How to Reduce Overhead Costs in Your Restaurant

When it comes to running a restaurant or food service business, understanding your overhead is going to help.

By performing calculations based on your revenues versus expenses, you’ll have a better idea of what is going on in the kitchen, and how that impacts your bottom line. Here are some things to think about if you are trying to find out how to find the total overhead cost.

What is Overhead?

One of the better ways to talk about what overhead is includes talking about what it isn't.

Overhead is the total cost of your ongoing restaurant operation. Things like rent, taxes, salaries, and benefits, as well as equipment, utilities, management, and advertising costs, are considered when determining overhead cost.

Most people do not include food costs and inventory costs in overhead. They have their own separate cost component.

When determining overhead, it's smart to think about how profitable your restaurant is.

How to Find Total Overhead Cost: How is Overhead Calculated?

To get your overhead as a percentage of total sales, divide the overhead number from your total sales and multiply by 100.

The result should be a percentage – for instance, your restaurant overhead percentage could be 20% or 25%. Any restaurant overhead percentage over 35% generally means that your business is not working very well in terms of profit margin.

Think of it this way – 33% is one-third of your profit. If more than that is being taken up by overhead, less is left for you to spend on other things, including food inventory and everything else that is critically important in the restaurant business.

How to Lower Overhead

There are several different paths you can take when you're looking for ways to lower overhead for a restaurant, for example, the cost of your rent.

Some restaurants are able to renegotiate leases with better terms to save money. There's also the alternative of sharing kitchen space with another business.

With the recent arrival of new food delivery services, a new kind of kitchen has emerged called a ‘ghost kitchen.’ The ghost kitchen uses a shared kitchen area to create dishes.

The idea here is that if you're squeezed for money, and not open all hours of the day and night, you can take those hours that you're not using and sublease them out to a ghost kitchen. That's additional money coming in, and saves on your total overhead, helping you to “balance the books” for a better revenue equation.

Another example could be examining the costs of your utilities.

You can pursue a greener dishwasher approach that saves water and look for ways to cut down on your energy use with other equipment, too. For example, a lean inventory method helps you to save money on your refrigerators and freezers because the air circulates better when the space isn’t crammed full of cargo.

In general, a good tip is to look at ‘spinners’ – items that really make your energy meter spin quickly – and tackle those to get real utility savings. A few lights may not really make a difference in your energy bill, but how you fire up your ovens, or how you heat a dining space, might.

A lot of these utility savings can come through designing the right menu. In general, many experts that come in to advise struggling restaurants suggest that they adopt a smaller menu. There are various savings in terms of food costs but there are also savings in terms of utility costs.

For instance, if you have one energy-efficient piece of equipment that's helping your chef create more dishes, and you can eliminate dishes that use other kinds of specialized equipment, you can save on operating costs along with savings on equipment long term.

Saving Money on Kitchen Gear

As mentioned above, you can change the ways that you use kitchen equipment to save money. Purchasing more energy-efficient equipment to lower your total overhead is another key element to lowering costs.

Business people often talk about expenses in terms of capital expenditures and operating expenditures, “capex” or “opex” for short.

Your overhead is part of your opex expenditures – they are ongoing costs that are going to apply to your restaurant for the life of your business.

Think about other components, too, like the cost of advertising, and how you can lower it by creating more affordable campaigns to get local attention and traffic to your door.

The above tips can help you to get a better handle on overhead for a restaurant. If you have an existing business plan, a lot of this may be documented in it. If not, it’s in your best interests to create something that will provide more transparency on revenues, expenses, and what your restaurant is making over time.

For everything that you need to run an efficient, money-making restaurant, turn to Chefs’ Toys. We have actual kitchen experience, which allowed us to put together a catalog that helps with overhead and much more.