6 Facts to Know About Your Restaurant Operating Costs Percentage

For restaurant owners, profitability and how to measure it effectively are top priorities. You want to generate the highest amount of revenue at the lowest cost to you.

A key core metric for understanding the cost of running your business is restaurant operating costs percentage. Operating costs cover everything from mortgage payments to inventory.

Ideally, you can keep restaurant operating prime costs under 60 percent, but your ability to do this relies on optimizing several parts of the business. Your first step in saving on operating costs is to identify areas for improvement.

Once you’ve pinpointed them, the next step is to roll out a data-driven strategy designed to lower costs while maintaining guest satisfaction. We created this guide to provide the best tips and tricks as you strive to boost profitability and financial sustainability. 

Optimize Your Restaurant's Bottom Line: 6 Key Operating Cost Strategies 

As you start breaking down and categorizing your restaurant operation costs, it’ll be helpful to have these six key insights in mind: 

1. Percentage of Fixed and Variable Costs in Total Cost Equation: When you add up your fixed and variable costs, you arrive at your total operating costs. Most restaurants have a higher percentage of variable expenses.  
2. How to Calculate Food Cost Percentage: To determine the food cost percentage of your overall operations, divide your cost of goods sold (COGS) by food sales. Then, multiply the resulting number by 100 to get the percent.  
3. Cost of Employee Turnover and Retention: It can be expensive to train new employees, but retaining existing employees can also strain your resources. Weigh the pros and cons of turnover vs. employee retention to understand a portion of the costs involved with labor, including minimum wage hikes. 
4. Typical Labor Cost Percentage for Full Service vs. Quick Service: Fast-service restaurants tend to see higher guest turnover, so they need fewer employees. Full-service restaurants, such as fine dining establishments, require a more comprehensive restaurant staff.  
5. Utility Cost, How to Lower It, and Maintain Sustainability: It’s possible to lower utility expenses by replacing natural gas with renewable energy sources, switching to LED lightbulbs, and performing audits to see which areas use the most energy. 
6. How to Uncover Savings in Inventory Management: Stock is a hugely variable cost that you can optimize to save money. However, to do so, you must have accurate insight into your purchasing habits and control over spending.  

Let’s look at how each of these insights could play out for your restaurant as you work to regain cost control and lower operating costs. 

Understanding Fixed and Variable Costs in a Restaurant 

As you break down your total restaurant operating costs, there are two key categories of expenses: 

1. Fixed Costs: Expenses that fall into this category tend to remain at a constant price point over time. Regardless of sales, the number of customers, or changes in stock market price, these expenses remain the same. Examples include rent, staff salaries, technology subscriptions, and insurance premiums.  
2. Variable Costs: Items that you categorize here can vary in price from month to month. Examples include raw ingredients, overtime, food storage, cleaning supplies, cutlery, napkins, and other costs. 

You can think of fixed expenses as foundational costs. They cover baseline operating costs, allowing you to keep your restaurant running smoothly.

When looking for ways to save money, focus on variable costs and semi-variable costs. A typical restaurant has more flexibility with types of food supplies, inventory management, contracted suppliers, and day-to-day business operations.  

Because fixed costs are unchanging, it’s easier to create an accurate budget for these expenses. However, variable costs can be more challenging to predict. To forecast your variable costs better, it’s helpful to analyze historical data to understand how these expenses change over time.  

Calculating Your Labor Cost Percentage the Right Way 

Labor is a crucial part of your total restaurant operating expenses. Depending on how you structure your team, you’ll either have salaried or hourly workers. 

To calculate labor costs for employees with a salary, divide an employee’s annual pay by the number of hours they work in a year. For hourly employees, multiply their hourly wages by the number of hours they work each month. These expenses form the basis of employee compensation. Yet, pay isn’t the only way you compensate employees. 

Employer-sponsored payroll taxes, such as the federal unemployment tax, as well as Social Security and Medicare contributions, health insurance, retirement matching, paid time off (PTO), and other employee benefits, also impact total labor costs. Additionally, overhead expenses, such as the cost to train employees or workers’ compensation insurance, add to your labor costs.  

When you add up your employees’ salaries, costs of benefits, and tax or insurance-related expenses, you arrive at your total labor cost. Now, if you want to know the percentage that labor costs make up of your operating costs, divide your total sales for a chosen period by your total labor costs, and then multiply this number by 100.

It should look like this:

(Labor costs/Total income) x 100

Ideally, your labor cost is around 30 percent of your total operating costs. 

Food Cost Percentage: 5 Insights to Balance Cost and Quality 

High-quality ingredients for your menu items are the cornerstone of your restaurant, so food costs account for a significant percentage of your overall operational expenses. That said, stock prices are also variable.

But before diving into tips to keep your food costs low, it’s essential to define these three key metrics: 

1. Plate Cost: This refers to the total cost of the ingredients used to prepare a menu item. You might also see it referred to as menu item cost.  
2. Beginning Inventory: This number is the total value of your restaurant’s inventory at the start of an accounting period.  
3. Food Cost Calculation: This is the equation you’ll use to calculate the total cost of ingredients that you use to prepare menu items as compared to the revenue you earn from selling those menu items.  

Those metrics help you get a solid understanding of your current food costs. Once you have your restaurant’s numbers on hand, the next step is finding ways to reduce food costs and secure the best market price for your ingredients. Use these five tips to save money without sacrificing quality: 

1. Use Strategies Like First-In, First-Out (FIFO) to Reduce Waste: FIFO strategies help ensure you use the oldest goods first, reducing the risk of them expiring and preventing waste.  
2. Engineer Your Menu to Highlight Profitable Items: It’s worth familiarizing yourself with menu layout strategy so that you can guide guest attention toward high-margin menu items.  
3. Take Advantage of Seasonal Ingredients: You can lower food costs and keep your menu fresh and exciting by sourcing quality seasonal ingredients.  
4. Negotiate With Suppliers for Bulk Pricing: Use historical purchasing data to get more favorable vendor contracts that could include discounts for bulk orders.  
5. Leverage Advanced Technology to Stay Organized: Industry-leading technology can provide accurate insights into food costs and help you control your purchasing.  

A grasp of your food costs gives you leverage to manage your restaurant’s operating expenses strategically, driving profitability and guest satisfaction.  

Managing Restaurant Operating Expenses Like a Pro 

As mentioned earlier, your restaurant’s total operating expenses extend beyond food and labor costs. These are six additional expenses that you should factor in: 

1. Insurance Premiums: If you offer employees’ insurance benefits, this is an additional expense. Additionally, consider business insurance.  
2. Rent and Utilities: The cost of renting a space is likely to remain the same whereas utilities can fluctuate month-to-month, depending on usage.  
3. Maintenance: You should anticipate one-off maintenance expenses as well as regular check-ins to ensure everything runs smoothly.  
4. Technology Subscriptions: Make sure to include subscription costs for technology like point-of-sale (POS) systems, advertising software, or loyalty program platforms.  
5. Advertising and Marketing Strategies: Consider any money spent on marketing and advertising strategies for your restaurant as an operating expense.  
6. Licenses and Permits: Business licenses, food handling permits, or any other formal accreditation come with a price tag. 

These are crucial expenses for keeping your restaurant up and running while maintaining guest satisfaction, yet they can be challenging to categorize when trying to understand your total operating costs. The list above is an efficient and effective way to break down these cost categories. 

Key Insight: Guest loyalty programs can be an asset in boosting revenue and customer satisfaction. Check out our 2025 Annual Loyalty Report to gain crucial insight into how to set up and optimize your restaurant’s program. 

Using Inventory Management to Control Restaurant Costs 

Inventory expenses fall into the variable cost category, meaning they can fluctuate from month to month. But this also grants you the flexibility to control and optimize them. Follow these three strategies to adjust your approach to inventory management to make it easier to control costs: 

1. Utilize Technology for Inventory Tracking: Inventory management technology provides insights into order frequency, prices, and food waste percentages.  
2. Order From Multiple Suppliers: To obtain the best inventory prices and mitigate the risk of supply chain disruptions in case of a supplier failure, work with several vendors.  
3. Use Just-in-Time Ordering: With the help of technology, you can place orders strategically to receive the ingredients you need without overstocking. 

The greater your insight into inventory costs, the more control you have over how you allocate your budget. Excellent inventory management creates opportunities to save money without sacrificing customer service or the quality of your menu items. 

Prime Cost vs. Total Cost: Which Should You Prioritize? 

You must prioritize where you focus your attention when trying to reduce operating costs, but deciding how to prioritize money-saving efforts can be difficult. It may be helpful to look at your expenses in terms of prime costs and total costs: 

1. Prime Costs: These are the expenses directly associated with running the business, like food and labor costs. 
2. Total Costs: These encompass all expenses associated with running the restaurant, including everything from marketing to cleaning supplies. 

In short, it’s a question of looking at your entire set of expenses to find ways to lower costs or focusing on prime costs, recognizing that food and labor tend to make up a large portion of your overall expenses. 

To experience the most immediate impact, focus on lowering prime costs. You have more flexibility here, especially with optimizing inventory management. Once you feel like you have food and labor costs under control, turn your attention to the rest of your operating expenses.  

How to Adjust Menu Prices Without Losing Guests 

You strive to price menu items in a way to maximize their margins, but the challenge is accomplishing this without devaluing your menu items or losing guests. One solution is using strategic menu engineering to offset rising ingredient costs and labor pressure. In this approach, you leverage menu design psychology to structure a menu that emphasizes high-margin items and guides guests’ attention toward them. 

In addition to menu engineering, consider these four strategies when making smart pricing updates: 

1. Promote Seasonal Menu Changes: Utilizing seasonal ingredients can help you save money, and you can highlight these dishes as exciting new menu items to boost guest enthusiasm. 
2. Incorporate Add-ons and Upselling Options: Design a menu that clearly and easily allows guests to add side dishes, upgrades, or other modifications to their order, which helps profits.  
3. Offer Limited-Time Offers (LTOs) or Specials: You can create a sense of urgency by offering LTOs or specials with a slight upcharge, so guests feel compelled to order a dish before it’s unavailable.  
4. Implement Dynamic Pricing: Adjust the prices of menu items to reflect varying restaurant traffic levels during different times of the day.  

When you make decisions based on accurate insights, you can strike a balance between saving money and maintaining loyal guests. 

Controlling Restaurant Costs Without Cutting Corners 

Providing memorable dining experiences with excellent service enables you to foster strong relationships with customers. However, while you’re trying to increase guest satisfaction, you’re still managing overhead costs.

Use these five tips to reduce costs without jeopardizing customer service: 

1. Leverage Advanced Technology: Intelligent restaurant industry technology provides you with insights to help you make data-driven decisions on how to optimize spend without jeopardizing guest satisfaction. 
2. Find Ways to Be Energy Efficient: Switch to LED light bulbs, use recycled utensils, and optimize your utility usage to reduce costs and conserve energy.  
3. Train and Retain Your Staff: It’s expensive to hire and train new employees, so it can be worthwhile to invest in keeping your existing ones. In doing so, you build up a reliable and knowledgeable team.  
4. Forecast Inventory Needs: Utilize inventory purchasing data to identify order patterns that you can use to project future inventory needs, allowing you to take advantage of bulk ordering or plan ahead to save money.  
5. Create Accurate Budgets: With accurate insights into your operating costs, you can create budgets that make sense for your restaurant, resulting in greater cost visibility and control.  

It’s possible to save money without sacrificing guest experience and this requires accurate data. When you understand your current operating costs, you can set achievable goals to drive revenue and stay competitive.  

Benchmarking Your Restaurant Operating Costs Percentage Against Industry Averages 

In comparing your restaurant’s operating costs percentage to the industry average, you can get a sense of your cost-competitiveness. Use these six benchmarks to understand your total operating costs: 

1. Prime Costs: The average restaurant’s prime costs are about 60 percent or less.  
2. Food Cost Percentage: The food cost percentage should be around 30 percent.  
3. Inventory Turnover Ratio: Ideally, your inventory turnover ratio should be between five and ten. 
4. Table Turnover Rate: Most restaurants see three to five turnovers per service. 
5. Average Labor Cost Percentage: A reasonable labor cost percentage lands between 20 percent and 35 percent. 
6. Average Profit Margin: The profit margin of most restaurants is around 5 percent. 

You can gain a deeper understanding of your operating costs by looking at the ratio of annual sales to total sales. Annual sales refer to the total revenue earned over one year. On the other hand, total sales refer to the total revenue over a more extended period.

By comparing these two numbers, you can calculate your average year-over-year revenue and better understand your long-term profitability. With more data, you have an accurate view of your restaurant’s financial health.  

Frequently Asked Questions About Restaurant Operating Costs 

These are our answers to the most common questions about restaurant operating costs.  

What is the ideal operating cost percentage? 

The ideal operating cost percentage is less than 60 percent. You can calculate your percentage by dividing your total operating costs by your revenue, then multiplying that number by 100. 

What type of restaurant most often has the highest labor cost? 

Restaurants that require staff with specialized skills or training often see the highest labor costs. Fine dining establishments usually make up the majority. 

How do I reduce labor costs in my restaurant? 

To reduce labor costs in your restaurant, focus on scheduling employees efficiently and minimizing turnover. You should also take advantage of technology to determine your exact labor needs, busy hours, and average shift times.  

Take Control of Your Restaurant Operating Costs to Drive Sustainable Profit 

With a foundational understanding of your restaurant’s operating costs, creating strategies to save money and drive revenue is within reach. You can make empowered, data-driven decisions to boost savings and control your restaurant’s operating cost percentage.

It’s easy to get started today by assessing your profits and losses and applying the insights you’ve gained here.