How a Restaurant Cost Breakdown Can Help Inform Prices and Protect Profitability

Running a successful food business is no easy feat, especially in today’s challenging economic landscape marked by inflation, labor shortages, and uncertainty. To ensure the sustainability and profitability of your restaurant, it’s crucial to conduct regular restaurant cost breakdowns. These breakdowns provide valuable insights that help you control expenses, optimize menu pricing, and ultimately boost profitability. In this comprehensive guide, we will explore what a restaurant cost breakdown entails, why it’s essential for your business, and how to conduct one effectively. We’ll also discuss the critical role of technology, such as Skipli, in automating and streamlining your cost management practices.

What is a Restaurant Cost Breakdown?

A restaurant cost breakdown involves the meticulous calculation and analysis of all expenses associated with operating a restaurant. These expenses encompass everything required to open, manage, grow, and optimize a food business. Typically, restaurant costs are categorized into fixed costs and variable costs.

Fixed Costs:

Fixed costs are expenses that remain constant and are not directly tied to sales. Examples include lease or mortgage payments, insurance premiums, property taxes, utility bills, technology fees, and depreciation of kitchen equipment. Operators often have limited control over fixed costs once they are established.

Variable Costs:

Variable costs are expenses that fluctuate with sales and are more controllable. These include the cost of ingredients (food costs, non-alcoholic beverages, paper goods), labor costs (salaried and hourly wages, payroll taxes, benefits), and other costs directly linked to daily operations.

Why Ongoing Restaurant Cost Breakdowns Matter:

Continuous cost breakdowns are essential for maintaining a healthy financial and operational foundation for your restaurant. Profits, the lifeblood of your business, depend on managing costs effectively. The formula for profit is simple: Revenue – Costs = Profits. To increase profits, you can either raise prices or generate more sales while simultaneously optimizing your costs.

However, it’s not as straightforward as just raising prices. Your menu pricing strategy must align with ongoing cost analysis to ensure consistent profitability, especially in times of inflation. Detailed restaurant cost breakdowns allow you to identify areas where ingredient price fluctuations and labor cost spikes are impacting profit margins. This insight empowers you to make informed decisions such as adjusting prices, changing menu items, or optimizing staff schedules.

In today’s volatile economic climate, where factors like labor shortages and ingredient price volatility persist, focusing on individual ingredient costs, negotiating with suppliers, and implementing efficient systems becomes paramount.

How to Conduct a Restaurant Cost Breakdown:

The two primary components of restaurant variable costs are the Cost of Goods Sold (COGS) and labor costs, collectively known as prime costs. Prime costs typically make up 60 to 70 percent of total restaurant sales costs, with an even split between COGS and labor.

Calculating Restaurant COGS:

Total COGS refers to the cumulative cost of all ingredients and products used in your restaurant over a specific time period. To calculate COGS accurately, you need detailed supplier invoices, which are the definitive source for actual inventory costs. Automation tools like Skipli can simplify this process by processing invoices efficiently.

Calculating Restaurant Labor Costs:

Total labor costs encompass annual salaries, hourly wages, payroll taxes, employee insurance, benefits, and bonuses. Calculating labor costs isn’t as straightforward as multiplying hours worked by wages; it requires factoring in additional expenses. Integrated payroll software can help streamline this calculation.

Combining COGS and Labor Costs:

The restaurant prime cost formula is simple: Total COGS + Total Labor = Prime Cost. Expressing prime cost as a percentage of total sales allows for benchmarking and performance evaluation: Prime Cost / Total Sales = Prime Cost as a Percentage of Sales.

Drilling Deeper into Cost Breakdowns:

To gain granular insights, you must delve deeper into COGS and labor cost contributors. This involves examining changes in ingredient costs, ingredient usage, labor hours, and sales amounts. Detailed, easily accessible datasets are critical for this level of analysis.

Leveraging Technology for Effective Cost Management:

Efficient restaurant cost breakdowns necessitate the right technology. Just as radar guides ships and airplanes safely, technology can help you make informed decisions based on cost data. Automation tools can provide real-time ingredient pricing data, simplify COGS calculations, and enable you to respond promptly to cost fluctuations. Similarly, scheduling and payroll software can help optimize labor costs and enhance operational efficiency.

Where to Go from Here:

The key takeaway from this guide is the significance of ongoing and consistent restaurant cost breakdowns. Your profitability hinges on your ability to manage costs effectively, and this requires actionable, precise cost analysis. Assess your current cost management processes and consider integrating technology solutions like Skipli to simplify and streamline your cost management efforts. By focusing on profitability and continuously refining your cost management strategies, you can ensure the long-term success of your restaurant.

Disclaimer: This information is provided for general informational purposes only, and publication does not constitute an endorsement. It is advisable to consult with a professional such as a lawyer, accountant, or business advisor for advice specific to your situation.