Budgeting is a crucial aspect of financial management for restaurant budget. Unfortunately, both small and large businesses often struggle to create and maintain a clear financial plan and budget.
Even after creating a budget, many restaurants find it challenging to stick to it and balance their spending against their revenues.
There are several reasons why restaurant budgeting can fail. Economic fluctuations, such as changes in raw material prices due to currency exchange rate shifts, new customs duties, or increased taxes, can create financial instability for a restaurant.
Additionally, inaccurate forecasting stemming from an insufficient understanding or review of financial reports can lead to unexpected waste or inventory shortages. This, in turn, increases operating costs and disrupts the budget. Excessive advertising and marketing expenses can also result in overspending beyond the allocated budget.
Prudent financial management demands a flexible budget. This adaptability is crucial for navigating fluctuating raw material costs and sales downturns, enabling sound financial decisions. A well-structured budget serves as the foundation for effective restaurant management.
In this article, we will discuss what a restaurant budget should include and the steps to create a practical budget. We’ll also pinpoint how to monitor and adhere to your budget.
What should a restaurant budget include?
A restaurant budget encompasses all expenses and revenues, along with various financial data. We will explain all of them in the following paragraphs.
Revenue forecast
To calculate projected revenue, you need to analyze your restaurant’s financial data and reports from previous periods.
This analysis helps you assess sales and spending performance, providing a comprehensive view for accurately estimating future sales and forecasting market trends.
Additionally, it’s important to consider periods of increased demand, such as holidays like Eid al-Fitr or Ramadan in Saudi Arabia and other Middle Eastern countries. Seasonal events to consider include Mother’s Day and Valentine’s Day.
Understanding the impact of these peak seasons and times on the budget is crucial to ensuring a balance between revenue and costs.
Further reading: Discover the benefits of seasonal menus for restaurants
Fixed costs
Restaurants incur various monthly fixed costs, with rent being the largest expense. When negotiating rent, look for long-term leases of at least 5 years to prevent sudden increases.
Utility bills, such as electricity, water, and gas, are among the highest operating costs for restaurants. They take up a chunk of your monthly fixed expenses.
That’s why you need to create accurate estimates based on prior experience. Consider seasonal expenses, like the increased use of air conditioning in summer, which leads to higher electricity bills compared to the winter months.
There are also fees associated with licenses and renewals, such as the annual renewal of your restaurant’s license. It is crucial to ensure that all licenses are renewed on time to avoid fines or penalties, as non-compliance can potentially lead to the closure of the restaurant.
Variable costs
Variable costs, the opposite of fixed costs, include expenses such as food, beverages, and ingredient costs. Demand inside the dining concept directly influences the cost of these raw material costs.
When the demand for a particular dish or beverage increases, the costs of the needed raw materials rise, and vice versa. Moreover, the type and quality of raw materials used can impact costs, while seasonal price fluctuations may also occur.
Another significant source of variable expenses is restaurant labor. While you can easily calculate monthly wages, variable costs include overtime pay and working on holidays, among others. All of these act as additional financial burdens to your budget.
Marketing and promotional activities also fall under variable costs. The marketing budget can vary based on the campaign, which may include digital advertising, social media promotions, loyalty program rewards, and influencer marketing.
These costs are contingent on the overall marketing strategy and the restaurant’s level of market activity.
Contingency planning
It’s essential to allocate a portion of the restaurant’s budget to cover unexpected costs, such as equipment malfunctions, facility repairs, or any potential damage. Establishing this financial reserve ensures uninterrupted business operations.
We recommend periodically reviewing and updating your budget to account for potential scenarios.
Additionally, when creating your budget, we recommend setting up a reserve account to address unexpected economic fluctuations. This is similar to those experienced in 2020 during the coronavirus pandemic, which led to many restaurants and businesses closing temporarily.
We suggest saving the equivalent of 6 months’ worth of operating expenses as a safety net for your restaurant.
Finally, it’s important to develop a clear action plan that you can activate in case of an emergency. This plan should define team responsibilities, establish communication channels, and outline the steps necessary to resume operations with minimal losses.
Steps to prepare a practical budget and stick to it
- Review past financial data: Start by analyzing reports and financial statements from previous periods. Focus on sales reports, expense reports, and profit-and-loss (P&L) statements, which provide key insights into a restaurant’s financial performance. This analysis helps you understand trends, identify reasons for sales fluctuations, and determine factors affecting profitability.
- Set realistic revenue and cost targets: Establish goals based on actual data rather than unfounded forecasts. For instance, if your previous analysis shows average monthly revenue is SAR 100,000, you can set a new revenue target of SAR 105,000 based on well-considered growth plans. This is opposed to unrealistically doubling your target and being unable to meet it.
Besides setting realistic revenue goals, you can use past performance to set an expense ceiling that includes both fixed and variable costs to ensure reasonable profits. - Compare actual performance to budget: Monitor achieved figures and compare them against the planned budget. If discrepancies arise, investigate the causes and adjust your plans or improve performance as necessary.
- Review your budget regularly: Update your budget frequently (weekly for daily expenses, monthly for overall performance reviews, and quarterly for trend analysis and strategic decision-making). This ensures you keep pace with actual changes in the market or within the restaurant. Be flexible in adjusting figures to accommodate unexpected expenses or price changes.
- Use real time tracking tools: Take advantage of modern point-of-sale (POS) systems, such as Foodics, and inventory management software that allows for real-time expense tracking. These tools enhance financial control and improve operational efficiency. They provide detailed reports that aid in making accurate and quick financial decisions.
Common restaurant budgeting mistakes to avoid
Overestimating revenue can lead to budget problems, including reduced funding. That’s why it’s important to base revenue estimates on market data and past performance.
For example, underestimating wage and benefit costs can cause significant operational risk, such as staff shortages, which hurt service quality. Make sure you calculate all labor costs correctly, including overtime.
Another common mistake in restaurant budgeting is ignoring interest rate changes, especially when rates go up. This is important in countries like Saudi Arabia and the UAE, where interest rates are often tied to decisions by the US Federal Reserve.
By avoiding these mistakes, you can create a budget that effectively supports your restaurant’s needs and prevents financial issues.
Conclusion
Creating an accurate and well-thought-out budget is not a routine administrative task; it is a foundational step toward building a thriving and sustainable restaurant business.
Think of your budget as a dynamic tool, one that should adapt to changing market conditions, business growth, and evolving costs.
By leveraging reliable data, consistently reviewing your financial performance, and harnessing modern technology to manage expenses and analyze revenue, you position your restaurant for success in meeting its financial goals.
This approach not only ensures financial stability for your restaurant, but also sets the stage for genuine growth, effective expansion, and an enhanced customer experience.
Your journey toward sustainable success begins now! Explore Foodics’ accounting system to learn how it can support you in developing and managing your restaurant’s budget effectively.
