How to Reduce Cost in Restaurant Operations: 7 Proven Strategies
 Finance & Accounting

How to Reduce Cost in Restaurant Operations: 7 Proven Strategies

Rick Johnson
Rick Johnson
April 16, 2024
Last updated on:

April 16, 2024

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Read time: 8 mins

Operating costs and expenses in restaurants are the various expenditures incurred in the day-to-day running of the business. This includes costs related to food and beverage purchases, labor wages, utilities, rent, equipment maintenance, marketing, and administrative expenses. Additionally, expenses such as insurance premiums, licenses, and taxes contribute to overall operating costs. These costs represent a significant portion of a restaurant's budget and heavily influence its financial health.

Therefore, effective management of operating costs and expenses is highly essential for restaurant owners to optimize their profit margins and enhance the bottom line. Moreover, controlling expenses is essential for long-term viability in an industry known for its thin profit margins and high failure rates. 

This blog discusses how to reduce restaurant operations costs by providing actionable strategies and insights.

According to a report by Restaurant Business Online, 87% of U.S. restaurants have raised menu prices to help save on restaurant food costs.

7 Tips to Reduce Cost in Restaurant Operations

Here are the 6 best tips to know how to reduce cost in restaurant operations while maximizing efficiency and profitability.

1. Analyze and Optimize Menu Offerings

The menu is not just a list of a number of dishes; it's a blueprint that shapes the entire operational framework of a restaurant. Each item on the menu carries implications for various aspects of the restaurant's financial health and operational efficiency. Therefore, high-cost, low-margin items can pose significant challenges, as they increase food expenses and contribute to waste if they don't sell well. 

In contrast, strategically optimizing the menu to showcase high-margin dishes and appropriately portioned items can transform profitability. By focusing on items with better profit margins, restaurants can boost their bottom line while minimizing the impact of food costs. Moreover, simplifying the menu and standardizing recipes can streamline kitchen operations, reduce labor costs, and enhance overall efficiency. 

Tips to Analyze & Optimize Menu Offering 

  • Menu Engineering Analysis: Conduct a comprehensive menu engineering analysis to identify high-profit margin items, low-performing dishes, and popular menu items.
  • Seasonal Menu Rotation: Implement a seasonal menu rotation strategy to capitalize on fresh, in-season ingredients and minimize food waste.
  • Offering Variety with Cost Efficiency: Balance menu offerings to include a variety of dishes across different price points while ensuring cost efficiency.
  • Monitor and Adjust Portion Sizes: Regularly monitor portion sizes to ensure they meet customer preferences and cost considerations.

How can restaurants effectively plan their cash flow and budget?

Restaurants can effectively plan cash flow and budget by forecasting revenue and expenses, monitoring financial performance regularly, managing inventory levels, negotiating favorable terms with suppliers, and maintaining a contingency fund for unexpected expenses, ensuring financial stability and operational resilience.

To know more on this, read our blog:‘5 Effective Ways to Improve Budget and Cash Flow Planning’

2. Manage Inventory Effectively

Poor inventory management results in several detrimental consequences. This includes heightened operational costs, increased wastage of perishable goods, and disruptions within the supply chain. This mismanagement often results in excessive purchases or inadequate stocking, leading to increased wastage of perishable goods and reduced profitability. 

However, by implementing meticulous inventory control practices, restaurants can mitigate these risks and optimize their overall performance. This entails a multifaceted approach encompassing various strategies and processes. For instance, accurately tracking inventory levels ensures that stock levels align with demand. By closely monitoring inventory, restaurant managers can effectively manage their supply chain, ensuring they neither overstock nor understock their inventory. Additionally, forecasting and planning are crucial in anticipating future demand and optimizing ordering schedules. By assessing historical sales data and seasonal trends, restaurants can make informed decisions regarding inventory replenishment. 

Tips for Effective Inventory Management

  • Regular Inventory Audits: Conduct frequent inventory audits to track stock levels accurately, identify discrepancies, and prevent overstocking or stockouts.
  • Utilize Inventory Management Software: Implement inventory management software to automate inventory tracking, streamline ordering processes, and generate real-time reports.
  • Forecast Demand: Use sales data, historical trends, and menu popularity to forecast demand for ingredients and supplies to enable more accurate inventory planning.
  • Optimize Storage Space: Organize storage areas efficiently, utilize FIFO (First In, First Out) inventory rotation methods, and invest in space-saving storage solutions.

3. Optimize Staffing Levels

Inadequate staffing leads to service delays, decreased customer satisfaction, and increased labor costs while overstaffing results in unnecessary expenses and reduced profitability. Such inefficiencies contribute to reduced profitability as labor costs escalate without commensurate gains in productivity or revenue generation. 

In contrast, by implementing effective staffing strategies, restaurants can maintain a balance between meeting customer demand and controlling labor expenses. This involves careful scheduling based on forecasted demand, considering factors such as time of day, day of the week, and seasonal fluctuations. Likewise, cross-training employees to perform multiple roles enhances flexibility in staffing, allows for smoother operations during peak periods, and minimizes the need for extra staff. Similarly, implementing time-tracking systems enables accurate monitoring of labor costs and identification of opportunities for efficiency improvements. 

Tips for Staffing Level Optimization

  • Optimize Employee Break Schedules: Coordinate employee break schedules strategically to ensure continuous coverage during peak hours while allowing staff to take breaks.
  • Utilize Temporary or Seasonal Staff: Hire temporary or seasonal staff during periods of high demand, such as holidays or special events, to supplement the existing workforce.
  • Cross-Train Employees: Train staff to perform multiple roles within the restaurant based on fluctuating demand and reducing the need for additional hires.
  • Monitor Labor Metrics: Regularly track key labor metrics such as labor cost percentage, sales per labor hour, and employee productivity.

5 Types of Operational Wastes in Restaurants
Image 1 - 5 Types of Operational Wastes in Restaurants

4. Streamline Restaurant Operational Processes

Restaurants operate in a fast-paced environment where every minute counts and inefficiencies can quickly lead to increased expenses and diminished customer satisfaction. For instance, delays in food preparation or service result in negative customer reviews and loss of repeat business. Moreover, inefficiencies can quickly escalate into increased expenses, as wasted time often translates into wasted resources and higher operating costs. 

However, by optimizing operational processes, restaurants can streamline workflows, minimize waste, and maximize productivity. This involves identifying bottlenecks and inefficiencies in various areas, such as food preparation, order fulfillment, and customer service. Moreover, implementing technology solutions, such as point-of-sale (POS) and kitchen display systems (KDS), automates tasks, reduces errors, and expedites order processing. Also, standardizing procedures and training staff on best practices ensures consistency and reliability in operations. 

Tips to Streamline Restaurant Operational Processes

  • Standardize Procedures: Develop and implement standardized operating procedures for key processes such as order taking, food preparation, and customer service.
  • Invest in Technology: Embrace technology solutions such as point-of-sale systems, kitchen display systems, and inventory management software to automate tasks.
  • Regular Performance Reviews: Conduct regular performance reviews and process audits to identify bottlenecks, inefficiencies, and areas for improvement.

5. Negotiate Vendor Contracts

Non-negotiation directly impacts the restaurant's bottom line, leading to reduced profitability. Additionally, restaurants may lack clarity on delivery schedules, payment terms, and quality standards without negotiated contracts. This ambiguity also results in logistical challenges, delayed deliveries, and inconsistencies in product quality. Furthermore, without negotiated agreements, restaurants may be more vulnerable to sudden price increases or changes in supplier conditions. 

In contrast, effective vendor negotiations enable restaurants to secure favorable terms, competitive pricing, and high-quality products and services from suppliers. By utilizing their purchasing power and building strong relationships with vendors, restaurants can negotiate discounts, rebates, and volume incentives to lower procurement costs. Moreover, negotiating flexible payment terms and delivery schedules helps improve cash flow and operational efficiency. Additionally, establishing clear performance metrics and service level agreements ensures accountability and transparency in vendor relationships.

Tips to Negotiate Vendor Contracts

  • Research Market Rates: Conduct in-depth research to understand current market rates for ingredients, supplies, and services, enabling you to negotiate from an informed position.
  • Leverage Volume Discounts: Negotiate volume discounts or bulk purchase agreements with vendors to secure lower unit prices for high-demand items.
  • Flexible Payment Terms: Negotiate flexible payment terms, such as extended payment deadlines or staggered payments.
  • Assure Quality: Ensure vendors provide quality guarantees and service level agreements, including provisions for timely delivery, product freshness, etc.

Types of Restaurant Expenses
Image 2 - Types of Restaurant Expenses

6. Implement Sustainable Practices

Without sustainability measures, restaurants may incur higher expenses across various facets of their operations. For instance, excessive waste generation can increase disposal costs and fees, whether through food waste or single-use packaging. Additionally, a lack of emphasis on sustainable sourcing practices may lead to higher procurement costs for ingredients and supplies. 

Therefore, implementing sustainable practices is an ethical responsibility and a strategic imperative for restaurants. These practices include various initiatives to reduce environmental impact, minimize waste, and promote social responsibility. By adopting sustainable sourcing practices, restaurants can support local producers, reduce their carbon footprint, and ensure the availability of fresh, high-quality ingredients. Likewise, implementing waste reduction measures such as composting, recycling, and food donation programs helps minimize landfill waste and demonstrates a commitment to environmental stewardship. Furthermore, investing in energy-efficient equipment, implementing water-saving measures, and reducing reliance on single-use plastics contribute to lower utility costs and reduced resource consumption. 

Tips to Implement Sustainable Practices

  • Source Locally: Prioritize sourcing ingredients and supplies from local suppliers and producers to reduce carbon footprint & support the local economy.
  • Reduce Waste: Implement strategies to minimize waste, such as composting organic waste, recycling packaging materials, and minimizing single-use plastics.
  • Embrace Energy Efficiency: Invest in energy-efficient equipment, LED lighting, and smart thermostats to reduce energy consumption.
  • Optimize Menu: Include sustainable and eco-friendly options, such as plant-based dishes and seasonal ingredients, to appeal to environmentally conscious customers.

7. Explore Outsourcing Opportunities

While internal efforts are valuable, they may not yield the most efficient or cost-effective results. Depending solely on in-house solutions may limit the restaurant's ability to leverage external expertise, innovative technologies, and specialized resources that could provide more effective cost-saving solutions. Moreover, in-house strategies may lack scalability, making adapting to changing market conditions or fluctuating demand challenging. 

On the other hand, outsourcing presents restaurants with a strategic avenue to optimize operations, enhance efficiency, and minimize costs. Delegating non-core functions such as accounting, payroll, or cleaning services to specialized providers allows restaurants to leverage external expertise and resources. By entrusting specialized tasks to experienced professionals, restaurants can benefit from cost savings, higher accuracy, and increased operational flexibility. Additionally, outsourcing enables restaurants to access advanced technologies and innovative solutions that may not be feasible to implement in-house. 

Tips to Explore Outsourcing Opportunities

  • Identify Non-Core Functions: Identify non-core functions within your restaurant that could be outsourced, such as accounting, payroll processing, marketing, or cleaning services.
  • Evaluate Potential Providers: Research and evaluate potential outsourcing providers to ensure they align with your restaurant's needs, values, and budget.
  • Consider Cost Savings: Focus on cost savings and efficiency gains by comparing the costs of outsourcing versus handling tasks in-house.
  • Start with Small Projects: Start with smaller outsourcing projects to test the arrangement's effectiveness and gradually expand outsourcing efforts.

How do restaurants and other small businesses select the right outsourcing partner for finance and accounting?

Restaurants and small businesses should consider factors such as the outsourcing provider's experience in the restaurant industry, expertise in finance and accounting, reputation, pricing structure, technology capabilities, and ability to customize services to meet specific needs.

To know more about finance and accounting outsourcing, read our blog:‘5 Essential Tips for Small Businesses Planning to Outsource Accounting for the First Time’

Conclusion

In the future, restaurants will employ cutting-edge methodologies to curtail costs and streamline operations. For example, technological advancements will play a significant role, with the widespread adoption of digital solutions and automation promising heightened efficiency. This includes leveraging data analytics and predictive modeling to optimize inventory management, menu planning, and staffing. Additionally, embracing sustainability practices will be essential, with a focus on eco-friendly initiatives such as local sourcing, waste reduction, and renewable energy adoption. Furthermore, strategic partnerships with suppliers and technology providers will enable restaurants to harness external expertise and develop innovative solutions to drive sustainable cost reductions. This is where third-party services will kick in to play a significant role. 

At Invensis, we offer specialized expertise, innovative solutions, and scalable resources that restaurants can utilize to optimize their operations and achieve sustainable cost reductions. For instance, we use advanced data-driven tools to optimize stock levels, reduce waste, and lower procurement costs. Moreover, we take care of non-core functions such as accounting and marketing and allow restaurants to focus on core competencies. Additionally, our experts have the experience to offer strategic guidance and best practices to help restaurants effectively navigate market trends and competitive pressures. 

Contact us to drive cost savings and deliver exceptional dining experiences with our restaurant accounting and bookkeeping services

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