April 23, 2020

Accurately calculating your overhead costs is a key component to running a restaurant. Doing so will give you a better idea of how to budget and identify savings opportunities. In light of recent events, this is especially important as many restaurants struggle to keep their doors open.   

Thankfully, there are several ways that you can reduce overhead expenses. By monitoring cost-saving opportunities in your rent, utilities, and salaries, you can increase your restaurant’s profit margin without sacrificing operational efficiency.

What are Overhead Costs

Overhead costs are ongoing expenses required to run a restaurant. Overhead does not include any costs related to the production of goods, meaning the cost of ingredients and other materials, such as napkins.

How to Calculate Overhead Costs

We recommend that you calculate overhead on a monthly basis in order to maximize cost-saving insights. First, you need to make a list of all of your expenses. Some common restaurant expenses include:

  • Rent and security and security deposit
  • Taxes
  • Marketing
  • Point-of-Sale (POS) machines and subscriptions 
  • Equipment
  • Repairs and maintenance 
  • Sanitation 
  • Insurance 
  • Salaries

Once you have created your list, you can total each expense to find your restaurant’s overhead cost. From here, you can use this number to help with budgeting. One way to do so is by calculating your overhead as a percentage of your total sales using the following formula:

  • Overhead / Total Monthly Sales x 100 =

This will tell you how much of your revenue goes towards overhead costs. A percentage below 35% is ideal as it means your restaurant operation is sustainable. If the percentage is above 35% you may want to look into ways to cut costs. 

How to Lower Overhead Costs

Since restaurants generally run on the low margins, it is best to try to save money wherever you can. While some overhead costs are not controllable, there are ways to rework your operation in order to cut costs. Here are six ways you can lower your overhead expenses:

1. Check Your Electricity Consumption

If you have not already, make sure that your lights and appliances are on an automatic timer. This will help to lower energy consumption and save money. You should also work with employees to ensure they know when applications must be turned on and off. For example, if your bar stays open until 1am but you stop serving food at 11pm, your employees should know which equipment needs to turn off. Additionally, make sure you turn off machines when they are idle. Even though they are not in use, they still use electricity. This is especially true for dishwashers, as many models have built-in water heaters that use a lot of electricity. Running one load at the end of the day as opposed to several loads throughout the day can help you save on electric costs as well.

Given the current landscape of the food service industry, it is important to adjust your energy consumption to account for the needs of your takeout operation. In a recent conversation with FSX, Howard Katz, Executive Partner at Lettuce Entertain You, recommended that restaurants “be mindful of utilities and reduce hours of operation because carry out and delivery are different than dining in.” Generally, takeout menus only include a portion of a restaurant’s total meal options which presents an opportunity to save on utilities. When creating these menus, include meals that only require certain kitchen equipment to be made. That way, you can save on electricity as you will not need to use your full kitchen to prepare meals.

You can also contact your electric company and ask how to better manage your electricity usage. Some companies will send a representative to your site to analyze your consumption and give you tips for improvement. While this may not be an option right now, there are several guides online that you can utilize to help you lower your consumption as well.

 2. Work With Employees

Due to the scope of a restaurant owner’s responsibilities, it can be difficult to identify every opportunity for overhead improvement. This is why you should be speaking with your employees to see they have any insights into where overhead expenses can be cut. Offering rewards to employees who uncover excess overhead is a great way to incentivize engagement.   

3. Leverage Point of Sale Systems

Efficient POS systems can help reduce oversights in labor costs. Many POS systems are integrated with employee scheduling software which makes it easy to identify discrepancies in labor hours.

For example, you can determine nights you have too many servers scheduled. Comparing labor data to forecasted sales allows you to create schedules that optimize coverage while adhering to your labor targets.

4. Renegotiate Your Lease 

Working with your landlord to renegotiate your lease is a great way to lower your overhead costs. Your landlord’s revenue stream is contingent on you renting their space, so they may be willing to renegotiate if you sign a long-term lease. Of course, you should only do this if you like the space you are in and believe that your restaurant will remain profitable in the future.

5. Purchase Overstock and Scratch and Dent Equipment

By purchasing overstock or scratch & dent equipment, you can save a substantial amount of money when outfitting your restaurant. Many times, the equipment is brand new with only a few small imperfections that do not affect functionality.

Final Thoughts

With the current pandemic forcing restaurants around the country to shift their business models, implementing cost-saving practices is crucial. While this is a challenging time, accurate overhead calculations can help reduce expenses and increase the efficiency of your operation.