As of last year there were approximately 660K restaurants in the United States. That number fluctuates yearly to reflect shifts in the industry landscape, with new stores opening regularly, and enterprising restaurateurs starting innovative independent spots. Some claims have been made in the past about the failure rate of restaurants, but using data from the Bureau of Labor Statistics, studies indicate that only around 17% of restaurants fail every year. Despite failure rates and an ever-evolving landscape, in 2017 restaurant industry sales hit $799B, which was approximately 4% of the annual GDP that year.
Opening a restaurant is no small thing, with a lot of legal and logistical hurdles to jump through before you ever open your door. Since you’ll have to plot all this out, where do you start? We’ve got you covered here with a handy guide to creating your restaurant budget.
How Much Does it Cost to Open a Restaurant?
The median cost for opening a restaurant is around $275K and that number can increase exponentially depending on whether or not you own the building. Those costs include everything from finding and outfitting your new space, to supplying your kitchen. Employee attrition vary based on niche, but on average the restaurant industry experiences a 73% turnover rate.
As such, labor and technology costs are often relative to one another too, as ease of use can factor into how easy it is to train new staff. Your time is money, and training can be a costly experience, especially dependent on the skill that you’re training for. That’s where finding smart technology with high ease of use can benefit you in keeping that training time to a minimum.
Note here that we’re looking only at the upfront costs to a restaurant budget to get everything in place for your first day of service. Once you’re off and running, you’ll have to consider ongoing expenses as well, which is a whole other topic.
Types of Restaurants
Before you can get too into the details of creating your restaurant budget, you need to determine your concept. Let’s look at the four most common varieties. Knowing what you’re aiming for will help determine everything else in your restaurant budget.
Can you find a location to open an independent quick service restaurant – venues that usually have drive-thrus – or are you willing to franchise? Will you serve alcohol? Do you have a chef or access to high value menu items?
For a lot of restaurateurs, starting small is the first step. As such, you may start with a “dark” or “ghost” kitchen, which is a delivery-only service that typically rents space. Another alternative is a food cart or truck, which tend to have an easier point of access to get started. That said, there are still expenses associated with both alternatives.
Should I Rent or Own My Restaurant?
There isn’t a right or wrong answer as to whether or not you should rent/lease or own your restaurant space, if you can find property for sale. Mortgage costs are influenced by size, city, and interest rate but offer you the benefit of long-term collateral, an ultimately finite expenditure, as you can eventually pay off your mortgage and face the possibility of a robust equity gain. The downside, is that you are potentially limited in finding an affordable location and are liable for any maintenance and upkeep.
Whether it’s rent/lease costs or a mortgage, factoring in your base expenses to your overall profit margins is not only necessary but practical. That cost will vary based on the size and location of your restaurant, which are determined by your expected capacity. Since cost is driven ultimately by square footage, you have to plan carefully, balancing that against the comfort of your customer base.
The total square footage of your restaurant also factors into your overall operating costs, per the following calculation: Sales Per Square Foot = Annual Sales / Square Footage.
Let’s say that you have a total capacity of 20 people per any given hour, and that you are open for 8 hours per day for 305 working days, which in this example is approximately one day closed a week. Now let’s say that the average meal yielded $20 in sales. In that equation, if you fill the house every day for a year – a restaurant owner’s fantasy – you would bring in $976,000 in annual sales before cost.
That more than covers your startup costs even if you own the building. Even factoring in operational costs, you’re likely to walk away with a solid net gain. Of course, that’s an ideal scenario, so treat it accordingly and prepare for seasonality and downtime as well as your actual hours of operation.
Ultimately, while food and labor costs will account for the lion’s share of your expenditures, you should plan to spend between 5-8% of your revenue for real estate. You’ll want to consult with your local fire department or corresponding government agency for clarification on local occupancy laws.
Restaurant Utilities: Keeping the Lights On
In addition to your static costs of rent/lease or mortgage, utilities are another recurring fee to include in your restaurant budget. It’s estimated that on average, restaurants in the U.S. spend an average of $2.90 per square foot on electricity and ¢85 per square foot on natural gas annually. To put that into perspective, if your restaurant is approximately 2000 square ft., then you will have an average of $625 per month in utility usage (2000 sq. ft. * 3.75 combined cost per sq. ft. of average utility cost ÷ 12 months). Be prepared to put aside a percentage of your operating costs every month into your bill of between 3 and 5 percent.
You may notice too that in some instances, like places with regulated utilities, your utility rates are higher at your commercial property than at your residential property. Utility companies justify that difference based on projected usage, which tends to be heavier in restaurants. Some companies may offer an averaged or budget plan that could be worth inquiring about, however. These programs offer an averaged rate that is based on previous consumption, so while it is not a discounted amount, it does offer you a fixed amount to aid with your restaurant’s budgeting throughout the year.
Managing Your Restaurant
Running your new restaurant comes with a host of administrative functions, from zoning and permitting to insurance needs. Beyond that, as the owner/operator, you are responsible for the staffing and training needs. As an administrator, you’ll need to build in time not only for the day-to-day management and bookkeeping, but the cost and upkeep, maintaining the appropriate licenses and paperwork, and overseeing your staff.
Restaurant Permits: The Essentials
When creating a restaurant budget, it’s critical to find out with your local government if there are any legal restrictions to opening shop in your area. Below is a rundown of the various licenses that you are either required to have, or might need depending on your business model. The costs will vary based on your local government, and like with any bureaucracy, the process can be time consuming. Plan ahead to make sure you have what you need by the time you start.
Below are the licenses that you absolutely must have to start a restaurant, and a description of what they cover. We looked at the upfront and upkeep costs when possible. First up are the licenses for a brick and mortar business.
A business license grants you permission to own and operate a business in your area. Costs vary from place to place, but expect both a moderate application fee at the least, and secondary charges that can range from $25 to $7000 depending on your state. Business licenses must be renewed annually.
Employer Identification Number (EIN)
An Employer Identification Number, or Federal Tax ID Number, is effectively a social security number for businesses that identifies you for tax purposes. An EIN is free and does not expire. You can apply online, which is a relatively painless process.
Certificate of Occupancy
While everything on this list is important, the Certificate of Occupancy verifies that your restaurant is in compliance with local zoning and building laws, which is critical when you are determining where to set up shop. You can only get this if you pass property inspections beforehand, so make sure that you consult with someone in your local government or a realtor to learn more. Since it is dependent on your area, go ahead and ask around about the annual costs and upkeep charges.
Food Service License
Now that you have the right licenses to occupy and run a business that can be taxed, next up is the Food Service License. As the name implies, this gives you the right to sell food and comes with a host of responsibilities that are also dependent on the state in which your business resides. No matter what your company is, if you handle food in any capacity, you have to have this annually renewable license in your budget.
As a quick note, if you ever plan to do anything off-premise, or if you’re starting a food cart or food truck, you need to obtain temporary licenses, which in some areas may be tied to a continuity in use. For example, if you have it for a month, use it for three days, and then quit, you may have to purchase a new license. See local government for details and associated cost.
This one seems a little trickier than it really is. Basically, with a Resale Permit, you only get taxed once for materials that you will convert to sales. The idea is to avoid getting taxed both at the point of purchase, and again once you’ve sold the product. In comparison to many of the permits on this list, it’s relatively inexpensive, although the details are dependent on your state and locale.
Building Health Permit
Definitely a no-brainer, the Building Health Permit – like the Food Service License – is designed with public safety in mind. A food safety initiative, the details are handled from state to state with marginal differences. Expect to renew this periodically.
Employee Health Permit
Similar to the Building Health Permit, you also have certain training requirements for your staff. The Employee Health Permit is a set of guidelines that the Food and Drug Administration requires for public safety. It is administered and monitored at the state level, so fees and administrative upkeep vary.
A Seller’s Permit is kind of like an EIN for the state, not federal level. Free of charge, the permit identifies the business as someone who collects state tax.
Dumpster Placement Permit
Once you open, you’re going to have to take out the trash. So, where do you put it? No surprise, but there is a permit for that, too. Average cost and involvement for a Dumpster Placement Permit varies per state, so make sure you check with your local government to ensure the accuracy of your information.
Other Restaurant Permits To Consider
Now, we move on to permits that aren’t strictly required to open up a food concept, but in many cases are valuable assets that enhance your restaurant’s long-term viability. Keep these in mind for your restaurant budget, too.
Not everyone wants to or needs to sell alcohol, although research indicates robust returns on your investment. If you are in an area that permits alcohol and own a business where that is part of your model, make sure you follow the appropriate guidelines for your Liquor License to stay legal.
That’s right, you have to get a permit to have a sign. While that detail may seem trivial at first, without a Sign Permit you may be less visible to potential walk in customers. First up: what is a sign? That may seem easy enough, but is it something a physical dimension or a flat banner on the side of your building? Next, what are the rules in your locality? Ask around for costs and potential renewal fees to determine what works best for you.
The music that you play in your restaurant helps set the tone. Studies indicate a direct link between your choice of music and how that impacts the dining habits of your customers. In order to set the tone for your customers, you have to pick up a Music License. Unlike so many other licenses on this list, this is neither federal nor state, but a third party. You can go here to see what the American Society of Composers, Artists, and Performers (ASCAP) or Broadcast Music Inc. (BMI) needs for you to turn up the jukebox.
Valet Parking Permit
Clearly, this will only apply to a small percentage of restaurant owners. But if you cater to an upscale crowd, valet parking is an expectation, and one that requires coordination for parking and operating a vehicle, so you’ll need a Valet Parking Permit.
Live Entertainment License
Say you have a nice spot in a hip neighborhood with a little extra, unused room. Having a live performing to bring in patrons at different hours might sound fun, but you have to have the appropriate licensing for that. Like a Music License, a Live Entertainment License goes through an entity like ASCAP or BMI to secure, and covers any live rendition of someone else’s intellectual property. It’s worth checking with the fire marshal or appropriate public figure to make sure there are no further safety concerns too, as live shows can yield that risk.
Pool Table License
You definitely may never have considered this, and may never need it. But a Pool Table License is a real thing, with rules and fees that vary from state to state in areas, that is, where they apply.
Let’s be clear about this: You don’t have to have insurance, but that’s not advised. There are a host of different types of insurance that you might consider from property or general liability to employee coverage. It’s a huge deal that can protect you from catastrophe in the long run. Monthly rates will vary dramatically from place to place, as local insurance providers are competitive and always looking for new clients.
Staffing is a big deal that involves hiring a lot of personalities and skill sets from your chef to your hostess and your manager. The median salary for lower skilled employees is around 20K, 24K for waitstaff, and 45K for chefs. Make sure you brush up how to hire restaurant staff before you conduct interviews and vet your candidates.
It may not seem like the biggest deal at first, but you’ve got to get the word out to people about the restaurant. An easy option is to explore social media to share information about your restaurant. You might also use things like Google My Business that shares information about your hours, contact info, reviews, menu, and photos, among others.
Average Restaurant Food Cost
Food costs and staffing are substantial expenditures to your monthly restaurant budget. The amount that you spend on food per month varies based on what kind of restaurant that you own. For example, some very common ingredients yield robust ROI.
Start by determining your menu, and price out from there. You’ll start with a formula that looks at cost versus markup. If you sell pizza, price it out by the ingredient, then break down by the average markup. The process of menu engineering is crucial for restaurant management professionals, as it can help separate a profitable operation with ample margins, from a leaner one.
What you need to run your business is subject to whatever sort of restaurant you want to run; you wouldn’t expect to need a stove if you run an ice cream parlor. Finding a supplier is as simple as searching online. Consider shopping locally whenever possible, not only to give back to your community, but for the time it could potentially save on receiving your equipment. Before you get started, learn more about any contractual obligations you may have, and weigh that against potential costs at competitors.
Below we have a handy list of things you absolutely need, that you may overlook, or that might make your business run a little smoother. If you can find a mentor in the business, make use of your connection. While you can readily find what you need to purchase, you may have no idea how hard they are to maintain. Are certain forks or pans really hard to clean or do you have to do it in a particular, potentially time consuming, way? Getting some insight into that can be invaluable.
Unless you have a speciality like a bakery or yogurt shop, you are going to absolutely require the following larger appliances. It’s hard to put a specific price tag on any one thing, because it depends on what exactly you need. If you’re crafty you may be able to refurbish equipment at a much lower rate. For the rest of us, find a good wholesaler, and shop around.
Below are a couple of hot items you will likely need to consider. You may be able to make do by combining some of these that are functionally similar, but a short-term fix like that may very well become a long-term problem later, especially as you experience growth. It’s a champagne problem, but one worth considering when you measure the overall attrition rate for new restaurants annually.
Utensils, Glassware, Napkins
These are the kind of odds and ends that you need to plan for when creating a restaurant budget. There are tons of things on this, and it’s exactly the kind of accoutrements that will nickel and dime your budget. There isn’t any solid equation out there to assess your needs, although you can find utensil/glassware calculators online. That’s a good start point, but may not speak to your needs in specific. As a rule of thumb, you may establish two to three time more utensils/dishware/etc. than your maximum capacity. As customers come and go, this allows your staff time to prep.
These are things that you don’t need in your restaurant budget, per se, but that add a distinct value you to your business. This includes things like kitchen display systems, guest management systems, as well as various point of sale systems. You might be able to handle all of that with paper, a cash register, and a good hostess, but all of previously mentioned tech can help you in understand your restaurant data, while enhancing the guest experience. For example, a KDS system can not only help time out when each item needs to be prepared, but also lower food waste in the process – a substantial cost to restaurants.
How to Secure Restaurant Funding
Finding the money is a big deal, especially when balanced against the aforementioned success rate. But if you feel confident in your dream, then you’ll know when this is something you have to do. The most direct route is to apply for a loan, which can be a difficult process. Loans can come in a number of ways though, from lines of credit to establish your stock to getting your restaurant properly equipped, so stay on the look-out for what’s available.
Low Cost Funding Alternatives
There are plenty of non-traditional solutions to getting funding for your business. Possibly the best is an angel investor, which is a silent partner that provides the startup capital. Depending on the restaurant’s theme, you might look into crowdsourcing options too. Finding investors, angel or not, involves networking, so be friendly but also be ready to talk shop. The restaurant business is a community, so go into it with the goal to find a mentor that may be able to help you out.
Consider starting small. Rather than opening up a brick-and-mortar first, maybe look into a Dark or Ghost Kitchen, Food Truck, or cart. Both have a much lower overhead and allow you to get your feet wet without as much overt risk.
Restaurant Inventory Management
Once you’re off and running, restaurant inventory management is essential. First off, you’ll want to know when/if you need to purchases new items, whether that’s restocking your supply of food, or replacing a broken dish or appliance. Beyond that, it’s a good way to measure your business progress throughout the year; you can start to see over time when you may have peaks and lulls in your service and work into that in the future.
Part of knowing your inventory, is knowing what you need at any given day at any given time. For example, if it’s a Friday night rush and you serve hamburgers and fries, you may need to have a healthy supply for that evening so that you can continue to keep up with needs as they arise. The use of a KDS can aid with this information, with an additional benefit of helping navigate your bin management, a tool that helps mitigate waste while streamlining efficiency.
It’s easy to get lost in one detail or another when you’re plotting out your big idea, but the devil is in the details. Balancing each of these ingredients is critical to your success, and requires a lot of advanced planning before you ever get started, which should factor into your restaurant budget; how much will it cost you before you ever even open your doors? With the right planning and a little luck, you can successfully break through your opening year and work towards a brighter future.
Source: Syd Bishop for QSR Automations