefits. 

However, you have control over the scheduling of your team. This means you can regulate the
overtime hours that your employees are working. There are situations when you can’t avoid
overtime, of course, but try to keep it at a minimum if you want to reduce labor costs.