Restaurant Budgeting: How to Create A Restaurant Budget

Managing a restaurant is not for the faint-hearted. The restaurant business is one of the most competitive industries, and this shows in the fact that only 20% of restaurants succeed in the market. 

Your stiff competition requires innovative thinking and aggressive growth strategies to stay on top. In this industry, one of the worst-case scenarios is running out of money. 

To help you survive and thrive, we've created a step-by-step and easy-to-follow restaurant budgeting guide. 

What is included in a restaurant budget?

Before learning how to budget, you must first know the 4 biggest figures you need to keep an eye on. This includes:

• Net Sales: The total revenue derived from your sale of food and beverages.

• Prime Cost: This represents your restaurant's largest expenses

• Controllable Income: Measures how much profit you have left over after deducting controllable expenses like COGS, labor, and direct operating expenses from your sales

• Operating Expenses: Costs incurred in the daily operations of your restaurant

What are the top 3 expenses of restaurants? 

Your restaurant expenses may vary depending on various factors, such as the equipment you use, your business location, the size of your operation, and whether you own or rent your commercial space.

However, as a rule, the primary costs you can expect in running your restaurant are usually related to food, labor, and rent.

Restaurant expense #1: food cost

Your restaurant's food cost comprises 3 elements: the food cost percentage, the cost of ingredients, and the sales or revenue from selling your dishes.

Food cost percentage

When deciding how much to price your menu items, TouchBistro advises keeping the food cost percentage anywhere between 20% and 40%. Most restaurants try to keep it at around 30% to be safe.

By doing so, you can account for the cost of your ingredients while leaving an acceptable margin for your overhead costs and profit. 

To compute your food cost percentage, use the formula: Food Cost Percentage = Item Cost/Selling Price

Cost of ingredients

Knowing the cost of ingredients for every recipe on your menu is essential, especially when you need to reduce a recipe's selling price.

To calculate a recipe's ingredients cost, use the formula: Cost of Ingredients = [Cost of Ingredient Purchased/Quantity of Ingredient purchased] x Quantity Needed In Recipe

Food Sales

Your food sales allow you to gain insight into which dishes bring in the profits and determine which items on your menu aren't as profitable. You can easily retrieve this data from your POS system.

Restaurant expense #2: labor cost

Labor costs are one of your restaurant's biggest expenses. They also make up a significant part of your prime costs, which is the metric restaurant owners use to analyze the efficiency of their operations.

For easier and more accurate computation, make sure your labor costs include:

• Benefits

• Salaries

• Payroll taxes

• Overtime

• Bonuses

• Paid time off (sick leaves and vacation days)

• Employee meals

• Training and development programs

• Uniform allowance (if provided)

Calculating your labor expenses can help you determine your labor cost percentage or the ratio between your total revenue and labor costs. 

To calculate the labor cost percentage, use the formula: Labor Cost Percentage = [Labor Costs/Gross Sales] x 100

Restaurant expense #3: Rent expenses

Rent is one of the fixed expenses that could vary depending on several factors:

• The condition of your space

• Your location (it may be more expensive if you're in the city and renting a commercial space along the road)

• The square footage you're leasing

However, your total occupancy costs are not limited to the cost of your rent alone but also include expenses like:

• Real estate taxes

• Building insurance

• Common Area Maintenance (CAM) fees

• Depreciation

• Amortization

Generally, your restaurant's total occupancy costs should be between 6% and 10% of the gross sales, but this number could vary depending on your location and business situation.

Why should you create a restaurant budget?

Your restaurant budget serves as the roadmap that will guide you in spending your business' money wisely, give you insight into how your restaurant is faring, and ensure that you are making profits and meeting your financial goals.

After all, inaccurate numbers can, at best, point you in the wrong direction and, at worst, lead to bad financial decisions.

To help you understand the importance of budgeting in restaurants, here are some of the benefits you can expect from doing it:

Closely monitor income and expenses 

Monitoring your income and expenses will help you make informed financial decisions and properly allocate your resources.

A restaurant budget allows restaurant owners and managers to see directly if they are meeting their income and expense benchmarks.

This can help you make proactive changes to ensure your business stays afloat in the long run. A clearly defined restaurant budget can also help you pinpoint which aspects of your operations you can cut back on to maximize your earnings.

For example, if you notice that some of your customers don't eat the vegetables you serve as a "side dish" for your meals, you can make it optional or an add-on. This can reduce your budget for ingredients and, at the same time, minimize food waste.

Promotes proactive decision-making

Restaurant owners and managers must adapt quickly to be successful and retain their competitive advantage.

The CEO of Restaurant Systems Pro, Fred Langley, highlighted the importance of proactive planning and stated that a restaurant budget is your success plan.

This means not being satisfied by simply reacting to the situation but being proactive and making the necessary changes to ensure your food and labor costs stay on track.

By budgeting your restaurant's resources, you can proactively anticipate the obstacles, hurdles, and challenges your business might face and take the steps needed to prevent them from taking place. 

If prevention is not an option, preparing a plan in case the unexpected happens is better than simply responding to the situation. Solutions can include preparing for possible changes in pricing, staffing, customer trends, and new technology. 

For example, to counter rising ingredient costs, you can proactively plan and look for alternate vendors and suppliers that can provide the same quality but at a much more affordable price.

Prevent overspending

Lastly, restaurant budgeting gives managers a clear picture of the costs and expenses they incur in their business operations. 

Proper restaurant budget planning can help eliminate overspending on expenses like ineffective marketing campaigns or expensive supplies like food packaging and tissue paper. 

While it might seem tempting to overspend on your marketing and advertising efforts, the cash you'd use to pay to run your ads could only lead to waste, especially if you don't know much about running an ad campaign effectively. 

For instance, you might be running your ads on Facebook incorrectly by targeting the wrong audience. If you’re a restaurant business in Toronto, don’t target Canada as a whole.

While a couple of people living far away might be interested in visiting your restaurant, it is better to target those who are already within your business’ vicinity.

You also have to study the conversions your ads are making. If you spend $500 on your ad, how much business would that bring you? How many people have visited your restaurant in the past weeks because of an ad they saw on Facebook?

If creating and running advertisements is not your forte, you can always outsource this service to freelancers specializing in digital marketing. 

8 ways to create a realistic restaurant budget

With 17% of restaurant owners shutting their business down in the first year of operations, you must make the necessary effort to help your business stay afloat during challenging times.

One key to ensuring your restaurant thrives is knowing how to budget properly.

This will help you manage rising business costs and be mindful of your expenses, especially unnecessary costs like expensive menus, ineffective marketing campaigns, and spending most of your money on furniture and decorations.

To help you understand better how to create a realistic restaurant budget, you should know how to:

• Track your restaurant's financial data

• Use a restaurant budgeting template

• Track your money closely using a restaurant budgeting software

• Calculate your restaurant's costs

• Track your restaurant's sales

• Compare your restaurant sales vs costs

• Make the necessary budget changes

• Develop a strategy to increase restaurant profits

Let's take a closer look at each step.

Track your restaurant's financial data

Having access to your restaurant budget is not enough—you have to know what to do with those numbers, and this can be accomplished by having a method of recording and organizing the data you have.

Your restaurant’s financial data is the backbone of your business.

This is why restaurant owners should constantly monitor their finances to see early on if they are making profits, address any problems that could arise, and plan future expansions once the business starts growing.

Tracking your restaurant's financial data can be achieved using a manual restaurant accounting system (like a ledger or columnar pad) or specialized accounting solutions for restaurants.

Then, ensure you have clear and designated columns for income, costs/expenses like rent, hiring costs, and labor, to name a few, and of course, your sales. For a small business, this should be enough. 

However, as your restaurant grows, you incur more expenses, like hiring a marketing team to promote your new locations, and you shouldn't forget to add this to your restaurant's budget. 

While columnar pads and ledger books are great ways for new restaurant managers to learn about restaurant accounting and bookkeeping, opting for manual procedures can be difficult to reconcile.

For instance, if your books aren't balanced, you may have difficulty finding which financial transaction was erroneous, unlike if you have a computerized record-keeping template. 

You can start with Google Sheets or Microsoft Excel and work your way up to restaurant-specific budgeting software like Quickbooks for Restaurants or Restaurant365.

Use a restaurant budgeting template

What could be an easier way to keep track of your money than using a restaurant budget template you can use whenever you need it?

As previously mentioned, computerized budget templates are easier to access and maintain and less error-prone than manual accounting and bookkeeping using pen and paper.

The best thing about this is it’s almost the same as manual bookkeeping and accounting—it has the same columns for sales, costs, income, and expenses, except this time, you can easily navigate your records and check for any discrepancies if the need arises.

7shifts' restaurant budgeting template provides 2 columns where you can input your budget for expenses like restaurant utilities, labor costs, marketing, and cost of sales.

You can also use this to keep track of other costs, such as insurance, license fees, repairs and maintenance, and the actual costs you incurred for a better and closer comparison.

By using this ready-made restaurant financial template, you can figure out exactly what aspect of your restaurant business you have been going over budget so you can adjust your spending as needed. 

Track your money closely using a restaurant budgeting software

A restaurant budgeting template accomplished via Google Sheets or Microsoft Excel is good. Still, for businesses with huge operations (especially those with various physical locations), restaurant budgeting software is not optional but mandatory.

When looking for restaurant budgeting software, go for the one that helps you manage your finances and assists in restaurant forecasting. This will help you understand your restaurant's potential for growth and manage your financial situation well. 

The budgeting software can also help you forecast restaurant sales and manage your payroll and inventory so you can optimize your daily operations. 

It would also greatly help your business if your budgeting software could be seamlessly integrated with other restaurant management software, especially those that can schedule and track your employees' shifts. 

7shifts can help you with this (and more) thanks to its ease of integration with over 80+ software, including POS, payroll, analytics, delivery, payments, reservations, and tax credits.

Calculate your restaurant costs

Most of the costs and expenses you incur in your restaurant business can easily be anticipated. Your fixed costs, for instance, stay almost the same monthly and yearly, like your insurance and rent/lease payments.

There are also semi-variable costs, a combination of fixed and variable costs. These costs are repeatedly incurred monthly (fixed costs) but with a variable element that can change depending on the activity or volume.

For instance, employee wages are semi-variable costs because you have to pay them monthly, but your payment might be subject to change if your employees render overtime or take unpaid leave.

Lastly, your variable costs are those that constantly change or occur as needed. Some examples include repairs, maintenance, and your budget for supplies.

To ensure proper restaurant budgeting and record keeping, record everything you spend daily, weekly, and monthly. Then, add those figures to arrive at your total incurred costs or expenses for the month.

Alternatively, you can calculate your total costs every two weeks, which is better if you pay your employees' wages bimonthly.

Recording your restaurant costs is important because it can help you track exactly what you spend your cash on. You can gain insight into which areas of your operation require the most money and, if needed, devise alternative ways to reduce your costs and maximize your profits.

If you have been in the restaurant industry for some time, you can use your past years' data to create accurate and close-to-reality restaurant forecasting.

Track your restaurant's sales

Aside from tracking your expenses, you must also closely monitor your sales data. This will come in handy when preparing your restaurant budget, as you will have to estimate your sales for the week, and you should have a close idea of what this number would be.

But when making a forecast, be careful when estimating your sales, as you can overestimate them.

Remember that meeting a sales target is the same as meeting a goal, which means it must be S.M.A.R.T.—specific, measurable, achievable, realistic, and time-bound. 

Use your historical data as a basis when budgeting and making sales forecasts. Use previous records like ledgers, receipts, or budget and financial templates to project your sales precisely. 

Be careful, though, and ensure you view your data analytically throughout the process. If, for example, your February sales last year spiked, look back and remember if you hosted any events or promotions during that period. 

Perhaps your restaurant hosted a Valentine's Day gala? Or maybe the Basketball Finals fell on a certain month, causing the unusual sales spike.

With access to this data, you can plan your budget accordingly and prepare for the possible influx of customers by hiring additional staff or buying extra supplies so you don't run short in the middle of the busy season. 

Another great benefit of tracking your restaurant sales for budgeting is that it can help you determine where most of your restaurant's sales are coming from.

For instance, if you discover that a large chunk of your income comes from booze, this can indicate that liquor is the cornerstone of your restaurant's income. You can later use this data to justify expanding your beer and alcohol offerings.

Compare restaurant sales vs. costs

After tracking your costs/expenses and sales, it is time to compare them to gain more insight into your restaurant's financial standing. If you notice that you are barely making any income based on the data you have, then it's time to tweak your budget to ensure that you're not just breaking even but making profits.

However, there are times when large expenses, such as remodeling or purchasing new furniture and equipment for your restaurant, will drive your monthly expenses past your income.

While this is occasionally acceptable (assuming that the extra expenses you incurred for this are charged out of your savings), if regular expenses like food, beverages, and utilities exceed your income, then it's time to make the necessary budget cuts.

Tracking your cost vs. sales ratio is extremely important, especially in today's unpredictable economy. Knowing these metrics will help result in better restaurant revenue management and put you in control of running your business to ensure its success.

Make the necessary budget changes

After carefully comparing your costs and sales data, it's time to determine which areas of your operation you can cut your budget on. To increase your sales, you must work harder to gain new and repeat customers for your restaurant.

You can increase your advertising budget to reach a wider audience and introduce your business to them, or tap into your restaurant's sales driver (like liquor) and give your customers more options.

Aaron Allen & Associates, Global Restaurant Consultants, mentioned that restaurants usually allocate 3% to 6% of their sales to marketing. "It’s also a good idea to allocate this money proportionally to your sales volume. 

Meaning, if July is your busiest month, you should spend a proportionate amount on your restaurant's marketing budget in that month."

This reiterates the importance of the adage “fish where the fish are biting.” If your restaurant is near a beach, don't be afraid to spend more on marketing when it is bikini season and many people flock to the beach.

Meanwhile, if you're looking to decrease your costs, then you can find alternatives to the supplies or ingredients you're using, as long as your offerings' quality will not be negatively impacted.

During off-seasons, you can also decrease your labor and wages budget by reducing the number of your full-time employees. To save on your electricity bill, you can adjust the normal temperature in your restaurant, especially if there aren't that many people around.

A good restaurant manager will work on increasing sales while decreasing costs simultaneously to maximize profits.

To ensure your restaurant's success, you must constantly monitor and adjust your budget as needed, depending on the season, occasion, and current state of your business.

Develop a strategy to increase restaurant profits

After you have scrutinized your financial data and adjusted your restaurant's budget accordingly, it's time to develop a strategy.

Since your primary goal as a restaurant owner is to ensure your business is making profits, you should create a specific strategy to meet that goal. This can mean setting up a budget to attract new customers so you can increase your marketing and advertising efforts.

For example, you can run ads on social media platforms like Facebook, which has 3 billion monthly active users, or tap into Instagram because, according to a study by Facebook, 43% of Instagram users search for food and drink-related content.

In addition, you can cut back on unnecessary costs, such as using plain containers with branded stickers instead of custom-printed food packaging.

It would also help to find cheaper alternatives to your supplies and the ingredients you use in your menu and create promotions and exclusive offers to drive repeat customers to your business.

Another thing that’s often overlooked but just as essential is scheduling your employees' shifts properly to ensure that you aren't overstaffed in the off-season or understaffed during peak seasons.

This means making room in your budget for restaurant scheduling software to achieve maximum efficiency and profitability. A growing restaurant business means more customers, which equates to the need for more staff to work in the kitchen and wait tables. 

Conclusion

Restaurant budgeting requires an analytical mind. You can only create a solid financial plan if you know what to do with the data presented to you. 

If done right, this can help you anticipate future expenses so you can better prepare your business for it and predict sales so you know what items drive profits to your restaurant and capitalize on them. 

Of course, once you’ve forecasted your sales, you must prepare your staff for the days when customers are expected to pour in. This is where a reliable restaurant scheduling software like 7shifts comes in.

By scheduling shifts effectively, you can have the right number of employees working during rush hour and peak seasons, and you can reduce your workforce during off days to save on labor costs.

With its ease of integration with over 80+ apps, you can manage your team, settle employee salaries, pay taxes, and prepare a restaurant budget without switching between apps.

The best thing is that it’s built to accommodate various food and beverage businesses, including quick and full-service restaurants, coffee shops, bars and breweries, pizzerias, pubs, bakeries, and catering services. 

Thus, you can be assured that your business is well taken care of, regardless of your restaurant type.

FAQs

Why is a budget important in a restaurant?

Budgeting is important when managing restaurants because it ensures adequate funds for paying your staff's wages, your establishment's utilities like water, electricity, and wifi, and buying the ingredients needed to create your recipes.

Creating a budget plan can also help restaurant managers make better decisions regarding developing the menu, pricing food and beverages, and creating cost-control strategies to maximize profits. 

What is a good marketing budget for a small restaurant?

A good marketing budget ranges from 3% to 6% of your total sales. However, this varies depending on your restaurant's size, location, and the type of cuisine you specialize in. 

For instance, a fine-dining restaurant in a huge city will likely have a higher marketing budget than cafes in rural towns. 

What is forecasting in a restaurant?

In the restaurant industry, forecasting refers to estimating possible future costs/expenses to be incurred and predicting profits based on historical data.

This is important because it can help restaurant owners and managers plan for peak season and anticipate the sudden influx of customers by hiring more staff or stocking up on ingredients for their recipes.

What's the difference between forecasting and budgeting in food production?

Forecasting in the restaurant industry refers to estimating future trends based on historical and current data. Meanwhile, budgeting is preparing a financial plan for the incoming period.

Regardless of their differences, both are essential in developing an effective strategy for the food and beverage industry. 

What is the most common expense in a restaurant budget?

The most common expense in a restaurant budget is labor costs. This includes employees' hourly salaries and wages, overtime pay, paid vacation and sick days, payroll taxes, and employee benefits.