Comprehensive Guide to Calculating Restaurant Overhead Rate
Careful financial planning is necessary for managing a successful restaurant, and overhead costs are one important consideration. Accurately calculating your restaurant's overhead rate is essential for maintaining profitability and operational efficiency. This guide will provide an in-depth look into calculating your restaurant's overhead rate, making sure your company has the resources it needs to run efficiently.
Understanding Restaurant Overhead Costs
Overhead costs are the ongoing expenses associated with operating a restaurant that are not directly tied to food production or service. These costs can be categorized into two main types: fixed and variable.
Fixed Overhead Costs
Fixed overhead costs remain constant regardless of your restaurant's sales volume. Common fixed costs include:
• Rent or Mortgage: Monthly payments for your restaurant's physical location.
• Property Taxes: Regular tax payments on your property.
• Insurance: Coverage for liability, property, and worker's compensation.
• Salaries: Fixed wages for managerial staff and salaried employees.
• Depreciation: Gradual reduction in the value of your restaurant's assets, such as kitchen equipment and furniture.
Variable Overhead Costs
Variable overhead costs fluctuate with your restaurant's level of business activity. Examples include:
• Utilities: Costs for electricity, gas, water, and waste disposal.
• Supplies: Cleaning products, office supplies, and other miscellaneous items.
• Repairs and Maintenance: Upkeep of kitchen equipment, HVAC systems, and the physical premises.
• Marketing and Advertising: Expenses for promotions, advertising campaigns, and social media.
Steps to Calculate Your Restaurant Overhead Rate
Accurately calculating your restaurant's overhead rate involves several key steps. Below, we outline a detailed process to help you determine this critical financial metric.
Step 1: Gather Financial Data
Collect comprehensive financial data for a specific period, typically a month or a year. Ensure you have detailed records of all fixed and variable overhead costs.
Step 2: Calculate Total Overhead Costs
Sum up all fixed and variable overhead costs for the chosen period. This total represents your restaurant's overhead costs.
Step 3: Determine Total Sales
Identify your restaurant's total sales for the same period. This figure will be used to calculate the overhead rate as a percentage of sales.
Step 4: Calculate the Overhead Rate
Use the following formula to calculate your restaurant's overhead rate:
Overhead Rate (%) = (Total Overhead Costs / Total Sales) x 100
Overhead Rate Example Calculation
Consider a restaurant with the following financial data for one month:
Fixed Overhead Costs:
Rent: $5,000
Insurance: $1,000
Salaries: $4,000
Depreciation: $500
Variable Overhead Costs:
Utilities: $2,000
Supplies: $1,500
Repairs and Maintenance: $3,000
Marketing and Advertising: $3,000
Total Overhead Costs for the month would be calculated as follows:
Total Fixed Overhead Costs = $5,000 + $1,000 + $4,000 + $500 = $10,500
Total Variable Overhead Costs = $2,000 + $1,500 + $3,000 + $3,000 = $9,500
Total Overhead Costs = $10,500 + $9,500 = $20,000
Assuming the total sales for the same month is $100,000, the overhead rate calculation is:
Overhead Rate (%) = ($20,000 / $100,000) x 100 = 20%
In this example, the restaurant's overhead rate is 20%, indicating that 20% of its sales revenue is consumed by overhead costs.
Note: When calculating your restaurant's overhead rate, it's also essential to understand how these costs factor into your overall profitability. A key tool for evaluating financial health is break-even analysis, which helps determine when your revenue covers all fixed and variable costs. Learn more in our Ultimate Guide to Calculating Break-Even Point for Restaurants, where we explore how to assess your restaurant's financial health and develop effective strategies for growth.
Analyzing and Optimizing Your Overhead Rate
Understanding and optimizing your overhead rate is crucial for maintaining profitability. High overhead rates can erode profit margins, making it essential to regularly review and manage these costs.
You may also find it beneficial to read our Guide to Restaurant Profit Margins, which provides insights on how overhead rates affect overall profitability and strategies for optimizing both.
Benchmarking Against Industry Standards
Compare your overhead rate to industry benchmarks to identify areas for improvement. The average overhead rate for restaurants typically ranges from 15% to 25%. If your overhead rate exceeds this range, consider strategies to reduce costs.
Cost Reduction Strategies
Energy Efficiency
Invest in energy-efficient appliances and lighting to reduce utility costs. Regularly maintain equipment to ensure optimal performance.
Supplier Negotiations
Negotiate better terms with suppliers to lower the cost of supplies. Consider bulk purchasing or long-term contracts for additional savings.
Streamlined Operations
Implement efficient scheduling and inventory management systems to minimize waste and reduce labor costs.
Outsource Your Back-Office
Outsourcing back-office functions such as accounting, payroll, and human resources can significantly reduce overhead costs. By outsourcing these tasks, you can lower wages and insurance costs associated with maintaining a larger in-house administrative staff. Additionally, outsourcing reduces the need for supplies and utilities required for back-office operations, such as computers, office space, and energy consumption. Professional accounting firms or specialized service providers can handle these tasks more efficiently and cost-effectively, providing access to expertise, advanced technology, and streamlined processes. This approach enhances financial management and compliance while freeing up time to focus on core restaurant operations.
Utilizing Technology
Leverage technology to improve operational efficiency. Point-of-sale (POS) systems, inventory management software like R365, and employee scheduling tools can streamline processes and reduce overhead.
Regular Financial Reviews
Conduct regular financial reviews to monitor overhead costs and identify trends. Adjust your strategies as needed to maintain an optimal overhead rate.
5 easy Steps For Restaurant Overhead Rate Calculation
[Gather Financial Data]
[Calculate Total Overhead Costs]
[Determine Total Sales]
[Calculate Overhead Rate]
[Analyze and Optimize Overhead Rate]
Conclusion
Calculating and managing your restaurant's overhead rate is vital for financial health and long-term success. By understanding the components of overhead costs, accurately calculating the overhead rate, and implementing cost-saving strategies, you can optimize your restaurant's profitability and efficiency.
Contact us today to learn how Over Easy Office (OEO) can help you streamline your back-office operations and reduce overhead costs.
Hiring a hospitality-focused accounting firm can significantly reduce overhead costs by lowering wages and insurance expenses, as well as reducing the need for supplies and utilities associated with back-office operations. Regular financial reviews and benchmarking against industry standards will help ensure your overhead rate remains in check, allowing your restaurant to thrive in a competitive market.