We all know that profit margins are razor-thin in hospitality. It’s why effective cost management isn’t just important — it’s key to survival.
But cost management is tricky. The financial goalposts are constantly moving with fluctuating prices and changing customer demand.
Plus, it’s hard for restaurant operators to fully understand and manage the financial levers that determine their profitability. You came into the business because of your passion for it — not because of your accounting expertise. 🤷
One of the common financial pitfalls is failing to distinguish between fixed and variable costs. This lack of clarity often leads to poor decision-making, which can reduce profits and impact your bottom line. Not ideal.
But good news! In this article, we break down the basics of fixed and variable costs in a restaurant. By the end, you’ll know how to differentiate the two, how to manage them effectively, and how AI-powered systems like Nory can revolutionise your cost control.
Fixed vs variable costs: What’s the difference?
Let’s start by defining what fixed and variable costs are, and how to tell them apart.
What are fixed costs in hospitality?
Fixed costs remain constant regardless of business volume. In other words, they don’t change regardless of how much (or how little) business you do.
Here are some examples of fixed costs for restaurants:
- Rent and mortgage payments
- Annual employee salaries
- Insurance payments
- Equipment leases
All of these costs are predictable, staying the same no matter what. This is great for budgeting and planning for the long term. Plus, it’s easy to calculate your break-even point (the level of sales your restaurant must achieve to cover all its costs) without making a loss.
It also makes cost-plus pricing easier to manage. In a cost-plus pricing strategy, you set menu prices by adding a markup to your costs. If your fixed costs are high, you’ll need to ensure that your markup covers these expenses.
For example, if your rent payments are high because you’re leasing a property in central London, your menu items might need a higher markup to ensure these costs are met.
So what are the drawbacks of fixed costs?
One of the downsides of fixed costs (and especially higher fixed costs) is that it can push your menu prices higher. In the current cost-of-living crisis, this can be an issue for some diners.
The solution? Balancing the need to cover fixed costs with what customers are willing to pay, which isn’t always easy.
Hot tip 🔥 Read our article about how to increase menu prices and still maintain customer loyalty for tips and insights into strategically upping your prices.
Fixed costs are also harder to adjust in the short term.
Let’s say you have an unexpectedly slow month at the restaurant. You decide to step in and make some changes to your spending to keep your profit margins healthy (very sensible of you).
But you can’t change any of your fixed costs. These are coming out of your bank account no matter what (unless they’re at the end of their contract). So, you have to look at other areas where you can minimise your spending, like your variable costs.
What are variable costs in hospitality?
Variable costs fluctuate with business volume. As the number of customers or the volume of food produced increases, variable costs rise accordingly.
Here are some examples of variable restaurant costs:
- Food and beverage costs (including the cost of goods sold)
- Hourly wages (for staff that work flexible hours)
- Utility bills
Unlike fixed costs, variable costs are easier to change in the short term. They’re much more flexible, meaning you can make quick changes to boost revenue and increase your profit margins.
Let’s say that your classic cheeseburger is a top seller in your restaurant. To boost your profits, you reach out to your meat supplier to negotiate a bulk deal on minced meat for your burger patties.
As a result, you buy more meat at a better price, which increases the profit margins for your top-selling burger.
Are there any downsides to variable costs?
The biggest issue is unpredictability. Variable costs can change pretty quickly, making it harder for you to budget and forecast effectively.
Although there is a solution to this problem: Restaurant management technology.
With Nory, for example, you can track costs in real-time. If costs change, you can see it instantly. The system automatically updates your forecasts, profit margins, and so on. That way, you can keep on top of spending and ensure your restaurant is as profitable as possible.
Our AI-powered system can also predict your variable costs based on historical data. This gives you a chance to get ahead of the curve and proactively manage your variable costs.
Nory success story 🥳 Discover how Rocksalt uses Nory to accurately track prices and supplier costs, allowing them to make instant changes to optimise spending.
With instant access to real-time pricing, reviewing costs is a much less time-intensive experience. Stephen Burns, the Group Operations Manager at Rocksalt, now spends less time managing pricing and more time running the business.
“Because all the ordering and invoices are updated daily, we can catch a price increase from a supplier pretty much instantly. As soon as we spot it, we can react to it immediately.” – Stephen Burns.
How to optimise fixed costs in your restaurant
Negotiating contracts is one of the best ways to optimise your fixed costs.
With long-term contracts, it’s easy to let things roll over for another year instead of spending the time looking at other options — but this is where you can save money. By looking for other options, you can:
- Find better deals. By looking at other options on the market, you might find a better deal. If you don’t look at all, you’ll never know what’s out there.
- Use other suppliers as leverage. If you find a better deal elsewhere, let your current supplier know. This can act as leverage, giving you negotiating power to bring your current contact price down.
Tracking fixed-term costs with technology is also a great way to optimise them.
With Nory, for example, you can keep a close eye on your fixed costs and compare them with your restaurant’s performance. If they’re making a big dent in your profits, you can easily see it in the system. This means that you can start thinking about other ways to increase profits, like changing suppliers at the end of your contract or reducing your variable costs.
How to control your restaurant’s variable costs
The key to controlling variable costs is having real-time access to data. With real-time data, you get valuable insight into your restaurant’s sales and performance, which helps you predict future demand.
Keeping track of customer demand is one of the best ways to ensure optimal spending on variable costs. When you know what to expect, you can make sure your spending is in check.
Take a look at Nory as an example. With our real-time data, you can see live restaurant sales, stock levels, and profit margins. Using this information, we can accurately predict demand and forecast future sales.
The results? You can optimise spending on your variable prices, like labour and inventory costs:
- Improve your inventory management. Instead of taking a stab in the dark and hoping you have the right amount of ingredients to meet customer demand, Nory can predict demand to ensure you have the right amount. This means spending less on ingredients you don’t need and reducing the amount of food that goes to waste. It’s a win-win.
- Optimise labour schedules. Nory creates demand-based schedules to ensure you schedule staff when they’re actually needed. If you overschedule a shift, you’re paying for unnecessary wages — and this can really make a dent in your profits.
Nory success story 🥳 See how Badiani UK achieves 96% sales accuracy with Nory! By tracking inventory and sales in one location, Badiani can now optimise its inventory orders and create optimal labour schedules to meet demand. This means preventing overspending on wages during quiet times, which keeps profit margins healthy.
“We really look forward to growing in the future, and having Nory alongside us every step of the way. Nory has been fundamental in tailoring a solution for our growth.” – Faraj, Head of Operations, Badiani UK
The value of leveraging technology for cost management
Every restaurant has fixed and variable costs. Understanding what these costs are and how to optimise them effectively is the difference between a profitable restaurant and
And the best way to optimise these costs?
Restaurant technology.
With the right systems in place, you can track costs and spending to future-proof your restaurant. Nory, for example, allows you to:
- Track fixed and variable costs in real-time. Get instant visibility into cost fluctuations so you can make quick, informed decisions to increase profits. Negotiate prices with suppliers, source new suppliers for better deals, and ensure that all your costs are as low as possible to boost your gross profit margins.
- Optimise your inventory management. Reduce waste and improve cash flow by optimising your inventory management. Manage supplier relationships, track stock levels, and ensure you only order the ingredients you need to meet customer demand.
- Control labour costs: Use AI-driven scheduling to prevent over-scheduling during quiet periods and impacting your bottom line. Ensure you have enough staff to meet demand at any given time to deliver the best possible customer experience without overspending on wages.
It sounds too good to be true, right?
We promise it’s not! Take a look at Roasting Plant Coffee to see for yourself. After working with Nory for just two months, the cafe reduced labour costs by 18% and increased its sales forecasting accuracy by 98%. 🤯
Want to find out more? Book a call with the team to get this show on the road.
FAQs about fixed and variable costs
How do you calculate fixed restaurant costs?
Calculating your fixed costs is pretty simple. Start by identifying all the expenses that remain constant regardless of sales (like rent or mortgage payments, employee salaries, and so on). Then, add these up every month (ensuring annual costs are divided by 12). And voilà — these are your fixed costs.
How do you calculate variable restaurant costs?
Calculating variable costs is pretty much the same process as calculating fixed costs, but it requires more nuance. For example, food operators have to break down the following costs in a given period:
- The food costs of each menu item sold
- The cost of hourly staff wages
- Energy prices and usage
What is value-based pricing?
Value-based pricing involves setting menu prices based on the perceived value to the customer rather than strictly on cost. It considers things like the dining experience, quality of ingredients, and the ambiance of the restaurant instead of solely looking at the cost of producing a meal.
