Mastering Restaurant Costs – Part 1: Understand Your Costs and Build a Control Framework

When your love for cooking meets the harsh reality of restaurant math.

Many restaurant entrepreneurs face the same frustrating dilemma: sales seem fine, the menu looks great, the reviews are solid… but profits? Nowhere to be found. The reason often isn’t a lack of passion or quality; it’s a lack of clarity.

Before we talk about savings, growth, or expansion, we need to start at the core: understanding what it truly costs to operate your restaurant.

This article is the first in a three-part series that will help you take control of your restaurant’s financial health, not with guesswork, but with data and strategy.

Know the Difference: Fixed vs. Variable Costs

The first common mistake is lumping all costs together. In reality, not all expenses behave the same way. You need to distinguish between the two main types:

Fixed Costs

These are the expenses that don’t fluctuate significantly month to month. They’re predictable and often locked in through contracts or service agreements. Examples include:

• Rent or mortgage.

• Utilities (electricity, gas, water)

• Licenses, insurance, permits.

• Salaried employees.

• Payment processing fees.
  

While you may not eliminate these, you can renegotiate or optimize their structure. These costs are the price of simply “being open.”

Variable Costs

These change with the flow of your business and are directly influenced by your daily operations. Unlike fixed costs, variable costs are controllable, and this is where your focus should be when aiming for profitability.

They include:

• Food, beverage, and ingredients (COGS)

• Disposable packaging or delivery containers.

• Cleaning supplies and kitchen consumables.

• Hourly labor (kitchen, servers, delivery staff).
  

Among your variable costs, the most critical are prime costs, which are the combination of your COGS and direct labor.

How to Calculate Prime Cost

To manage your costs, you need to measure them. Here’s how prime cost works:

Prime Cost = COGS + Direct Labor.

Let’s break it down:

• Monthly COGS: $30,000.

• Labor (wages, taxes, benefits): $5,000.

• Monthly sales: $60,000.
  

Total Prime Cost = $35,000Prime Cost Ratio = $35,000 ÷ $60,000 = 58%.

Tracking this number monthly is essential. A healthy prime cost typically ranges between 55% and 65% of total sales in most restaurant models.

Why This Matters

If you don’t know your prime cost, you’re flying blind. This number is your compass—it helps you:

• Set prices with confidence.

• Detect cost creep from suppliers or labor fluctuation.

• Know when to raise prices or reduce portions.

• Benchmark across different periods or locations.
  

Without this foundational metric, any other action you take will be reactive—and potentially too late.

Many restaurateurs invest deeply in the menu, the space, and the guest experience—and they should. But if you’re not equally invested in understanding your numbers, you’re building on shaky ground.

Cost control is not about cutting corners. It’s about being a responsible owner, a strategic operator, and a leader with a long-term vision. When you genuinely understand your costs, you gain freedom—the freedom to scale, to experiment, and to grow sustainably.

In Part 2 of this series, we’ll dive into how to track and update your costs consistently using automation tools, and how to avoid the monthly surprise that your profit margin is gone. Are you ready? kitxens.com