Have you ever wondered why some restaurants look packed every day but in fact make meagre profits? Their revenue may be high but the costs incurred are high as well. On the other hand, some ordinary-looking businesses are able to make better profits and outlast their more popular competitors. The key is understanding what makes up your restaurant’s operation costs and how to balance them so that a minimum profit is guaranteed.
Break even cost
An essential number in restaurant management is your break even cost: how much it takes for your business to start making a profit. While profiting is good for staying in business, breaking even is necessary for staying in business. Without knowing that magic number, how would you know how much profit your eatery is truly making?
Here’s how you calculate it.
First you need to know your restaurant’s fixed costs and variable costs. Fixed costs are costs that do not change significantly when the revenue changes, e.g. rental, labour*, utilities, accounting and professional fees. Variable costs are food and beverages, consumables like paper products and gloves, credit card charges, etc. They tend to increase with your outlet's revenue. For new F&B outlets, you will need to estimate the costs incurred in order to have an indication of how much your break even cost should be.
Your break even cost = fixed costs divided by 1 - variable costs.
Example:
Fixed costs: $50,000
Variable costs total: 36% (food 34%, credit card charges 2%)
Breakeven sales = fixed cost / (1- variable cost)
= $50/ 1- 0.36
= $78,125
*Labor and personnel expenses are considered variable costs, although the overall personnel costs can be controlled by managing the number of shifts assigned and how much overtime is approved. Small restaurants with a relatively static customer base may see very little variation in the month-to-month costs of staff, but staffing expenses at larger restaurants may vary more. Key personnel expenses – e.g. the manager's and head chef's salary – fall under the fixed costs category.
General restaurant operating cost structure
An example of a restaurant's operational cost breakdown.
How much profit your food business stands to make depends on how the operating costs are managed. Ideally, the costs can generally be split into:
Food Cost (or *cost of goods sold): 20 - 35%
Manpower: 25 - 30%
Rent: < 20%
Profit: ≥ 15%
Other expenses (such as utilities, taxes, equipment maintenance): < 20%
*Cost of goods sold (COGS) = Beginning inventory + Purchased inventory - Final inventory
The percentages stated are a guideline and may vary from business to business. They have been tailored to suit Singapore’s F&B business climate and recommended by Singaporean restaurant owners.
5 Important Principles for Operating Costs
To ensure your restaurant is profitable and sustainable, keep these adhere to these principles.
1. Proportion rather than absolute numbers
Seeing your costs go up is a scary thing, but this is not necessarily bad. For instance, you might see your manpower costs increase by $1000 in a month because more staff worked longer hours and feel the need to cut down on the number of staff hours. However if your overall revenue that month actually increased because of the longer operating hours, then it no longer is a problem because you can afford it and the manpower costs stay within the safe zone of 25-30%.
2. The 3 major costs should not exceed 70% of overall revenue
They are manpower, rent, and cost of goods – this ensures that you can make a decent profit if other costs are reasonable.
3. The rent must be less than 20%
Having rental that is too high compromises your food cost and manpower, and you would have to drive those costs down in order to make a profit. This will in turn affect the quality of your food and subsequently, the pricing of your menu items.
4. COGS + manpower (prime costs) must be kept below 60%
The most important costs you can control are your cost of goods sold (COGS) and manpower. Together, they are also known as your restaurant’s prime costs. How they can be kept in check depends on F&B format and management’s creativity.
5. Total cost must add up to less than 85%
You should aim to keep the percentages as low as possible so that you make a minimum of 15% profit.
Staff and Food costs in High end restaurants vs fast casual
A general rule of thumb is that:
the higher the prices of restaurants, the more customers expect out of atmosphere and service; so the manpower cost will be relatively higher than that of more casual eateries.
At lower priced restaurants, the customers expect more value for money and less in terms of service, so your food cost will likely be higher in proportion to your manpower cost. To reduce labour costs, you may need to hire part-time staff or have ways for customers to serve themselves.
Fast-food restaurants or takeaway kiosks also often rely on convenience foods that are more expensive than raw ingredients, leading to higher food costs. The profit is derived by having a high turnover and keeping labour costs low.
Fine-dining, high-margin restaurants tend to rely less on convenience foods and more on quality ingredients and a high level of service. Although food costs in dollars are high for such restaurants, the food cost percentage may be lower than in casual eateries because menu prices are much higher. Labour cost percentages also tend to be higher because higher trained personnel is needed.
According to the Singapore Productivity Centre’s Productivity Benchmarking Report in 2014, labour costs on average in a full service restaurant were about 30%.
The profit in full-service to high-end restaurants often often comes from serving fewer customers but having higher average guest checks rather than relying on high volume or turnover.
How different kinds of F&B can achieve more profitability
Changes in the cost of doing business are inevitable...
... Whether it’s due to consumer demand, crop yields, or government mandates (e.g. stringent foreign worker quotas or changes in minimum wage). Most predictably, there will be fluctuations in the cost of raw materials depending on the supply, so there should be a buffer in place for food cost in your calculations (this should also take into account wastage, theft, and employee meals) . Some restaurateurs manage this by using seasonal pricing or using fresh produce that is in season. The key is to be flexible in your mentality and approach to budgeting.
Cheryl Tay is the editor and marketer at iCHEF Singapore. She also manages iCHEF Club, a growing community of F&B owners in Singapore – organising events, an online newsletter and the F&B Entrepreneur Bootcamp, the only regular workshop on opening a new restaurant in the country. In her spare time, she attempts to read every book that’s ever won a literary prize and watches cat videos. Like any proper Singaporean, her love for food runs deep – especially spicy food. Chili is life.
