One of the primary reasons why the restaurants in Dubai fail in their initial years is due to undercapitalization or lack of working capital. There is a severe need to balance your restaurant operating cost for prolonged success.
Launching your restaurant is not enough, you need to keep a regular check on the profit you are making for every penny that you are spending on your business.
There could be a restaurant with great footfall but is unable to make significant profits; this could be due to poor management of restaurant operating cost; therefore you need to understand what makes up your restaurant’s operating cost and how you can balance it.
We have prepared a list of several restaurant costs that add up to your operating cost.
Calculating And Controlling Your Restaurant Operating Cost
Managing your restaurant’s operating cost is not a child’s play. There are several aspects to it and includes various expenditures like the food cost, cost of goods sold, etc. The restaurant owners need to calculate the expenses with the utmost attention to make sure there’s no room for errors that can result in losses. To calculate the values accurately, we need to first understand what restaurant operating cost is.
How To Calculate Your Restaurant Operating Cost
This is the cost associated with the maintenance and operations of a restaurant on a day-to-day basis. It tells you how much your restaurant spends to produce services for your customers.
There are two components to it, fixed cost and variable cost.
- Fixed cost: This is the cost that does not increase or decrease with regards to the sales of the restaurant and has to be paid regardless of the restaurants’ performance, for example, the rent of the restaurant. These kinds of costs cannot be eliminated; hence are known as fixed costs.
- Variable cost: These costs, as the name applies varies with the value of the production. These costs can increase or decrease with time depending on the sales of the restaurant, for example, cost of the raw material, the market prices of the raw materials keep fluctuating depending on the crop production. It can sometimes be difficult for the restaurant owners to calculate the variable cost as they keep changing.
There are also several other costs that collectively make up the restaurant operating cost like:
- Cost of Goods Sold( CoGS): It is the cost required to make each item on your restaurant’s menu. It also represents the total amount you need to spend on the inventory to acquire the necessary raw material for cooking over a period. It helps you determine if the menu items are priced correctly or if the food cost is high.
CoGS = (Beginning inventory of F&B) + (Purchases) – (Ending inventory)
- Prime Cost: It is the total sum of your labor costs and the cost of goods sold(CoGS), including the food and liquor cost. It represents the restaurant’s largest expenses, it affects your entire operations including how you price the menu, create your budget and set the goals for your restaurant.
Calculating Prime Cost:
Prime Cost = CoGS + Total labor cost
- Break-even point: This is one of the most essential restaurant metrics to calculate. It helps you determine how your sales should be performing to earn back what you have invested. You can use this number to forecast how long will it take for you to earn back what you have invested in your restaurant business. It is also a crucial number if you are looking for investors.
Calculating Break-even Point:
Break-even Point = Total fixed cost / [(Total Cost – Total Variable Cost) / Total Sales]
- Customer Acquisition cost: It is a marketing metric that shows how much it costs to get a new customer to your restaurant. It is helpful as it helps you determine if your marketing strategies are effective or not. By comparing different customer acquisition costs you can prioritize the marketing strategy that gives you the maximum return on investment.
Calculating Customer Acquisition Cost:
Customer Acquisition Cost = Marketing Expenses / Total New Customers Acquired
Tricks To Keeping Your Restaurant Operating Cost Under Control
Keeping the restaurant operation cost under control is not only the owner’s responsibility, but the staff members play an equally important role. By closely monitoring and evaluating your operational costs you an ensure profitably without sacrificing the quality.
The below-mentioned tricks will help you manage your restaurant operation cost-effectively.
1. Managing The Stock And Inventory
For any restaurant business, a poorly managed inventory can add up to the operating cost, you need to keep a regular check on the stock available, which includes keeping track of the daily consumption of the raw material. Inventory control is essential as it directly impacts a restaurant’s food costs and the overall profit.
To closely monitor the inventory, you can install a stock and inventory management system that would give you real-time reports.
Installing a system will prevent you from running out of raw material also, it will help avoid any internal theft or pilferages, as it keeps an account of all the raw materials purchased or used.
2. Controlling Employee Turnover
The labor costs in the UAE is pretty high due to a lack of skilled labor. For any restaurant, it costs more to hire someone new rather than retaining an old employee; therefore invest time and effort in keeping your employees happy.
The hiring process would require you to invest a lot of time and resources which is not a smart choice if you are planning to save.
To retain the current staff, provide them with proper training, this would make your employees feel valued. You can ask the experienced staff to train and supervise new employees. This would eliminate the need to hire an outsider and pay him/her for their services.
Hire the right people even if it means hiring less permanent employees. Wrong candidates won’t stay for long, forcing you to hire someone new.
Invest time and give feedback to your employees, they will appreciate the feedback as this would make them feel significant and help them polish their skills.
3. Accurately Pricing The Menu
An accurately priced menu fuels the restaurant’s success and keeps its doors open. According to a report by the Gulf News, over the last three months, the prices of fresh vegetables have gone up by two to three dirhams per kilo this makes it very vital for the restaurant owners to price their menu the right way because this would help you in keeping the restaurant operating charges under control. The very first step of pricing the menu correctly is identifying the ingredients you wish to use; this would help give you a rough idea of the expenses. For example, exotic fruits and vegetables would cost you more as compared to native fruits and vegetables. Also, keep into account the variables charges that can arise due to fluctuations in the market price of the raw materials as this decides if that dish would earn you profit or not.
4. Checking Through Daily Reports
Every restaurant owner should make it a habit to check through the reports on a daily basis. Installing a POS system that gives you live reports on your mobile phone itself is a smart way of keeping a check on your restaurant operating cost.
Even if you have a manager taking care of all the operations, you should be aware of what is happening at your restaurant, and checking through the daily reports is an excellent way of doing so.
Checking through your monthly-sales report will give you a clear idea of how your restaurant is performing and whether or not you are making profits.
5. Proper Vendor Management
Considering more than one vendor is an excellent way of keeping the restaurant operating cost under check. Consider comparing the prices that different vendors have to offer for the same raw materials; this would also help you in negotiating and procuring the best deal.
Although it is usually advised to get all the raw materials from one vendor itself since they might give you a discount based on the bulk orders you make or the trust you have built over years of professional relationships but, what if on a given month the vendor decides to increase the cost due to a poor crop production? The extra cost would be passed to you. Therefore, it is essential to buy raw materials from different vendors or have other vendors at your disposal if one of them decides to hike up their prices.
Managing your restaurant’s operating cost will help you in keeping your doors open. With the expansion in the food and beverage industry in the UAE, it becomes imperative for the restaurant owners to manage the operating cost to compete with other restaurants.
You might have a lot of customers at your door, but it won’t be of any use if you are not able to manage your restaurant operating cost-efficiently.