How to Calculate and Reduce Overhead Costs in Your Restaurant?

The restaurant industry is pretty exciting and carries a lot of prestige and fulfillment for those who succeed.

However, it’s also very unforgiving, especially in the kind of economy we have right now. To stay afloat, you need to keep track of a million different things at once – and overhead costs are some of the most critical things to watch out for.

The very core of any restaurant establishment is to try and minimize costs and maximize gain.

So if you want to be a savvy restaurateur, you’ll need to find ways to reduce your overhead costs. That, and more, will be our topic for this article.

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What are Overhead Costs?

In general, you need to take care of three main types of costs when running a restaurant: startup costs, food costs, and overhead costs.

As you might have guessed, startup costs are the expenses associated with starting your restaurant. These include necessary equipment, downpayment for your establishment, permits and legal documents, and more.

Your food costs are the expenses you will have to pay for any part of producing food for your restaurant. Buying ingredients, beverages, spices, and other components to create your menu.

Meanwhile, overhead costs are the expenses you need to keep up with in running your restaurant. These are expenses such as utility bills, utilities, salaries, rent, and more.

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Why are overhead costs important?

Restaurant owners need to keep track of their overheads because it’s a big expense. Although rent and other utilities aren’t as hefty as startup costs, it’s consistent – and the monthly money you shell out adds up to consume a big chunk of your annual gross profit.

After calculating and determining your restaurant overhead rate, you can then begin to plan out ways that you can reduce it without compromising the experience quality in your restaurant.

Many restaurateurs think that overhead costs remain fixed the entire time they’re running their establishment. While this is generally true, there are still several things that you can do to save more money.

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How To Calculate Overhead Costs?

Overhead costs are recurring expenses, so you can decide whether to calculate them on a monthly or any other arbitrary basis. Most managers decide to calculate monthly expenses since the patterns are already laid out and thus won’t take as much time.

Whatever period you choose for your calculations, it doesn’t change the first step of your calculations, which is to make a list of all your expenses.

Some of the most common expenses managers include in their overhead calculations are as follows:

• Building rent
• Salaries
• Subscriptions
• Taxes
• Utility bills

Ensure that all of these bills have the same monthly period of payment. For example, if you only pay your taxes every quarter, divide your total tax cost to accommodate how much you’ll have to save each month.

Once you’ve listed everything in the right payment periods, just add everything up. This will give you your monthly overhead.

Next, gather your total monthly sales from POS data.

With both these figures, you can then calculate the overall efficiency of your establishment with this formula.

Overhead as a percentage of sales = Overhead / Total Monthly Sales x 100

The entire process can be summed up as follows:

1. List down all your monthly expenses.
2. Add up all your monthly expenses to find overhead costs.
3. Get monthly total sales from your POS.
4. Calculate for restaurant efficiency (overhead as a percentage of sales).

How to Lower Overhead Costs?

So you know how to calculate your overhead costs – great! But that information isn’t actionable if you don’t know what to do next.

Your overhead costs merely serve as a metric for the things that you’re doing right. If you know what to do next, you will see this number lessen significantly over the next couple of payment periods.

How you can do that is what we’ll discuss in this section. We’ll split it into several parts after the most major cost drivers of your overhead: rent, utilities, labor, and waste.

Rent Expenses

It’s highly unlikely that you own the building that your establishment is in, so rent remains to be one of the biggest cost drivers in any restaurant. Thus, it makes sense that managers should focus on this significant red mark to reduce their total overhead.

There are a couple of ways that you can go about trying to minimize your rental expenses, such as the following.

Re-Evaluating Your Lease

Now, it’s safe to assume that you’ve done your research when choosing that precise location for your restaurant. It might be the ideal place back when you started – but does it remain that way until now?

The landscape has changed since the pandemic, with new restaurant trends emerging as we speak. One of the most significant ones is the reduction in foot traffic.

Now that online ordering is fast growing to be a major norm, you need to reevaluate the value of your physical location. Is it still worth paying for that big floor space when a growing part of most restaurants’ total sales is now made through online orders?

Go through the numbers and consider moving to another location, somewhere that will perhaps be cheaper for your establishment in the long run.

Renegotiate With Your Landlord

Granted, moving your entire establishment is a tall order, even at the best of times. For many of us, the added money, time, and effort drain aren’t worth saving a few hundred bucks every month – if even that.

Thankfully, there are other less invasive choices. Renegotiating your lease is one of the first things that come to mind.

It might surprise you how many landlords are open to renegotiating their contracts, especially if it will assure a longer stay. This is because of two things: industry instability and a shift in consumer attitudes.

Various reports have revealed that tens of thousands of restaurants have closed down due to the pandemic, and it’s safe to say that not many businesses are replacing them. Commercial space owners prefer lowering rent to not having any renters.

Another factor that might make it more palatable for your landlord to renegotiate rent expenses is the fact that many restaurants are downsizing because of altered customer attitudes. Post pandemic, fewer people are dining out, and more people are looking for outdoor spaces with lots of ventilation and protection.

These major factors all point to the loss of business for commercial space owners, who would likely be more open to granting you a few privileges in exchange for continued business.

Subleasing Your Space

Another potential solution to your rental woes is subleasing. Renting out the space you’re renting out might turn out to be the ideal arrangement for you to offset your rental payment, especially because of the previously-mentioned change in customer choices.

You may not be using as much of your floor space, which you can then lease to other vendors or businesses that can use the space during waning business hours.

Alternatively, you could also sublease your kitchen part-time. Many pop-up restaurants and food trucks are looking for places to prep their food, and you can rent out your kitchen before opening hours and after closing hours to them.

Leveraging Ghost Kitchens

Ghost kitchens are restaurant kitchens that don’t have floor space for on-site dining. The food they create is carried by third-party food delivery services that are now dominating the market and into the waiting hands of customers who want to eat restaurant food from the comfort and safety of their homes.

You can turn a part of your open floor into a ghost kitchen or use an extra part of your storage or kitchen to cater to these demands. This can help you offset the cost of rent by using the same space to generate multiple streams of income.

Utility Expenses

The next significant part of your overhead costs will most likely be your utilities. This includes bills for electricity, water, internet, and everything else necessary for your restaurant to be operational every day.

Like rent costs, there’s often little wiggle room when it comes to utility expenses – but since you need to pay these regularly, they can easily add up to a significant amount. Any small thing you implement can save you thousands in the long run.

Replace Old Equipment

If you have decades-old electric equipment sitting in your kitchen that you’ve been putting off replacing, this is your sign to upgrade.

Old electronics are notorious for being energy guzzlers. Modern versions are now optimized to give the best performance at a fraction of the energy costs those old ones would have taken.

Heavy equipment in the kitchen is usually the main culprit. Kitchen appliances such as ovens, grinders, mixers, etc., can consume a lot of electricity – especially if they are old.

Switch to Green Appliances

While modern appliances consume less electricity than their older counterparts, green appliances consume far less still.

This is because green appliances are optimized to be healthier for the environment and therefore are made to consume less and last longer. Better yet, smart appliances often feature timers and motion detectors that will further streamline how much resources your establishment consumes every month.

You can see why getting these would be a no-brainer. With green appliances, you cut a little off your electricity bill every month, whether that’s through green LED lamps, air conditioners, or other things.

Implement No-Waste Policies

It’s easy to think about green appliances and smart switches for LED lights, but there’s a far more significant way to lessen your utilities – although it’s not the most convenient to implement.

No-waste policies might potentially add to your staff’s already stressful workload, but they’re necessary if you want to save.

Policies such as using gray water to mop your floors or clean comfort rooms help you save water in the long run. Similarly, unplugging equipment and appliances when not in use can not only lessen bills but also prevent safety hazards.

Most restaurants already have these policies in their employee handbooks, but successful restaurant operators know that the real battle is in the implementation. Make sure that your manager carries out your policies to the letter so that they can supervise your employees to do the same.

Similarly, implementing incentives for following no-waste policies to motivate your employees is also a great idea.

Labor Costs

Another possible area you can save up on is your labor costs – which can be pretty significant depending on your scope of operations.

Today’s job market is extremely job-seeking oriented. Because of a mix of pandemic-fueled issues, government intervention, and industry faults, many restaurant workers are quitting and not looking back.

Operational restaurants are fighting an uphill battle in retaining workers who could quit and do just fine versus the instability and steep material prices today.

Make sure you streamline your labor costs as much as possible. Luckily, this is possible through automation. Employee management and inventory software make it possible for you to avoid overscheduling, spot trends, discrepancies, and more, without doing anything extra.

Find an easily-implementable software solution for your restaurant according to your specific needs, and use that to ensure that your labor costs are sufficiently balanced.

Wastage

The last thing you’d want to do if you want to minimize your overhead cost is to reduce all-around wastage. Simply implementing a few steps can a significant chunk of resources that would otherwise have gone to the bin.

Here are some tips to consider.

• Invest in a good inventory system. Inventory is critical to your restaurant’s operation, and a good system will ensure that you’re not over or under-ordering anything.
• Shorten your menu. Shorter menus are more suitable for the industry’s current conditions. As long as you know proper menu engineering, shorter menus are actually more straightforward, resourceful, and easier to produce.
• Train your staff. Make sure to implement waste avoidance in both your front and back-of-house staff training, such as training line chefs to use every inch of a whole chicken or serving smaller portions to avoid extras.
• Invest in security. Both employee and petty theft are very common in restaurants, and security solutions such as cameras and surveillance systems can boost your security capabilities to help you avoid them.

Reducing Overhead Costs This 2022

It’s undeniable that the restaurant industry looks very different now than it did just a few years before, and it’s primarily because of forces beyond our control. However, we’re not completely hopeless.

Minimizing your overhead costs through the various methods we’ve put in this article will not be an easy thing to do – but it’s a surefire way of improving your margins even during these lean times.

One of the most quick to implement things on the list is enhancing your security to avoid theft, which is very common in restaurants and bars.

Glimpse is the best software to handle these situations; an AI-powered video auditing software that identifies and verifies all drinks served in your bar so that you can recognize and prevent wastage and theft as it happens.

If you want to learn more, read our other articles! For more information, get in touch with Glimpse today.