What is Direct Operating Expenses

What are Direct Operating Expenses?

The expenses directly associated with the day-to-day operations of a restaurant, such as food and beverage costs, labor expenses, and rent.

What are Examples for Direct Operating Costs or Expenses?

Here are some common examples of direct operating expenses in a restaurant:

  1. Cost of Goods Sold (COGS): This is one of the most significant direct operating expenses for a restaurant. COGS includes the cost of all the ingredients and materials used to prepare the menu items. It encompasses items like food, beverages, condiments, and packaging.
  2. Labor Costs: Labor costs include the wages and benefits paid to employees directly involved in food preparation and service. This typically includes chefs, cooks, servers, bartenders, and kitchen staff.
  3. Utility Costs: Utility expenses, such as electricity, gas, water, and sewage, are directly related to the restaurant’s operation. These costs can vary depending on the size of the establishment and the type of equipment used.
  4. Rent or Lease Expenses: The cost of renting or leasing the restaurant space is another significant direct operating expense. It’s crucial to manage this cost effectively, as it often represents a substantial portion of a restaurant’s overhead.
  5. Kitchen Supplies: This category includes the cost of consumable supplies used in the kitchen, such as disposable containers, cooking utensils, and cleaning supplies.
  6. Kitchen Equipment Maintenance: Regular maintenance and repair costs for kitchen equipment, such as ovens, stoves, refrigerators, and dishwashers, are essential direct expenses to ensure smooth operations.
  7. Marketing and Advertising: While some marketing expenses can be considered indirect, those directly related to promotions and advertising campaigns for specific menu items or events are direct operating expenses.
  8. Credit Card Processing Fees: Fees associated with processing credit card payments for customer orders are part of the cost of doing business and are considered direct expenses.
  9. Waste Removal: The cost of waste disposal and recycling services, which is essential for maintaining a clean and sanitary environment, is a direct operating expense.
  10. Insurance: Insurance premiums, particularly liability insurance and property insurance for the restaurant premises and equipment, are direct operating costs.

What percentages should these Direct Operating Costs be?

  1. Cost of Goods Sold (COGS): Ideally, COGS should typically be around 25% to 35% of your total revenue. However, this can vary greatly depending on the type of cuisine you serve and your pricing strategy.
  2. Labor Costs: Labor costs, including both kitchen and front-of-house staff, are often targeted to be around 30% to 35% of total revenue. High-end restaurants may have a higher labor cost percentage due to skilled chefs and service staff, while quick-service restaurants may aim for a lower percentage.
  3. Utility Costs: Utilities can range from 3% to 5% of total revenue, but this can vary based on the size of your restaurant and the energy efficiency of your equipment.
  4. Rent or Lease Expenses: Rent ideally should be no more than 5% to 10% of your total revenue. However, this can be higher in prime locations with high foot traffic.
  5. Kitchen Supplies: Kitchen supply costs can vary widely based on the volume and complexity of your menu. Typically, they may account for 2% to 4% of total revenue.
  6. Kitchen Equipment Maintenance: Maintenance costs can vary greatly based on the age and condition of your equipment, but a rough estimate might be around 2% to 4% of total revenue.
  7. Marketing and Advertising: Marketing expenses can vary widely based on your marketing strategy, but a common range might be 2% to 5% of total revenue.
  8. Credit Card Processing Fees: Credit card fees can be around 2% to 3% of total revenue, depending on the percentage of sales paid by credit card.
  9. Waste Removal: Waste removal costs are typically a small percentage of revenue, perhaps 1% to 2%.
  10. Insurance: Insurance costs can vary widely based on coverage and location but might range from 1% to 3% of total revenue.

How to Control Your Direct Operating Costs

  1. Conduct a Cost Analysis:
    • Start by reviewing your financial statements, including income statements and balance sheets, to understand your current operating costs and identify areas where you can potentially make changes.
  2. Set Clear Goals:
    • Define specific cost reduction goals for each category of operating expenses. Determine how much you want to reduce costs and over what timeframe.
  3. Prioritize Expenses:
    • Identify which expenses have the most significant impact on your bottom line. Focus your efforts on those categories that offer the most potential for cost reduction.
  4. Negotiate Vendor Contracts:
    • Negotiate with suppliers for better pricing, discounts, or more favorable terms. Consider consolidating purchases with a single supplier for volume discounts.
  5. Menu Engineering:
    • Analyze your menu to identify high-margin and low-margin items. Consider adjusting your menu to feature more profitable items or redesigning low-margin dishes to improve menu profitability.
  6. Labor Management:
    • Optimize staffing levels based on demand to reduce labor costs. Cross-train employees to handle multiple roles, and use scheduling software to minimize overstaffing.
  7. Energy Efficiency:
    • Invest in energy-efficient equipment and practices to reduce utility costs. Ensure that equipment is properly maintained to avoid energy wastage.
  8. Waste Reduction:
    • Implement waste reduction and recycling programs to minimize waste disposal costs. Train staff on proper portion control to reduce food waste.
  9. Marketing Efficiency:
    • Evaluate the effectiveness of your marketing and advertising efforts. Focus on cost-effective marketing channels that yield a high return on investment.
  10. Technology Integration:
  11. Benchmarking and Industry Research:
    • Compare your restaurant’s expenses to industry benchmarks and best practices. This can provide insights into areas where you may be overspending.
  12. Regularly Review Financial Statements:
    • Continuously monitor your financial statements and performance metrics to track progress toward cost reduction goals. Adjust your strategies as needed.
  13. Employee Training and Efficiency:
    • Train your staff in cost-conscious practices, such as portion control, efficient food preparation, and minimizing waste.
  14. Consider Outsourcing:
    • Evaluate whether certain functions, like bookkeeping, can be outsourced to reduce internal labor costs.
  15. Seek Professional Advice:
    • It’s crucial to the success of any restaurant to be able to identify and act on your costs. Advice from professionals like the team at Hone can help operators get to that information more quickly and with less mistakes. Request a demo today.