How to Manage Restaurant Finances

Operating a restaurant means more than creating delicious dishes and a welcoming atmosphere—it also needs innovative financial management. Without a clear plan for handling expenses, cash flow and labor costs, even the busiest restaurants can struggle to stay profitable. 

Below, we’ll break down some of the most crucial tips to take to manage your restaurant’s finances properly. From budgeting to financial forecasting and beyond, we’ll teach you proven strategies that’ll help you take control over your finances to build long-term success.

Create Financial Goals & Objectives

First things first: you need to set clear financial goals. Having financial objectives to follow will help you reach your goals and guide your decision-making process. For instance, if you’re aiming to improve profit margins, you could set a specific percentage increase as your goal. If you’re planning to reduce food waste, consider setting a target for the amount of waste you aim to reduce. Or if you’re considering upgrades, you could set a budget for the renovations. These goals and objectives will help you prepare for all the exciting aspects of your restaurant.

As suggested by NetSuite, consider breaking down your financial goals into three categories: short-term, medium-term and long-term financial goals.

Short-Term Financial Goals

Short-term goals are objectives you aim to accomplish within a year or less. For restaurants, some common short-term goals include:

• Lowering food costs


• Increasing average check size


• Reaching specific sales or profit goals


• Improve labor cost efficiency

Medium-Term Financial Goals

Medium-term goals are objectives that can be achieved within one to five years. In the restaurant industry, common medium-term financial goals can include:

• Paying off debt


• Renovating the dining room


• Investing in new commercial kitchen equipment


• Expanding your staff

Long-Term Financial Goals

Long-term goals are objectives that you want to complete within five years or more. These can commonly be:

• Opening a second location 


• Paying off debt


• Hit a significant financial milestone

Once you have your financial goals and objectives laid out, you now have a roadmap to follow for long-lasting financial success.

Make a Budget (and Stick to It)

Now that your goals are in place, it’s time to create a detailed budget. Having a budget is not just about tracking your spending; it’s about staying in control and organized. It’s a tool that will help you adhere to your goals and manage your restaurant’s finances effectively.

Here are some key areas to include in your budget:

• Expense tracking—Track EVERYTHING, from fixed costs to food & beverage expenses and everything in between. These expenses need to be evaluated regularly within your budget.


• Monitor food & beverage costs—From inventory to portion sizes to food waste, keep a close eye on your food and beverage spending.


• Fixed costs—These are expenses that happen regularly, like rent, bills and utilities.


• Planned maintenance expenses—Make sure you budget for your regularly scheduled planned maintenance tasks to keep your equipment running properly.


• Labor & salary costs—Include direct wages, indirect wages and additional employee benefits.


• Unplanned expenses—Set aside funds for any emergencies or unexpected costs.

To help you track and manage your budget, consider investing in accounting software.

Manage Food & Beverage Costs

Your food and beverage (F&B) costs are your biggest expense when it comes to operating a restaurant. There’s a lot that goes into managing these costs, so let’s break it down.

Track Food Cost Percentage Regularly

The first step is knowing your numbers. To do that, you’ll need to gather some vital information like:

• Beginning Inventory—The value of food on hand at the start of the period.


• Purchases—All food bought during the period.


• Ending Inventory—The value of food left at the end of the period.


• Food Sales—Total sales of food items during that same period (from your POS).

Next, it’s time to do some math to figure out your Cost of Goods Sold (COGS): 

COGS = Beginning Inventory + Purchases – Ending Inventory

This number tells you how much food you actually used, and not just bought. For example, let’s say your beginning inventory costs $5,000, your purchases cost $7,000, your ending inventory is $4,000 and your food sales total $25,000. To determine your COGS, let’s follow the formula above:

5,000 + 7,000 – 4,000 = 8,000

In this example, your COGS is $8,000.

Once you have your COGS, it’s time to apply the food cost percentage formula. This will give you a better understanding of how much you’re spending on food and beverages, so you know where to make improvements. The food cost percentage formula is:

Food Cost % = COGS ÷ Food Sales x 100

Using the example from above, where we determined the COGS, let’s apply that to the food cost percentage formula, where the COGS is $8,000 and the food sales total is $25,000:

(8,000 ÷ 25,000) x 100 = 32%

In this example, your food cost percentage is 32%. Industry benchmarks usually fall between 25 and 35% depending on the restaurant type. If your number is higher than your target, it’s time to check for excessive waste, portioning, or pricing discrepancies.

Implement Strong Inventory Control

To help lower F&B costs, start with your inventory. You must regularly count your inventory every week (or even daily for high-cost items). From there, you can track usage of expensive items like proteins and alcohol closely. To make this process easier, consider investing in inventory management software and integrating it with other technologies you already use in your restaurant, ensuring the most accurate count possible.

Standardize Recipes & Portion Sizes

Standardizing recipes and controlling portions will help reduce food waste and establish portion control guidelines for your kitchen staff. To do so, create recipe cards with exact ingredient measurements. You should also train staff to use portioning tools (scales, ladles, measuring cups) to ensure consistency. With these new strategies in place, you can help prevent “plate creep” (portions unintentionally getting larger over time).

Reduce Food Waste

In our guide on how to reduce food waste, we identify some of the most common causes as over-ordering, food preparation, spoilage and plate waste. To reduce food waste, here are some quick tips you can follow:

• Monitor prep levels to avoid over-preparing perishable items.


• Repurpose excess ingredients into specials or staff meals.


• Analyze plate waste and adjust portions if customers consistently leave food behind. 


• Use the First In, First Out (FIFO) storage method to reduce spoilage.

Work with Suppliers Strategically

To keep F&B costs down, consider working strategically with your suppliers. By negotiating better prices through bulk orders or long-term contracts and comparing multiple vendors, you can ensure competitive pricing. This approach will make you feel empowered and resourceful in managing your restaurant’s finances.

Engineer the Menu for Profitability

Follow menu design psychology tactics to highlight high-margin items on the menu, such as chef’s specials or signature cocktails. Next, remove low-profit, low-demand dishes that tie up resources.

Control Beverage Costs

Use measured pour spouts or jiggers to prevent overpouring. Also, be sure that you train bartenders and servers to upsell premium options with better margins. Then, along with your food inventory management, be sure to monitor keg yields, bottle usage and spillage.

Control Your Labor Costs

After food, labor costs are your second-largest restaurant expense. According to Restaurant 365, you should keep your labor costs to around 28-33% of your total revenue. However, they also recommend regularly reevaluating your labor costs since so many factors can fluctuate.

With this in mind, how do you actually control your labor costs?

Types of Labor Costs

For restaurants, especially, numerous types of labor costs need to be considered. These are broken down into two categories: direct costs and indirect costs. 

• Direct Costs—These include wages, salaries and other types of compensation that are paid to the employees for labor-related activities.


• Indirect Costs—These include employee benefits like health insurance, workers’ compensation, uniforms, payroll taxes and any training expenses.

These various types of expenses need to be taken into consideration when calculating labor costs.

Calculating Labor Costs Percentages for Restaurants

First, it’s crucial to determine the correct percentage to aim for when it comes to labor costs. Depending on the type of restaurant you run—fast casual, quick-service, casual or fine dining—you may need to adjust your percentage accordingly. Typically, casual and fine-dining restaurants have more labor costs, while QSRs and fast-casual restaurants have less.

Next, it’s time to do some math. You can either use an online labor cost calculator from Toast, Restaurant 365 or TouchBistro, or you can do it the old-fashioned way and use a formula. The most commonly used labor cost percentage formula is:

Labor Cost % = Total Labor Cost ÷ Total Sales x 100

Calculate the total labor costs (including wages, salaries, overtime, benefits, payroll taxes, and insurance) and the total sales (gross sales for the same time period), then divide the labor costs by the sales. Next, multiply that number by 100. 

As an example, let’s say your labor costs are $7,500, and your total sales are $25,000. You’ll divide those two totals, then multiply that new total by 100:

(7,500 ÷ 25,000) x 100 = 30

In this example, your labor cost percentage is 30%. Once you have the labor cost percentage, you can then determine how to manage your labor cost if the percentage is lower or higher than anticipated.

How to Manage Labor Costs

Now that you’ve got the numbers, it’s time to manage your labor costs. Here are some strategies on how to keep these costs in line:

• Manage staff schedules—Using scheduling software, manage each staff member’s schedules to avoid overstaffing and understaffing. This is especially important during both slow and peak sales periods. 


• Increase employee retention rates—There are many ways you can improve your restaurant’s employee turnover rate. According to Toast, some of the most common reasons why an employee might leave include low pay, lack of recognition and little to no career growth. Make sure you pay your employees a fair salary and give your staff the recognition they deserve. Consider rewarding employees with bonuses when they excel, and provide ongoing training to those who want to advance in their careers. These factors, and more, can help you retain your employees.


• Cross-train your employees—Training your employees to do various jobs around your restaurant can help keep your operations running smoothly. It can also help keep labor costs low, so you don’t have to schedule too many employees for a shift.


• Predict overtime—While some overtime will occur, you can reduce it by staying up-to-date with the work schedule to anticipate any gaps that may lead to large amounts of overtime.  


• Check labor reports—Regularly checking labor reports will keep you informed of where you are wasting resources and where you can reallocate them. You can then use this information to schedule your staff accordingly.

Build & Maintain a Cash Reserve

A cash reserve, also known as a “rainy day fund,” is a set amount of money saved for emergencies. This reserve provides a cushion for you in case you have unexpected downtime or your equipment needs costly repairs. To keep yourself comfortable and prepared for the unexpected, here’s how to build a cash reserve for your restaurant:

• Save 3-6 months of operating expenses—Just like with your personal finances, saving around 3-6 months’ worth of operating expenses can help in a pinch.


• Don’t touch the cash reserve—Refrain from dipping into your cash reserve except for emergencies.


• Rebuild the cash reserve—If you’ve used some or all of your cash reserve, be sure to rebuild it quickly.