Restaurant Budgeting: How to Create A Restaurant Budget

Food and labor costs keep climbing, and your margins are thin. A restaurant budget is how you stay in control of both. It shows you what you’re spending, where you’re overspending, and what you can change before a bad month turns into a bad year.

The stakes are high. About 17% of restaurants fail in their first year, and the average failure rate runs closer to 30%. A clear budget won’t guarantee your restaurant beats those odds, but running without one makes them worse.

To help you survive and thrive, we’ve put together a step-by-step, easy-to-follow restaurant budgeting guide.

What is included in a restaurant budget?

Before learning how to budget, you must first know the 4 biggest figures you need to keep an eye on. This includes:

• Net sales: The total revenue derived from your sale of food and beverages.
• Prime cost: This represents your restaurant’s largest expenses.
• Controllable income: Measures how much profit you have left over after deducting controllable expenses like COGS, labor, and direct operating expenses from your sales.
• Operating expenses: Costs incurred in the daily operations of your restaurant.

Prime cost is worth a closer look, because it’s the number most operators watch first. Prime cost is your food, beverage, and labor costs added together. As a rule of thumb, it often runs about 60% to 65% of total sales, though the target shifts with your concept.

What are the top restaurant expenses?

Your restaurant expenses may vary depending on various factors, such as the equipment you use, your business location, the size of your operation, and whether you own or rent your commercial space. However, as a rule, the primary costs you can expect in running your restaurant are usually related to food, labor, and rent.

Here’s how those costs typically stack up as a share of sales. The food, occupancy, and prime cost figures come from NetSuite, and the labor range reflects National Restaurant Association data. Treat these as starting targets, not hard rules. Your numbers will move with your concept, menu, and market.

• Food / COGS: 28% to 35% of sales (varies by concept)
• Labor: 25% to 35% of sales (varies by concept)
• Occupancy (rent and related): 6% to 10% of sales (varies by location)
• Prime cost (food + beverage + labor): 60% to 65% of sales (varies by concept)

Food cost

Your restaurant’s food cost comprises 3 elements: the food cost percentage, the cost of ingredients, and the sales or revenue from selling your dishes. Your cost of goods sold, the ingredients you use to make what you sell, typically runs 28% to 35% of revenue, though it climbs at fine-dining concepts and drops at quick service.

Food cost percentage

When deciding how much to price your menu items, many restaurants aim to keep food cost around 28% to 35% of sales, with 30% a common target. By doing so, you can account for the cost of your ingredients while leaving an acceptable margin for your overhead costs and profit.

To compute your food cost percentage, use the formula: Food Cost Percentage = Item Cost / Selling Price

Cost of ingredients

Knowing the cost of ingredients for every recipe on your menu is essential, especially when you need to reduce a recipe’s selling price.

To calculate a recipe’s ingredients cost, use the formula: Cost of Ingredients = [Cost of Ingredient Purchased / Quantity of Ingredient Purchased] x Quantity Needed In Recipe

Food sales

Your food sales allow you to gain insight into which dishes bring in the profits and determine which items on your menu aren’t as profitable. You can easily retrieve this data from your POS system.

Labor cost

Labor costs are one of your restaurant’s biggest expenses. They also make up a significant part of your prime costs, which is the metric restaurant owners use to analyze the efficiency of their operations.

For easier and more accurate computation, make sure your labor costs include:

• Benefits
• Salaries
• Payroll taxes
• Overtime
• Bonuses
• Paid time off (sick leaves and vacation days)
• Employee meals
• Training and development programs
• Uniform allowance (if provided)

Calculating your labor expenses can help you determine your labor cost percentage, or the ratio between your total revenue and labor costs.

To calculate the labor cost percentage, use the formula: Labor Cost Percentage = [Labor Costs / Gross Sales] x 100

Labor typically runs about 25% to 35% of sales, and recent figures run higher: the National Restaurant Association reports full-service labor at a median of 36.5% of sales in 2024, well above the historical average of about 33%. The right number depends on your concept, and full-service operators tend to run higher than quick service, so many operators are watching this line closely.

The biggest lever you control here is scheduling to demand. When you staff to your forecasted covers instead of habit, you keep labor in line without cutting service. If your labor report shows 32% against a 28% target, your schedule is usually the first place to look.

Operators who schedule to their forecast treat labor as a target they manage all week, not a number they check after the fact. Tom Schmidt, co-owner of Salt and Smoke, describes how his teams do it:

“We’ve spent the last several years really using 7shifts as a forecasting tool to understand: this is how much revenue we expect, so we should budget this much labor, build our schedules to that much labor, and then adjust accordingly. If a rainstorm comes through, we’re using it proactively and training our teams to use it proactively. If my budget is x% of revenue for my labor, we’ll look at their schedule with them the week in advance and say, ‘You’re already 5% over. If it’s on your schedule, you’re not going to hit your target, which means you’re not going to hit your bonus.’ And where are you off? It’s always Monday, Tuesday, and Wednesday, the slowest days, where you’ve put on more people. It’s just such an effective tool for us.”

Rent and occupancy costs

Rent is one of the fixed expenses that could vary depending on several factors:

• The condition of your space
• Your location (it may be more expensive if you’re in the city and renting a commercial space along the road)
• The square footage you’re leasing

However, your total occupancy costs are not limited to the cost of your rent alone but also include expenses like:

• Real estate taxes
• Building insurance
• Common Area Maintenance (CAM) fees
• Depreciation
• Amortization

Generally, your restaurant’s total occupancy costs should be between 6% and 10% of the gross sales, but this number could vary depending on your location and business situation.

Why should you create a restaurant budget?

Your restaurant budget serves as the roadmap that will guide you in spending your business’ money wisely, give you insight into how your restaurant is faring, and ensure that you are making profits and meeting your financial goals. After all, inaccurate numbers can, at best, point you in the wrong direction and, at worst, lead to bad financial decisions. To help you understand the importance of budgeting in restaurants, here are some of the benefits you can expect from doing it.

Closely monitor income and expenses

Monitoring your income and expenses will help you make informed financial decisions and properly allocate your resources. A restaurant budget allows restaurant owners and managers to see directly if they are meeting their income and expense benchmarks.

This can help you make proactive changes to ensure your business stays afloat in the long run. A clearly defined restaurant budget can also help you pinpoint which aspects of your operations you can cut back on to maximize your earnings.

For example, if you notice that some of your customers don’t eat the vegetables you serve as a “side dish” for your meals, you can make it optional or an add-on. This can reduce your budget for ingredients and, at the same time, minimize food waste.

Promotes proactive decision-making

Restaurant owners and managers must adapt quickly to be successful and retain their competitive advantage. The CEO of Restaurant Systems Pro, Fred Langley, highlighted the importance of proactive planning and stated that a restaurant budget is your success plan.

This means not being satisfied by simply reacting to the situation but being proactive and making the necessary changes to ensure your food and labor costs stay on track. By budgeting your restaurant’s resources, you can proactively anticipate the obstacles, hurdles, and challenges your business might face and take the steps needed to prevent them from taking place.

If prevention is not an option, preparing a plan in case the unexpected happens is better than simply responding to the situation. Solutions can include preparing for possible changes in pricing, staffing, customer trends, and new technology. For example, to counter rising ingredient costs, you can proactively plan and look for alternate vendors and suppliers that can provide the same quality but at a much more affordable price.

Prevent overspending

Lastly, restaurant budgeting gives managers a clear picture of the costs and expenses they incur in their business operations. Proper restaurant budget planning can help eliminate overspending on expenses like ineffective marketing campaigns or expensive supplies like food packaging and tissue paper.

While it might seem tempting to overspend on your marketing and advertising efforts, the cash you’d use to pay to run your ads could only lead to waste, especially if you don’t know much about running an ad campaign effectively.

A budget only prevents overspending if you actually use it to catch the overspending. Here’s how to do that.

How to spot and stop overspending in your restaurant

Start with one simple habit: compare what you budgeted against what you actually spent, line by line, every month. The gap between those two numbers is your variance, and that variance is exactly where you’re overspending.

Say you budgeted 28% of sales for labor and your report comes back at 32%. That 4-point gap is real money walking out the door, and now you know where to look first. Do the same for food, occupancy, marketing, and repairs. The lines with the biggest gaps get your attention this week, not next quarter.

Once you know how to find the gaps, watch these hot spots. They’re where most restaurants leak money:

• Labor: Overspending here almost always traces back to scheduling. When you staff by habit instead of forecasted covers, you pay for hours you don’t need. Match your schedule to demand and check labor while you build the schedule, before the numbers are locked in.
• Food and COGS: Waste, over-portioning, and loose ordering push your food cost past target. Track waste, tighten portions, and count inventory on a regular schedule so shrinkage shows up fast.
• Marketing: It’s easy to keep spending on ads that don’t pay back. Tie every campaign to a result, and cut what you can’t measure.
• Equipment and repairs: Deferred maintenance turns small fixes into big emergencies. Budget for upkeep so a walk-in on its last legs doesn’t blow up your month.

Catching the gap is the first step, but knowing why the gap opened is what changes your next decision. Garrett Mills, CEO at Uncommon Brands, put it this way:

“Just getting the food cost percentage is one thing, but being able to dive deep into the numbers and understand why your food cost was what it was is ultimately what’s most valuable in making decisions moving forward. Things like theoretical food cost, theoretical versus actual, learning how to close the gap of what theoretical versus actual is, plate cost, and inventories should all be standard practice.”

8 ways to create a realistic restaurant budget

Rising costs make disciplined budgeting essential, especially for a new restaurant. You have to put in the effort to keep your business afloat during challenging times. One key to ensuring your restaurant thrives is knowing how to budget properly.

This will help you manage rising business costs and be mindful of your expenses, especially unnecessary costs like expensive menus, ineffective marketing campaigns, and spending most of your money on furniture and decorations.

Build your budget once a year, then check it monthly (or on 13 four-week accounting periods) so it stays realistic as your sales and costs change. To help you understand better how to create a realistic restaurant budget, you should know how to:

1. Track your restaurant’s financial data
2. Use a restaurant budgeting template
3. Track your money closely using a restaurant budgeting software
4. Calculate your restaurant’s costs
5. Track your restaurant’s sales
6. Compare your restaurant sales vs. costs
7. Make the necessary budget changes
8. Develop a strategy to increase restaurant profits

Let’s take a closer look at each step.

1. Track your restaurant’s financial data

Having access to your restaurant budget is not enough. You have to know what to do with those numbers, and this can be accomplished by having a method of recording and organizing the data you have. Your restaurant’s financial data is the backbone of your business.

This is why restaurant owners should constantly monitor their finances to see early on if they are making profits, address any problems that could arise, and plan future expansions once the business starts growing. Tracking your restaurant’s financial data can be achieved using a manual restaurant accounting system (like a ledger or columnar pad) or specialized accounting solutions for restaurants.

Then, ensure you have clear and designated columns for income, costs/expenses like rent, hiring costs, and labor, to name a few, and of course, your sales. For a small business, this should be enough.

However, as your restaurant grows, you incur more expenses, like hiring a marketing team to promote your new locations, and you shouldn’t forget to add this to your restaurant’s budget. While columnar pads and ledger books are great ways for new restaurant managers to learn about restaurant accounting and bookkeeping, opting for manual procedures can be difficult to reconcile.

For instance, if your books aren’t balanced, you may have difficulty finding which financial transaction was erroneous, unlike if you have a computerized record-keeping template. You can start with Google Sheets or Microsoft Excel and work your way up to restaurant-specific budgeting software.

2. Use a restaurant budgeting template

Digital budget templates are easier to access and maintain and less error-prone than manual accounting and bookkeeping using pen and paper.

It’s almost the same as manual bookkeeping and accounting. It has the same columns for sales, costs, income, and expenses, except this time, you can easily navigate your records and check for any discrepancies if the need arises. 7shifts’ restaurant budgeting template provides two columns where you can input your budget for expenses like restaurant utilities, labor costs, marketing, and cost of sales.

You can also use this to keep track of other costs, such as insurance, license fees, repairs and maintenance, and the actual costs you incurred for a better and closer comparison. By using this ready-made restaurant financial template, you can figure out exactly what aspect of your restaurant business you have been going over budget so you can adjust your spending as needed.

3. Track your money closely using restaurant budgeting software

A restaurant budgeting template built in Google Sheets or Microsoft Excel is good. Still, for businesses with large operations (especially those with various physical locations), restaurant budgeting software becomes a need, not a nice-to-have. When looking for restaurant budgeting software, go for the one that helps you manage your finances and assists in restaurant forecasting. This will help you understand your restaurant’s potential for growth and manage your financial situation well.

The software can also help you forecast sales and manage your payroll and inventory so you can plan your daily operations with fewer surprises.

It also helps if your budgeting software connects with the other tools you use, especially the ones that schedule and track your employees’ shifts. 7shifts works with over 80 software partners, including POS, payroll, analytics, delivery, payments, reservations, and tax credits.

4. Calculate your restaurant costs

Most of the costs and expenses you incur in your restaurant business can easily be anticipated. Your fixed costs, for instance, stay almost the same monthly and yearly, like your insurance and rent/lease payments. There are also semi-variable costs, a combination of fixed and variable costs. These costs are repeatedly incurred monthly (fixed costs) but with a variable element that can change depending on the activity or volume.

For instance, employee wages are semi-variable costs because you have to pay them monthly, but your payment might be subject to change if your employees render overtime or take unpaid leave. Lastly, your variable costs are those that constantly change or occur as needed. Some examples include repairs, maintenance, and your budget for supplies.

To ensure proper restaurant budgeting and record keeping, record everything you spend daily, weekly, and monthly. Then, add those figures to arrive at your total incurred costs or expenses for the month. Alternatively, you can calculate your total costs every two weeks, which is better if you pay your employees’ wages bimonthly.

Recording your restaurant costs is important because it can help you track exactly what you spend your cash on. You can gain insight into which areas of your operation require the most money and, if needed, devise alternative ways to reduce your costs and maximize your profits. If you have been in the restaurant industry for some time, you can use your past years’ data to create accurate and close-to-reality restaurant forecasting.

5. Track your restaurant’s sales

Aside from tracking your expenses, you must also closely monitor your sales data. This will come in handy when preparing your restaurant budget, as you will have to estimate your sales for the week, and you should have a close idea of what this number would be. But when making a forecast, be careful when not to overestimate your sales.

Remember to set sales targets as S.M.A.R.T. goals: specific, measurable, achievable, realistic, and time-bound. Use your historical data as a basis when budgeting and making sales forecasts. Use previous records like ledgers, receipts, or budget and financial templates to project your sales precisely.

Be careful, though, and ensure you view your data analytically throughout the process. If, for example, your February sales last year spiked, look back and remember if you hosted any events or promotions during that period. Maybe a Valentine’s Day gala drove the bump. With access to this data, you can plan your budget accordingly and prepare for the possible influx of customers by hiring additional staff or buying extra supplies so you don’t run short in the middle of the busy season.

Another great benefit of tracking your restaurant sales for budgeting is that it can help you determine where most of your restaurant’s sales are coming from. For instance, if you discover that a large chunk of your income comes from booze, this can indicate that liquor is the cornerstone of your restaurant’s income. You can later use this data to justify expanding your beer and alcohol offerings.

6. Compare restaurant sales vs. costs

After tracking your costs/expenses and sales, it’s time to compare them to gain more insight into your restaurant’s financial standing. If you notice that you are barely making any income based on the data you have, then it’s time to tweak your budget to ensure that you’re not just breaking even but making profits.

The concrete way to do this is a budget-vs-actual review. For every line, put three numbers side by side: what you budgeted, what you actually spent, and the variance between them. The variance tells you, in dollars and percentage points, exactly where you went over.

• Food / COGS: budgeted $9,000, actual $9,400, variance +$400 (over)
• Labor: budgeted $8,400, actual $9,600, variance +$1,200 (over)
• Occupancy: budgeted $2,400, actual $2,400, variance $0
• Marketing: budgeted $1,200, actual $900, variance -$300 (under)

In the example above, labor is your biggest overspend, so that’s where you start. Run this every month and the pattern becomes clear. However, there are times when large expenses, such as remodeling or purchasing new furniture and equipment for your restaurant, will drive your monthly expenses past your income.

While this is occasionally acceptable (assuming that the extra expenses come out of your savings), if regular expenses like food, beverages, and utilities exceed your income, then it’s time to make budget cuts. Tracking your cost vs. sales ratio is extremely important, especially in today’s unpredictable economy. Knowing these metrics will help result in better restaurant revenue management and put you in control of running your business to ensure its success.

7. Make the necessary budget changes

After carefully comparing your costs and sales data, it’s time to determine which areas of your operation you can cut your budget on. To increase your sales, you must work harder to gain new and repeat customers for your restaurant. You can increase your advertising budget to reach a wider audience and introduce your business to them, or tap into your restaurant’s sales driver (like liquor) and give your customers more options.

Aaron Allen & Associates, Global Restaurant Consultants, mentioned that restaurants usually allocate 3% to 6% of their sales to marketing. “It’s also a good idea to allocate this money proportionally to your sales volume. Meaning, if July is your busiest month, you should spend a proportionate amount on your restaurant’s marketing budget in that month.”

Meanwhile, if you’re looking to decrease your costs, then you can find alternatives to the supplies or ingredients you’re using, as long as your offerings’ quality will not be negatively impacted. During off-seasons, you can also decrease your labor and wages budget by reducing the number of your full-time employees. To save on your electricity bill, you can adjust the normal temperature in your restaurant, especially if there aren’t that many people around.

A good restaurant manager will work on increasing sales while decreasing costs simultaneously to maximize profits. To ensure your restaurant’s success, you must constantly monitor and adjust your budget as needed, depending on the season, occasion, and current state of your business.

Develop a strategy to increase restaurant profits

After you have scrutinized your financial data and adjusted your restaurant’s budget accordingly, it’s time to develop a strategy. Since your primary goal as a restaurant owner is to ensure your business is making profits, you should create a specific strategy to meet that goal. This can mean setting up a budget to attract new customers so you can increase your marketing and advertising efforts.

You can also cut back on unnecessary costs, such as using plain containers with branded stickers instead of custom-printed food packaging. Consider cheaper alternatives to your supplies and the ingredients you use in your menu and create promotions and exclusive offers to drive repeat customers to your business.

Another thing that’s often overlooked but just as essential is scheduling your employees’ shifts properly to ensure that you aren’t overstaffed in the off-season or understaffed during peak seasons.

This means making room in your budget for restaurant scheduling software to match your staff to demand and protect your labor budget. A growing restaurant business means more customers, which equates to the need for more staff to work in the kitchen and wait tables.

Conclusion

Restaurant budgeting requires an analytical mind, because a solid financial plan only works if you know how to handle the numbers. Done right, it helps you anticipate expenses, predict sales, and spot the items that drive your profits.

Once you’ve forecasted your sales, you still have to staff for the days when customers pour in. That’s where a reliable scheduling tool like 7shifts helps: you can schedule the right number of people for rush hour and peak seasons, then scale back on slow days to protect your labor costs.

It’s built for a range of food and beverage businesses, including quick and full-service restaurants, coffee shops, bars, pizzerias, and bakeries. Start with one month of budget-vs-actual tracking, and you’ll know exactly where your money is going.

FAQs

Why is a budget important in a restaurant?

Budgeting is important when managing restaurants because it ensures adequate funds for paying your staff’s wages, your establishment’s utilities like water, electricity, and wifi, and buying the ingredients needed to create your recipes.

Creating a budget plan can also help restaurant managers make better decisions regarding developing the menu, pricing food and beverages, and creating cost-control strategies to maximize profits.

What is a good marketing budget for a small restaurant?

A good marketing budget ranges from 3% to 6% of your total sales. However, this varies depending on your restaurant’s size, location, and the type of cuisine you specialize in. For instance, a fine-dining restaurant in a huge city will likely have a higher marketing budget than cafes in rural towns.

What is forecasting in a restaurant?

In the restaurant industry, forecasting refers to estimating possible future costs/expenses to be incurred and predicting profits based on historical data. This is important because it can help restaurant owners and managers plan for peak season and anticipate the sudden influx of customers by hiring more staff or stocking up on ingredients for their recipes.

What’s the difference between forecasting and budgeting in food production?

Forecasting in the restaurant industry refers to estimating future trends based on historical and current data. Meanwhile, budgeting is preparing a financial plan for the incoming period. Regardless of their differences, both are essential in developing an effective strategy for the food and beverage industry.

What is the most common expense in a restaurant budget?

The most common expense in a restaurant budget is labor costs. This includes employees’ hourly salaries and wages, overtime pay, paid vacation and sick days, payroll taxes, and employee benefits.

What is the 30/30/30/10 rule for restaurants?

The 30/30/30/10 rule is a simple starting split for your budget: roughly 30% to food, 30% to labor, 30% to overhead, and 10% left as profit. Treat it as a rough guide, not a hard rule, and adjust the mix to fit your concept and market.

What is the 60/40 restaurant rule?

The 60/40 rule says your prime cost, which is food plus beverage plus labor, should stay around 60% of sales, leaving about 40% to cover everything else and your profit. It’s an easy gut check, but your target will vary by concept.

What percentage of a restaurant budget should go to labor and food?

Food and COGS typically run about 28% to 35% of sales, and labor about 25% to 35%, which puts prime cost in the 60% to 65% range combined. These are starting targets that vary by concept, so use your own numbers to set your goals.