With COVID-19 potentially jumpstarting new growth, understanding what it takes is more critical than ever.
One of the primary reasons why restaurants fail is a lack of proper budgeting. And COVID-19 has made it even harder to manage ongoing expenses.
This means it’s more important than ever to understand the costs associated with running a successful restaurant—whether you want to open your own establishment or if you’re an owner looking to compare against industry averages.
So, how much does it cost to run a successful restaurant?
Apart from your location and the type of restaurant you want to open, your startup costs will depend on several other factors, too. Let’s look at them in more detail.
Buy versus Rent
Should you decide to buy, you need to have enough capital for the initial down payment (at least 10 percent of the value). And depending on the size and location of the property, the total buying price is typically between $200,000 and $850,000.
Renting is usually more affordable, with average restaurant rents in the U.S. at around $5,000 per month. That said, you might have to pay for several months upfront or have an existing property to swap—which could make buying a building more attractive.
If you choose a location that was not previously a restaurant or is in need of a refresh, you may need to spend a considerable amount on renovations. This can vary depending on the original state of the property and your design goals. Even if you are taking over an existing restaurant, you can expect to spend $150 to $750 per square foot on renovating the space.
Whether you are buying an existing restaurant or starting your own from zero, you need to ensure that you have the right equipment to run your business, from cutlery and glassware to ovens and dishwashers. On average, you should budget around $115,000 for equipment.
Consider second hand equipment and making distributor deals (for things like refrigerators) in order to reduce this amount.
Starting inventory and salaries
Your next major startup cost will be opening inventory and salaries. Depending on the number of your employees, location, and menu, you should budget enough for at least your first 3 months of operations.
To make things easier, try to arrange credit for some of your inventory and pay for it using your initial revenue. In addition, starting with a simple menu will reduce the amount of stock you need to keep on hand.
Also, consider starting with temp staff or reduced opening hours if you need to keep labor costs to a minimum.
Technology is crucial when it comes to running a restaurant. You will need a basic point-of-sale system and may even consider adding on extra features such as inventory management and the ability to process online orders. Some apps charge on a monthly basis instead of one-off setup which may reduce the burden early on.
Make sure that you have spare cash ‘just in case’. You never know what extra costs can crop up at the last minute, so make sure that you have enough of a reserve to cover unexpected costs.
Licenses and Permits
You typically need to obtain licenses for selling alcohol, handling food, and general health and safety. These vary by state so you can see which rules apply to your situation in the U.S Small Business Administrations Bureau.
The average labor cost in the US is 30–35 percent, so you should aim for this range and budget for it based on your expected revenue. You should aim to reduce these costs below 30% if possible.
The biggest factor here is food cost which should generally be up to 32 percent of your total food sales. For liquor, you should budget for 18–20 percent in general.
A study by CostBrain shows that restaurants budget less than 5 percent of total costs to utilities. And on average, restaurants pay $2.90 per square foot on electricity and $0.85 per square foot on gas on a yearly basis. Internet and phone can be anywhere from $60 to $100 depending on the package you choose and all of these costs are dependent on your location and restaurant size.
Due to the sheer volume of transactions, hiring a bookkeeping service will save you a lot of time, especially if you don’t know how to deal with it yourself. Accounting prices start from under $100 and can go up to several thousand when you include additional services like payroll, reporting, and consulting.
Marketing and promotion costs are likely to grow over time but in the early days it’s normal to keep monthly costs below $500 and rely mostly on Facebook boost and email marketing. That said, your initial website and online presence may set you back with more, depending on the functionality, design, and content requirements you have.
As you can see, the costs of running a successful restaurant vary based on multiple factors like your venue size, location, and whether you decide to rent or buy the building.
All in all, you should expect a minimum startup investment of $200,000 which can go up to $400,000 and above if you're in a more expensive location.
Afterward, the ongoing costs will largely depend on your sales volume, with a 70 percent gross profit margin as the minimum to build a viable business.
With 20-plus years experience in executive positions across the luxury hotel market as well as acclaimed restaurant groups, Paul is the CEO of Glimpse. The cross-functional expertise and the know-how to connect dots from the dish-room to the boardroom is helping Glimpse reshape the future of the food & beverage service industry with artificial intelligence and predictive analytics solutions, designed to reduce operational costs and drive revenue opportunities in the full-service and quick-service segments.