The Anatomy of Restaurant Expenses
Restaurant costs typically fall into four main categories, each requiring different management strategies. Controlling these expenses is what separates thriving establishments from struggling ones.
Prime Cost (food + beverage + labor) should typically represent 55-65% of total revenue in a healthy restaurant operation.
Cost Category Deep Dive
Food Cost Management
Key Control Points:
- Recipe standardization and portion control
- Inventory rotation (FIFO system)
- Weekly food cost calculations
- Supplier price comparisons
- Waste tracking and reduction
Red Flags: Food cost exceeding 35%, inconsistent portion sizes, high waste percentages
Beverage Cost Control
Key Control Points:
- Standardized pour sizes with measured tools
- Regular inventory audits (especially liquor)
- Bottle tracking for premium spirits
- Happy hour profitability analysis
- Theft prevention measures
Red Flags: Beverage cost exceeding 30%, inconsistent drink quality, missing inventory
Labor Cost Optimization
Key Control Points:
- Sales forecasting for scheduling
- Cross-training staff for flexibility
- Overtime monitoring and control
- Productivity benchmarks (covers/server)
- Turnover reduction strategies
Red Flags: Labor cost exceeding 35%, frequent overtime, low covers per labor hour
Other Operating Expenses
Key Categories:
- Rent/Lease: 5-10% of sales
- Utilities: 2-4% of sales
- Marketing: 3-5% of sales
- Repairs/Maintenance: 1-3% of sales
- Administrative: 1-2% of sales
Red Flags: Any category growing faster than revenue
Cost Control Strategies
Proactive approaches to manage each expense category:
Food Cost Strategies
- Menu Engineering: Highlight high-profit items and adjust portion sizes on low-margin dishes
- Seasonal Purchasing: Build menus around what’s in season and plentiful
- Waste Tracking: Implement a waste log to identify problem areas
- Inventory Management: Use the PAR (periodic automatic replacement) system
Beverage Cost Strategies
- Pour Control: Use measured pour spouts and jiggers
- Menu Design: Feature high-margin cocktails and wines
- Inventory Control: Conduct surprise liquor counts
- Supplier Negotiation: Leverage volume discounts
Labor Cost Strategies
- Scheduling Software: Match labor to forecasted demand
- Cross-Training: Develop flexible staff who can work multiple positions
- Performance Incentives: Reward productivity and upsell success
- Turnover Reduction: Invest in staff development and retention
Operating Cost Strategies
- Energy Efficiency: LED lighting, ENERGY STAR equipment
- Preventive Maintenance: Regular equipment servicing
- Vendor Audits: Review all recurring services annually
- Technology Adoption: POS systems that reduce administrative work
Remember: Cost control isn’t about cutting corners—it’s about eliminating waste and inefficiency while maintaining quality standards.
The Cost-Percentage Mindset
Successful restaurateurs think in percentages, not just absolute numbers:
Why Percentages Matter
- Allow comparison across different sales volumes
- Help identify trends over time
- Provide industry benchmarking capability
- Enable menu price adjustments based on cost changes
Key Percentage Formulas
- Food Cost %: (Cost of Food Sold / Food Revenue) × 100
- Beverage Cost %: (Cost of Beverage Sold / Beverage Revenue) × 100
- Labor Cost %: (Total Labor Cost / Total Revenue) × 100
- Prime Cost %: (Food Cost + Beverage Cost + Labor Cost) / Total Revenue × 100
Track these percentages weekly. A 1% reduction in food cost on £1M in annual sales equals £10,000 straight to your bottom line.