Whether you’re opening your dream restaurant from scratch, or taking over an existing establishment, what’s the one thing that can make or break your restaurateur dreams?

Your restaurant budget.

Having a well-researched, strategically outlined budget is imperative for any restaurant, new or old. And with all the responsibilities already involved in running an eatery — greeting guests, writing specials, managing payroll, maintaining kitchen equipment — administrative tasks like budgeting are easy to let fall by the wayside.

Don’t fall into that trap. Budget planning is the savvy restaurateur’s first step towards success and profit. Here’s how.

Why is restaurant budget planning important? 

Ever tried to take a long road trip without a map? Of course not. That’s crazy.

But that’s what running a business without a comprehensive budget plan is like. You can have the most talented, competent staff; a brand new, top-of-the line kitchen; loyal customers who can’t stop coming back for your food. But without careful budgeting, you can still run that business into the ground.

You need insight into into your losses and your gains. You need to know you’re not overspending on food and ingredients. You need to know how to price your cocktails. You need to know how much to pay your staff, and how many of them to schedule at any given time. You need to track your spending to make sure money going out isn’t more than money coming in.

In other words, you need a budget.

Who should be involved in budget planning? 

Unlike many facets of running a restaurant, budget planning shouldn’t involve your entire staff. It’s a task that’s better left to administrative staff, managers, supervisors, and any partners or investors who are heavily involved in your restaurant’s operations.

Managers (which should include executive chefs and entertainment managers, if your restaurant employs those) should have a hands-on involvement in setting the monthly, quarterly or annual budgets that they need to run their departments.

And when setting your budget, it might be a good idea to have an attorney or financial planner present to oversee agreements, spending reports and other pertinent information.

What are the goals when restaurant budget planning? 

It’s easy to fall into thinking the purpose of planning a budget is to keep expenses lower than income. In reality, there’s more to it than that.

You need a comprehensive budget plan to maximize your potential for profit while eliminating waste and over-spending.

A well-researched and carefully planned budget will keep you from overspending on food, ingredients, alcohol, kitchen supplies and cleaning supplies. It will also ensure you are keeping administrative costs like payroll and marketing cost-effective.

A budget plan should also help you design a menu with good profit margins.

If you’re designing your establishment’s menu from scratch, your budget plan can be instrumental in deciding what dishes to include

How do you create a restaurant budget?

There’s a basic, general formula that provides a good starting point for any restaurateur who’s planning a budget:

Follow the 68% formula

What this means is that your restaurant’s overhead expenses should account for right around 68% of your budget (with a little bit of wiggle room, because every restaurant is different). The breakdown for this is around 30% for food and supplies, 25% for payroll, 3% on utilities, including gas, electric, phone bill and internet, and 10% on rent or the mortgage for the building space. The remaining 32% should be profit.

 A road map for planning out your budget

First, evaluate your current reality

This can’t just be an educated guess. Pull all your receipts, your purchase orders, your payroll. You need an accurate picture of your expenses and income right at this moment.

Next, calculate the return on investment (ROI) for everything in your budget.

You need to know inside and out how much profit margin you’re getting for each dish on your menu. You have to balance that against the cost of having staff on the clock. If you have too many staff on at a time, the ROI on your staffing expenses won’t be great. If you’re overspending on ingredients, the ROI on your menu may need improvement. Figure out where you’re at now, and maybe set some goals about where you’d like to be.

Then, do a careful audit of your current overhead and income

And importantly, identify places where you need to make adjustments. Keep the percentages from the 68 percent formula in mind as you tweak different parts of your budget.

Finally, replace the old with the new

Now that you have a budget plan, implement it and stick with it for success! 

Starting a restaurant budget from scratch

Opening a restaurant from the ground up takes even more careful budgeting. While ambition, a good taste for food and a vision for a niche cuisine will help a new restaurant owner, no restaurant is going to open without capital — and lots of it.

Depending on the state in which you are opening and licensing a restaurant, permit fees can run up to $7,000. And it’s only after that that you get into the real costs of opening a new space.

In some cases, opening a new, 90-seat restaurant can run anywhere from $275,000, or around $3,064 per seat, to $400,000, or around $4,444 per seat. And those are just the ends of the median costs. Any unexpected setbacks could cause that cost to rise even more.

Opening a new restaurant is far from cheap, which is why it’s absolutely necessary to have a good business plan and a budget when you start.

Restaurant startup costs you need to plan for

First, your venue

Market cost for a restaurant-friendly commercial space will vary wildly depending on your chosen location. In Chicago, for example, commercial space is now trending over $40 per square foot. Compare that to Toronto, where restaurant real estate can be as high as $100 per square foot in high-traffic neighborhoods.

As a general rule to follow when picking a location, your rent or lease agreement should not exceed six to 10 percent of your projected gross annual sales. If you can, get an assignable lease. That way, if a restaurant goes under, you’re able to reassign your lease to someone else and avoid bearing the cost even if the next tenant goes under.

Then there are the costs for fitting out your restaurant

(Costs on average, $300 to $500 per square foot) and supplying all the equipment for both the front and back of house (on average, $150 to $300 per square foot). We’re already over several hundred thousand dollars here.

And don’t forget about your initial food costs

The first food and beverage order that’s placed will be larger than average, so up to $25,000, depending on the concept of the restaurant (this cost will be lower for something fast-casual than something gourmet, for example).

And once you’ve dropped all that cash, there’s still the operating costs to cover.

With all of these costs adding up, you see why it’s common for restaurants to operate in the red for their first several years, and why so many of them fail early on.

Want to learn more? Read the Guide to Restaurant Accounting & Inventory Management.