How to Control Fixed & Variable Restaurant Costs to Boost Profit

Key takeaways

• Understanding fixed vs. variable costs is vital to controlling your restaurant’s profitability. Fixed costs (like rent and insurance) are stable, while variable costs (like food and hourly labor) change with sales.

• Profitability depends on how well you manage costs. Fixed and variable expenses are the barriers between revenue and profit, so learning how to influence them can impact your bottom line.

• Fixed costs include rent, utilities, tech subscriptions, and salaried wages. These are consistent month to month and harder to change quickly.

• Variable costs, such as cost of goods sold (COGS) and hourly labor, can and should be closely monitored and changed frequently to reflect sales trends and market prices.

• Break-even analysis is important. Hitting your break-even point (where total revenue matches total costs) is an important financial milestone.

• Consistent cost calculations are necessary. Restaurant operators should regularly calculate both fixed and variable costs to get the clear financial picture and find opportunities to cut waste.

• Restaurant technology can streamline cost tracking. Tools like Toast POS, Toast Payroll, and xtraCHEF can automate invoice analysis, labor reporting, and profitability tracking.

In 2024, surveyed restaurant operators' top pain points were inflation, guest throughput, hiring employees, marketing, and guest foot traffic, according to data at Toast.

This year, a higher percentage of respondents say analyzing and managing the cost of goods and services and supplier and vendor management are top pain points compared to last year. Inflation (or the increased costs of goods and services) is still a top pain point for operators.

Restaurant operators should consider calculating fixed expenses and variable costs in order to accurately track their profitability and bottom-line growth.

These restaurant fixed and variable expenses are the one thing standing between sales and profits, so understanding them and how to influence them — drive them down — can be critical for lowering costs and growing the bottom line.

Read on to learn more about fixed costs and variable costs, why they’re so important for your restaurant business, why you should be tracking them, and how technology can help streamline all this tracking.

Defining restaurant fixed costs and variable costs and their importance

Small businesses in the restaurant industry have an abundance of metrics to help measure their success.

Profit margin is a common measure of restaurant business success. It’s essentially the amount of revenue from total sales left over after accounting for all your operating expenses — also known as your bottom line.

While different types of restaurants will look at different metrics depending on their stage of business, most successful restaurant owners will have a handle on their profit margin — which means having a handle on restaurant expenses, typically broken down into total fixed costs and total variable costs.

What are restaurant fixed costs 

Restaurant fixed costs are all the costs that aren't directly tied to sales.

For example, your lease and your insurance premium remain the same from month to month, whereas the cost of a case of tomatoes can change from one week to the next. That’s why leases and insurance are fixed costs and food costs aren’t.

Examples of restaurant fixed costs include:

• Restaurant occupancy costs, including lease or mortgage payment, insurance premiums, and taxes

• Water, electric and/or gas, city sanitation fees, and other utility costs 

• Point of sale, accounting system, and other technology fees as well as ongoing professional and custodial services 

• Kitchen equipment depreciation 

• Salaried wages, included benefits

What are restaurant variable costs 

Restaurant variable costs are all those controllable expenses tied to your sales.

For example, the cost of a case of tomatoes is a variable, controllable cost that directly impacts your sales — variable in that the menu price can change week to week and controllable in that you can shop around to different providers or even remove tomatoes from your menu for a while.

The two main examples of restaurant variable costs include:

• Cost of goods sold (restaurant food costs, non-alcoholic beverages, paper goods, etc.)

• Labor costs (salaried and hourly employees, payroll taxes, benefits)

Controlling operating costs to hit your restaurant break-even point

Once a restaurant reaches enough total sales over a given period to equal their total restaurant expenses over the same period, they’ve hit their break-even point.

Conducting a break-even analysis can help restaurant operators understand how much they need to clear before revenue turns to profits.

If the average restaurant profit margin hovers around 5-10%, that leaves 90-95% of revenue going toward restaurant operating costs — which are split between fixed costs and variable costs.

Restaurant fixed costs aren’t typically something that can be tweaked from month to month — hence they’re labeled as “fixed” costs.

On the other hand, variable costs can be manipulated week to week to account for ingredient price fluctuations and other variables. These costs may also be called restaurant prime costs — the combination of restaurant labor costs and the cost of goods sold (COGS). 

Prime cost percentages typically float around 60% and are usually evenly split between labor cost percentages and food cost percentages, or COGS. This is more prescriptive than overall operating costs, and there’s still opportunity to go deeper into different labor and COGS groups. Semi-variable costs, like some aspects of staffing or certain supplies, can also be influenced through careful management.

How to calculate restaurant fixed costs, restaurant variable costs, and break-even points

If restaurateurs want to control costs, they can start with conducting consistent restaurant operating cost breakdown. This is a repeatable process of calculating costs required to operate your restaurant — with the goal of achieving a detailed view of different cost groups. 

Calculating fixed costs

This can be as simple as adding together all your lease or mortgage costs, utility bills, property taxes, regular marketing costs, typical employee benefits, POS system costs, and any other regularly repeating restaurant expenses.

Suppose your monthly lease is $3,000, utilities average $500, property taxes are $400, regular marketing costs are $300, employee benefits cost $700, and your POS system fees are $100.

Fixed Costs = $3,000 + $500 + $400 + $300 + $700 + $100 = $5,000 per month

Calculating variable costs

This is theoretically the same process, it just requires more nuance in determining variable expenses over a given period. Food service operators have to drill down to the food costs required to make all the menu items sold during a given time period — as well as the total staffing costs and hourly wages over that same period of time. This can include the cost of raw materials and ingredients.

If your food costs for ingredients this month total $4,000 and total hourly wages paid for staff come to $3,000, then:

Variable Costs = $4,000 (food) + $3,000 (wages) = $7,000 for the month

Implementing cost control technology to help your restaurant

Restaurant operators can lean on technology to help make it easier to track fixed costs and variable costs. 

You can start by assessing your current costing processes and cost tracking systems — or lack thereof.

Your ability to accurately, consistently break down total labor costs, food costs, and other expenses at scale can be dependent on proper technology. This is especially true for a new startup in the restaurant industry looking for cost-saving measures.

Combining Toast’s Point of Sale system, Toast Payroll and Team Management, and xtraCHEF by Toast can help all types of restaurants access reports on total costs, daily sales volumes and amounts, and overall restaurant profitability. This offers real-time insights into your operations.

Toast Payroll and Team Management, as well as Scheduling, powered by Sling, work together to uncover valuable labor cost trends to help you make better decisions. This helps improve employee retention by ensuring fair scheduling and proper pay.

xtraCHEF by Toast provides invoice automation tools and inventory management tools that can empower you to drill into line-item level details for every ingredient on each of your supplier invoices and control food costs.

Together, these tools can combine with Toast POS to help automate and simplify restaurant fixed cost and variable cost calculations.