Startup costs for restaurants come in many shapes and sizes, and it’s vital to map them out early. Poorly managed costs or unpredictable outgoings can be why many restaurants don’t see their first birthday.
From hidden franchise and food costs to an unexpected licence fee payment, miscalculated and underestimated forecasts can be a recipe for disaster. But understanding the factors that shape the costs to starting a restaurant can significantly reduce the risk of failure and help you forge a strategic business plan.
Discover how you can cut your overall restaurant costs by assessing fundamental startup costs, evaluating hidden fees and strategising ways to prevent accidental overspending.
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Restaurant Startup Costs 101
Opening a restaurant incurs various demands many startup costs. Some of these are one-time expenses, while others are recurring payments.
Firstly, it’s important to understand the restaurant startup costs you’ll incur before your doors even open. Many of these costs come from restaurant permits and licence fee payments.
Once your restaurant adheres to industry standards, you’ll want to think about other fundamental startup costs, which can include:
Renovation (depending on the current state of the acquired facility)
Dining room furniture
Aside from obvious recurring restaurant costs, like food costs and alcohol, you should think about operational expenses, too. Your operational costs encompass everything that keeps your restaurant running and they span a broad spectrum, from the cost of employees to the actual expense of the building.
Depending on the size of your staff, labour can be one of the highest startup costs for restaurants to manage. From front-of-house staff like servers, floor managers, hosts and bartenders to back-of-house employees including all kitchen staff, you’re responsible for hiring, training and paying all workers at your restaurant.
Having an employee management system, which can track these key restaurant costs, can help you continuously strategise new ways to empower your staff and protect your business.
You also have to think about how to retain your employees, which could lead to further restaurant startup costs. The demand for work-life balance and a positive working environment has grown enormously and is a requirement for the current generation. Explore different ways to keep your employees happy – try introducing things like office outings, holiday parties, fun team treats and more.
In most cases, a restaurant owner leases out a space and is responsible for the monthly rent and utilities, which can add up quickly. Rent is dependent on the space you have selected. For example, a tenant space is less expensive than a freestanding building. With all the kitchen appliances and water usage at a restaurant, utilities can also really add up. Forecasting these costs is extremely important when creating a budget and a strategic approach for your restaurant.
Initial startup operational costs
A range of operational expenses must be factored into your restaurant startup costs. They include:
UK business rates. This levy is charged by the Government on non-domestic properties like shops and restaurants to fund services in your local authority area. The amount you pay each tax year depends on your property’s rateable value. It’s worth exploring if you’re eligible to gain business rates relief from your council, which cuts the amount you need to pay.
Waste management costs. Your restaurant will produce significant amounts of waste for recycling and landfill, however large or small your premises may be. From food waste to empty wine bottles, you’ll need a third party to collect all your rubbish on a regular basis. A monthly rolling contract is favoured by many restaurants.
Franchise fees. Setting up a franchise restaurant within a larger, established chain offers many benefits – including a ready-made customer base and the safety net provided by a huge parent organisation. On the flipside, an initial franchise fee can run into thousands of pounds, and you’ll have to budget for legal and set-up costs too.
Property charges and insurance . You may need to budget for property service charges that go towards the upkeep of your building. Insurance is another vital restaurant startup cost to consider, with cover needed for your building, public and products liability, and employer’s liability.
Planning licence fee. You’ll need a specific type of planning licence to serve hot food from your premises: an A3. These licences are available from your local council but can be expensive – even the application fee could run to hundreds of pounds. But the financial penalties for not having the right licence in place are also high: fines of up to £1,000 are enforceable if you fail to produce a licence when asked.
Hidden Restaurant Startup Costs
Masked in the shadows of a restaurant’s fundamental costs are the hidden costs of starting up. While “expect the unexpected” sounds like a cliché, ignoring hidden startup costs for restaurants can cause major monetary constraints later on. Here are some restaurant costs you may not be thinking about just yet.
Ingredients and food costs
The overall food costs for a meal can be deceiving and may come as a shock. With the average meal needing to be given as much as a 75% mark-up on original ingredient costs just to help ensure a profit, it can be tricky to keep expenses down while offering food at a price your customers are willing to pay.
Where does all this money go? For starters, the array of ingredients that go into one meal can be misleading. Let’s look at making a pizza. While it might seem stress-free, preparing a pizza requires an abundance of ingredients to make the dough and the sauce, and then there are the toppings. All these separate food costs quickly stack up.
Additionally, restaurant owners have to be wary of the waste potential for these ingredients. If your restaurant is only serving that specific pizza, will the ingredients be used elsewhere on the menu? What is the shelf life of those ingredients? If you don’t take a strategic look at the menu to make the most of ingredients, a lot of money could be lost. Who knew this much thought would go into making one pizza!
While you may hope to stick with your original menu, tweaking, updating or completely reinventing dishes is inevitable – significantly adding to your restaurant costs. Trends change and demand for one food item may wane while another item may explode in popularity. Regardless of what you change, it’ll cost you.
As a new restaurant owner, it’s important to keep it simple. Keep up with food trends – as well as demand – but don’t go overboard by offering obscure items that appeal only to a few. Use versatile ingredients to prevent waste.
Tableware, which can include plates, cups, utensils and napkins, is not always prioritised, yet it’s a vital component of both a restaurant’s functionality and its overall aesthetic. Typically, restaurant owners underspend on tableware, which can cause shortages during peak hours and lead to other operational problems. This is one of the restaurant startup costs you simply can’t avoid.
Assess your predicted restaurant capacity and peak hours to gauge how much you should spend on tableware. The style of the plates, cups and utensils you use also influences your overall spend and should be factored into your budget.
Chefs often request certain equipment and utensils that may affect your budget and overall restaurant startup costs. So, it’s important early on in the restaurant planning process to hire a chef who aligns with your concept and overall business goals. This helps mitigate any surprising requests that come down the pipeline.
Onboarding and training staff is often overlooked, but it can be a large restaurant startup cost, especially if you suffer from low employee retention. Create an efficient, multifunctional team to start out.
Your restaurant point-of-sale software and other administrative systems should be easy to learn and execute, to cut down on training time. Finally, focus on retention rates and create an environment that makes your employees happy.
Creating a Plan for for Restaurant Startup Costs
All these restaurant costs need to be considered, evaluated and prioritised. However, many restaurant owners have a hard time developing a fiscally-responsible plan that still supports a unique, compelling concept. While it is important to keep things simple, owners don’t want their restaurant to be underwhelming and unimpressionable. This struggle usually leads to overspending.
Where do restaurant owners overspend and how can you prevent it?
Equipment: As a restaurant owner, remember to focus on the right equipment, not necessarily the newest on the market. Talk with your staff to gauge the tools they need and assess the menu to determine the essential equipment for food handling.
Technology: Just as with equipment, you want to find the best technology for your specific business. Start with an integrated restaurant point of sale (POS)system, which can handle your restaurant payments, receipts, inventory and much more. Essentially, a POS system should make your life easier, help you oversee key restaurant costs and promote growth for your business. A POS system can typically cost restaurants £30 a month to use, making it another potential financial headache to add to your list. The good news is that Square’s all-in-one Restaurant POS System offers a free version to those just starting out. As well as delivering all the basics of a typical POS system, Square for Restaurants has an OpenTable integration that allows you to turn tables faster, offer a waitlist so you never lose a customer and even gives table assignment recommendations so you can fit in that extra walk-in.
Payment hardware: Clunky, out-of-date tills and ordering systems can slow down your restaurant and eat into valuable staff time. But the Square Terminal and Square Register can keep your business moving by quickly accepting chip and PIN, contactless and mobile payments – either on your counter or when you’re offering a tableside service.
3rd Party Delivery App Comissions: While online ordering apps can be a great way to reach new customers and tap into a network of delivery drivers, using them often comes with a hefty comission of 20-40%. That’s why it’s important to have your own direct online ordering site where your loyal customers can order straight from you - without the comissions.
Decorations: From jaw-dropping chandeliers to captivating artwork, it is easy for a restaurant owner to become transfixed by expensive pieces and overspend on decor. Remember, a restaurant can create a memorable impression with minimal embellishment. One or two statement pieces in a restaurant can go a long way, so think quality over quantity.
Marketing: Marketing is an essential component of your restaurant’s success, but many owners tend to overspend on unnecessary strategies. It is important to choose marketing techniques that have a high return on investment (ROI) for your business. Social media might be a key strategy for some restaurants while email marketing tools may be a beneficial tactic for others. Find out where your target market is and how it finds information.
When starting a restaurant, the risk of failure is a top concern for all owners. Planning for startup costs can help you greatly mitigate restaurant risks and better strategise for success.
Tackling the Common Costs to Starting a Restaurant
The long list of restaurant startup costs may seem daunting – with everything from technology and equipment expenses to ingredients and franchise fees quickly adding up. But mapping out all the initial costs, recurring expenses and hidden fees you’re likely to face will prevent any nasty surprises once your restaurant business is up and running.
Create a business plan outlining how you intend to pay for each regular and one-off fee. And budget carefully to avoid dangerous overspending. Being realistic on costs – and staying aware of the potential pitfalls – will give your startup restaurant the best possible chance of success.