60% of restaurants fail within the first three years of opening their doors; do not let this be you.
When expenses outweigh revenues, businesses of all types are doomed. In Manhattan, with the high amount of competition, costs, and pricy real estate, it is even harder for restaurants to survive. Thankfully, IPG Real Estate has come up with an analysis of expenditures restaurant owners should follow if they want to stay afloat.
No more than 60% of the annual income should be spent on Prime Costs.
Prime Costs include the costs of goods and labour. Typically, labour costs include payroll taxes, workers comp, and other employee benefits such as medical insurance.
- 25%-30% will be distributed amongst the cost of goods.
- Labour costs should take up no more than 30-35%.
This can be broken down between hourly and salary employees.
- Salaried employees receive 10% of total sales.
- 20-25% is distributed amongst the hourly employees.
No more than 10% should be spent on occupancy costs.
Occupancy includes rent, insurance, and property/municipal taxes. In this 10%, 6% should be committed to rent and common area maintenance.
At the end of the day most owners’ profits will be around 5%, leaving 25% of sales to other expenses. These expenses include advertising/marketing, fees and licenses, utilities, TV/internet, etc.
Ramy Shim, who works in in the financial department of IPG Real Estate, says that “too often people are spending too much on rent, or too much on food costs. What they do not realize is that once they do this, if not enough customers are coming through the restaurant, or unforeseen expenses come their way, they will have nothing to take home at the end of the day. This ultimately leads to the restaurant closing. There has to be room in the budget for unexpected purchases or costs. By following the recommended analysis restaurants have a better chance of survival.”
The above analysis is based on the cost of living in Manhattan; percentages will vary depending on location and population.
Contact IPG Real Estate today to make sure you have the best location and price to suit your restaurant needs, or to have us analyze your company and help you make adjustments.
Written by: Lindsay Craven