A fixed cost is a cost that does not change with the activity of the company. A restaurant's fixed costs include rent, utilities, labor, and food costs. They are only dependent on how much business the restaurant has and not how much profit it makes. Fixed costs also include any other expenses that do not change with the amount of business a restaurant does. Restaurant fixed costs are important because they help determine how profitable a restaurant will be and whether or not it will stay in operation for an extended period of time. The higher these fixed costs are for a particular restaurant, the less likely the restaurant is to be profitable or stay in business long-term.
Top 5 ways to reduce your restaurant fixed costs
Owning a restaurant is a costly and complicated affair. Not just because the restaurant industry is one of the most competitive industries in the world, but because there are numerous challenges one has to deal with while running a restaurant business. In a normal circumstance, when there's no major disruption like the Covid-19 pandemic, most restaurant businesses have failed because of mishandled costs.
Too many factors affect the cost of running a restaurant. Hence, it's important to manage the fixed costs, a cost that does not change with the company's activity. A restaurant's fixed costs include rent, utilities, labor costs, and food costs. It is important to manage it with precision and tact.
In the end, where and how you spend your money determines how much you can minimize these high costs. As per the Bureau of Labor Statistics, restaurant wages have risen at more than twice the rate of inflation over the last five years, which has led to only an increase in costs.
In this article, we take you through five efficient, yet easy-to-execute ways to reduce fixed costs in a restaurant. Read on for five of the top ways you can reduce your restaurant's fixed costs.
Cut down on your food costs to reduce restaurant fixed costs
Inventory is the foundational backbone of any restaurant. In a restaurant business, it is the strategy behind the food and beverage inventory that keeps everything organized and cost-effective. A small change or mistake in managing the food and beverage inventory can result in losses. Here are a few steps that restaurant owners can follow to optimize the inventory costs.
1. Implement an Order Management System An order management is an automated management system to manage the entire ordering process from placing an order for inventory to its delivery.Order management process takes timely stock of inventory levels and decides what needs to be ordered, helps placing orders with vendors (purchase order) and finally, tracks order fulfillment. An efficient order management system ensures that a restaurant business keeps its food costs in control by utilizing everything in stock before ordering another batch.
2. Take Food Cost Percentage into account One of the best ways to keep the food and beverage cost in check is to have a methodology to create the average food cost for the menu items. It helps a restaurant owner in knowing the food cost percentage. Thus, making it easier to calculate the average food cost.The success of your business depends on how well you calculate your food cost percentages. Some of the things that enhance food costs include-purchasing raw materials in bulk, storing ingredients with a longer shelf life, and always be on the lookout for a vendor that offers a competitive price than the one charging more.
3. Keep a tab on seasonal ingredients The prices of many ingredients go exponentially up during different times of the year. If your menu offerings or prices don't take that into account, the probability is that the food cost will go up by a huge margin as well. It's important to identify these seasonal ingredients that a restaurant business uses a lot of, and consider how its pricing changes with every order. The pricing strategy or menu engineering may need to change as the prices of the ingredients do.
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Create a menu with less expensive ingredients to reduce fixed costs
Rejigging the menu with a focus on items that cost less and sell more is better than having a fancy signature dish with exotic and expensive ingredients that is hampering a restaurant's profitability. Some ingredients, for instance carbs (bread, potatoes, etc) are less expensive.
Creating menu items with them may help in churning in profit. It's important to reiterate again that keeping a tab on season ingredients the price of which go up at different times of the year is one of the most sensible business decisions. If you aren't a fine-dine, and especially if you are a small business owner, this always works in reducing Fixed Costs.
While designing a menu, these things can be taken into consideration-
1. Categorize menu items based on popularity and profit. If you have been into restaurant operating for a while, you may understand what menu item sells most and what makes maximum profit. Utilize this knowledge to engineer a menu that has a lot of items with similar ingredients that aren't very expensive. This will also help in reducing any wastage.
2. Limit the choice of customers to guide their buying decisions. Once you have decided on the ingredients that you are going to make the maximum use of, it is best to have a limited menu offering. Extended menus may often create decision fatigue, making the ordering procedure challenging. Keep it simple.
3. Design your menu with local ingredients Time to time, revisit the offerings at your restaurant and design delicacies that make maximum use of the local ingredients available in your area. Local ingredients often cost less than the ones that require importing and thus a lot of transportation expense.
Switch to a cheaper cooking oil to reduce restaurant fixed costs
There is a reason why different oils have different prices. In November, 2021, the Food And Agriculture Institute of the United Nations, for instance, noted that the international palm oil prices increased for a fourth consecutive month in October (2021). It largely happened because of persisting concerns over subdued output in Malaysia due to ongoing migrant labor shortages.
In the meantime, world prices of palm, soy and sunflower oils received support from reviving global import demand, particularly from India that lowered import tariffs further on edible oils. In addition, delayed harvesting and reserved farmer selling of sunflower seed in major producing countries also led to lower-than-anticipated crushings, lending further support to sunflower oil prices.
As for grapeseed oil, the continued strength in international values chiefly stemmed from protracted global supply-demand tightness. Rising crude oil prices also lent support to vegetable oil values, the report notes.
In the coming days, the edible oil prices will only surge. Restaurant Fixed Costs can be reduced if the cooking is chosen tactfully. The Russia-Ukraine war has affected the market as well with sunflower oil, palm oil and soybean oil supplies being dealt a severe blow.
To make it simpler, edible oils are the end product of a multi-pronged process. Everything makes a difference to the price of a particular oil, the area in which the raw materials are produced to the process of extraction and the demand and supply. For instance, palm oil, a relatively cheaper oil largely produced in Indonesia (57 percent of world production) saw a price surge recently. Apparently, the government in Indonesia has said that palm oil producers have to sell 30 percent of their produce in the local market, from an earlier quota of 20 per cent. Therefore only 70 per cent will be allowed to be exported. It has affected the price of the oil in other territories.
If you are running a restaurant business, what oil you use for cooking makes a lot of difference to your total sales percentage versus the profit percentage. It is thus important to find the most cost-effective cooking oil for a smooth functioning of your restaurant operations and manage the Supply Chain well. For instance, soybean oil, the most widely produced and consumed edible oil in the U.S., according to the U.S. Department of Agriculture may be one of the best options. The oil can be used for fast food frying, added to packaged foods, and fed to livestock as well. Thus, helping in optimizing your restaurants fixed and variable costs.
Reduce energy usage to reduced restaurant fixed costs
The charges for residential energy consumption have been on the decline with constant state support programs. But the same isn't the case when it comes to charges for businesses. It is especially difficult for restaurant owners. If you are operating a restaurant business, chances are that besides balancing the cost of goods, you are spending a large part of your operating cost in paying for the energy consumption.
One of the major reasons for this is that restaurant operations are increasingly becoming automated. More things plugged in than ever before. Beside the basic refrigerator, oven, etc, a lot of equipment is now connected to the electricity with advanced features like temperature control and time control.
While some of these automated equipment have become a necessity, keeping the rules laid out by the federal agencies. Some can be completely controlled. For instance, one can start with replacing conventional bulbs with LED bulbs. Consider switching to energy-efficient kitchen equipment.
Some of the other things that can help in saving energy in a restaurant include-
Regular cleaning and maintenance schedule of all appliances, chimneys, etc.
Clean refrigerator condenser coils.
Remember to shut off unused equipment.
Set up smart thermostats.
Running a restaurant can be expensive. You’re always trying to find new ways to cut costs and save money.
You try to get creative, but it feels like you’re running in circles.
Purchase an ice maker to reduce restaurant fixed costs
In a commercial food business a restaurant or a hotel an ice machine is a must. Ice isn't just used to serve beverages or is part of other refreshments, but it is an important ingredient for cooking as well as helps in proper storing. Equipping your restaurant with a good quality ice machine is integral for a smooth operation of your restaurant. Additionally, ice machines help in saving food costs and increasing service efficiency.
However useful it may be, it won't work to your advantage if you don't understand the electrical configurations of the ice-maker well while buying one. Most professional ice-machines are available in both 115V and 220V options. These configurations are determinants of both power consumption and rate of output. While 220V models consume more power, they also have a higher rate of ice production. The 115V machines are compact and may be using less power, but have lower capacities. Go for a configuration after analyzing your business requirements well in advance. In the longer run, utilizing this machine to the best of its capability, may reduce both fixed and variable cost for your business.
Implement technology to reduce restaurant fixed costs
In the fast-paced and ever-changing landscape with the pandemic-induced uncertainty looming large, the larger restaurant chains had the infrastructure and deep pockets to implement technology into their operations. Perhaps, that's the reason McDonald's digital sales exceeded $10B, or nearly 20% of systemwide sales, in 2020 across the top six markets. But many smaller businesses lacked digital tools to face the crisis.
The discourse on the downside of technology has gained steam every now and then. Trade pundits talk about malware, phishing, etc as a sign of vulnerability for the industry increasingly dependent on technology. The risk is always going to be there, but precautions can increase. Especially when technological advancements can help in the growth of the business.
In a recent National Restaurant Association's report, the insistence is on adapting to technology (like Employee Scheduling software) to thrive in an increasingly competitive landscape. Even the smallest restaurants need to embrace digital tools for better service, meeting customer expectations in an efficient and cost-effective manner.
Just implementing a point of sale (POS) system in your restaurant can bring a huge difference in cutting fixed and variable costs. A restaurant POS software does not just process the transactions at a restaurant, but with newer advancements, it is also being utilized for Restaurant Accounting and generating receipts. One solution can help with multiple things, especially with the advent of cloud technology. The point of sale system has evolved and become a complete restaurant management system now. It may cost to embrace technology, but it pays well too.
Conclusion to minimising restaurant fixed cost
It is not easy to run a restaurant business. Because in a restaurant business it is not only about the goods sold. There are too many additional hiccups including complex processes like inventory management and Operating Cost to service issues like customer satisfaction. Among all these things, if a few things can help in reducing the ever-growing fixed costs of restaurant operation, it may really help. Too many factors affect the cost of running a restaurant rent, utilities, labor costs, food costs, energy consumption.
Restaurant owners may often struggle to strike a balance between the cost of goods sold to the expenses incurred till the point of sale. It is, thus, important to manage it with precision and tact. In this article, we have covered five points that may help in reducing the fixed costs in a restaurant operation. From implementing an Order Management software to choosing the cooking oil, everything makes a huge difference.
The restaurant industry is notoriously expensive.
It’s not just the cost of food and ingredients. You have to factor in utilities, equipment, labor, and marketing.
The costs of a restaurant can vary depending on many factors. From the type of food they serve, to how they charge their customers, to the location, there are plenty of things that contribute to how much money a restaurant will spend. The following guide will tell you everything you need to know about the costs of a restaurant.
What are examples fixed costs?
Fixed costs are those that do not vary with the level of activity. For example, a company might maintain staff and rent for its office space no matter how many items it produces. Fixed costs can also include interest on loans or insurance premiums. Some fixed costs remain the same even if production changes while others will change in proportion to the amount of output. An understanding of fixed costs is important because they can make up a large part of total costs, even when there is little production. They are often subtracted from revenue to calculate net income.
What are fixed assets in a restaurant?
Fixed assets are just what they sound like- assets that are fixed, or cannot be changed. They are often tangible objects such as buildings, vehicles, furniture and fixtures, machinery, and equipment. These assets may be many years old but still, have value to a business. The term is sometimes used to describe intangible assets that cannot be converted into a tangible form (such as patents). Fixed assets aren't easy to track because they can't really be seen on a balance sheet. But if you know what to look for, it's possible to find them and use them as collateral for loans and another financing.