What Are Some General Targets for a Restaurant Budget?

Hey there restaurant pros, it’s David Scott Peters and welcome to episode 56 of the Restaurant Prosperity Formula. I’ve been coaching restaurant owners since 2003 and the Restaurant Prosperity Formula is based on what the most successful restaurant owners I’ve worked with do on a daily basis to achieve their success. The basic premise of the formula centers around achieving prosperity, freedom from your restaurant and the financial freedom you deserve. To achieve prosperity, you have to follow a very specific formula made-up of leadership, systems, training, accountability, and taking action.
Today’s topic, I want to focus on the most common questions I get asked when working with a restaurant owner on their budget. And that question is, where should my numbers be? Let’s get started. But first, a word from our sponsor. This episode is being brought to you by Repeat Returns. If you’re a restaurant owner of a medium to high volume independent restaurant, multi-unit or franchise operator, and you’re looking for a proven and realistic solution to attract, grow and retain customers, then you need to visit Repeat Returns. Repeat Returns is a modern marketing platform created by a restaurant owner for restaurant owners.
It studies each customer’s habits and patterns, predicts the most profitable outcome for your restaurant every single day, and deploys the marketing to make that happen. You’ll never lift a finger. com forward slash DSP. If you’re new to my podcast or new to me in general, I want to share with you one of my favorite pieces of wisdom. What is that, you ask? Well, the two most important systems any restaurant should have are budgets and recipe costing cards. By the way, what do you think the two systems are most restaurants never have? Budgets and recipe costing cards. Why? Because they’re too hard. Boo freaking who.
You’re in the toughest business I know. Like no other business that I’m aware of that you have to wear so many hats at the same time. where big businesses have department heads, somebody to do purchase, somebody to do human resources, hire, train, and do those things, somebody in marketing, somebody to be the CFO. You’ve got to do all those things at the same time. With that said, being the most difficult business I owe, you’ve got to make sure that you’ve got those two systems in place because without them, you’re throwing profitability to what I call ******* luck. Think about it, a recipe costing card.
Name an industry that doesn’t know what the hell they’re selling, what it costs them, and what they need to sell it for in order to make a living, to make money. Where in the restaurant business, a chef puts up a special, a feature in the window, and somebody goes, oh, what are we charging for? 95, because they generally know what the protein costs. They generally know what the side is. They generally know. Well, then you generally ain’t making money. There’s more to it. Well, the budget goes one step further. How the hell do you know where your numbers should be if you don’t have a budget?
Based on your location, style of service, quality of product, price point, your core values. So much goes into it. So you’ve got to create that plan for success. That’s a budget. A P&L is just rearview mirror looking to where you’ve been. While that’s important, We’ve got to say, where are we going? You as the leader, the restaurant needs. You need to lead the business with the right numbers. So I’m going to tell you this. I’m probably on at least one, if not two budget calls every single week with members. Now some of these calls are simple. They’re just reviewing existing numbers, meaning we’ve created their budget template.
They’re putting their actuals in because they got their P&L and we’re seeing where we hit or missed. We’re trying to look into the systems and see why we missed that number and what changes we need to make to the rest of the year to make the money back up. Because they want to measure success. We no longer just say, hey, do I have money in the bank account? What are the specific targets I’m shooting for? Did I hit them? Did I miss them? And if I miss them, what systems did we put in place that managers aren’t using that I need to retrain, hold them accountable, get back in place and change for the future?
Maybe their systems My manager is actually using, but I’m still not hitting my numbers that I need in order to make money. So what new systems are I going to put in place and how quickly I’m going to make changes in my budget? And you plan for your success. It’s A proactive system. It is critical to your success. I’m going to tell you right now, I don’t know how anybody advises you. Consultant, coach, friend, vendor. If you don’t have a budget, how the hell do they know where your numbers should be? Are we going to use industry averages? No way. Now many of the calls are also to create brand new budgets.
So they’re members in my restaurant transformation intensive program and they week after week after week till finally they hit boom, it’s budget week. And budget week is actually 10 through 13. It’s that important. There’s so much work that goes into it. And I always tell people it’s probably the biggest thing that we do together, the most important thing we do together, the thing that’s going to make the greatest impact in their business that we do together. Now let me walk you through the process. It is not scary. We take your last 12 months, trailing 12 months.
We get it from your QuickBooks or whatever accounting software you’re using in a single spreadsheet, 12 months across, or if you’re on 13 period accounting, 13 periods. And then all we do is we look at what percentage of the sales mix is. We look at where your cost of goods sold is for the year or if you’ve made changes more recently. Especially if you don’t take inventories, we have to use a bigger range so that inventories don’t, or purchases aren’t wildly up and down, which gives you a false sense of where your cost of goods sold is. We look at your labor. We get those averages, fixed versus variable expense.
And we go line by line by line by line on your operating expenses. And we say, hey, if we operate the next 12 months the same way we did the last 12 months, here’s what we’re going to make or lose. We actually create a template duplicating what you’re doing right now. That’s not a budget. That’s a budget template. You don’t need a budget if you’re just going to keep doing the same stuff you’re doing. But if you want to truly be successful, we’ve got to create that template. Now once that template’s been verified, we literally put it together. We get on a Zoom call with you and we verify every single number.
Sales for the last 12 months, look at each of the percentages. Oh, there’s something different here. We changed our menu, our cost of goods sold are really here. Oh, we got rid of that position since COVID’s gone. Like you go line by line by line. Oh, you didn’t know we have a loan on there. It hasn’t, our EIDL money hasn’t, you know, hit that budget yet. So we need to add it. We verified line by line by line. by line. And now we have a template to create a plan for success. And then we get on what? One, two, if not three, two-hour Zoom calls creating that plan for success. It is powerful.
And I’m going to tell you it takes as many as three two-hour Zoom calls because I go line by line by line discussing every single line item. Even getting down into the weeds doing a dollars per labor hour work for different positions going, this labor percentage looks too high. We need to make a change. But I’m going to tell you right now, the most common questions whenever I start working with a new member, when it comes to doing a budget, revolve around where should my numbers be. Now I’m going to tell you, I could go down any number of paths when it comes to numbers. And I could get truly in the weeds.
And I’m going to try and get into the weeds a bit. But some targets we can generalize, while others that really requires we know where you’re located, your style of service, your price point, your quality of product, your core values, what your minimum wage is. The list goes on and on. So there are certain numbers I can’t give you a perfect generality. For instance, I generally want 10 to 12% back of house labor. That’s cooks, prep cooks, dishwashers, all of them. But sometimes you’re in a really high minimum wage state. And because we don’t pay minimum wage anymore after COVID and after the labor shortage, we’re much higher.
Well, we may run a little bit higher. You might run 13, 14% back house labor. But just know that we’re going to have to make it up somewhere else, like in food cost or any other cost goods sold, bottle beer, drop beer, wine, liquor, and so on. But the fact of the matter is those are more difficult to pinpoint without being on a call with you. So I’m going to focus on the bigger, more general numbers that can help guide you. That’s what I want to focus on. Again, the bigger, more general numbers that are going to help you achieve the numbers and the profitability you want.
Now, if you’ve spent any time with me, if you’ve been on my YouTube channel, David Scott Peters, if you’ve been on my podcast, Restaurant Prosperity Formula, you’ve read my book, The Restaurant Prosperity Formula, What Successful Restaurateurs Do, if you’ve seen me speak, you’ve probably heard me talk about prime cost. And I often label that speech the one number you must know to have any chance to make money. It is that important. Now to old timers like me, prime cost was called controllable expenses in control of management. How we hire, fire, train, utilize, or schedule those people.
How we purchase product, utilize that product, or mismanage it for that matter. What it is controllable in the control of management day-to-day. where my managers can’t control what my rent is or what my loans are, can’t control that I’ve decided to run a Groupon at a 78% discount, giving away my profitability. They can control the people and product on a day-to-day basis. So prime cost is their report card. Now what makes up prime cost? Total cost of goods sold, that’s food cost. Bottled beer, draft beer, wine, liquor, NA bev, merchandise, all those costs all together, total cost of goods sold.
Plus total labor costs, including taxes, benefits, insurance. And that’s important. Well, if you put that all together and we say prime cost, well, that’s important to know what the dollar amount is, but how do we convert it to a percentage? Something we can control, a little easier to talk about. Well, it starts with making sure you’re using gross sales. Total cost of goods sold divided by gross sales. Now, what is gross sales? This is important because many of your POS systems, what they call gross sales is net sales. They define it incorrectly.
Gross sales is the ring of the register before the discounts have been removed, not including sales tax. Sales tax is not a sale. That’s not your money. That’s the government’s. So if I ring up a $10 burger and I comp $5, $10 is a gross sale before the discount. Net sales is the ring of the register after discounts, not including sales tax. So $10 burger comp $5, well, net sales would be $5. We use gross sales so we can measure our efficiencies properly. Again, it’s not if you’re running a coupon, It’s not your chef or kitchen manager’s fault that you’re running a BOGO, buy one, get one free.
Because in this $10 example, the burger sells for $10, but you have $3 in product on your recipe costing card. Oh, remember that part, right, when I started? Use divided by sales, $3 into $10, is a 30% food cost. Well, if I use net sales, 50% of that came in, I now have a 60% food cost. Is that real? So I need to measure my kitchen pros based on what they should have brought in and what they should have used. It doesn’t mean my profitability doesn’t take a $5 hit. Absolutely it does. But that’s a whole nother story.
My managers can’t control that unless we’re burning burgers and we’re giving ****** service and all those kinds of things, which is a whole nother number we’re going to pay attention to. Now, if you’re not following me, you’re still not with me. All right, my social working friends, let’s put it to you this way. You’re going to have your favorite charity, favorite charity, come buy out your restaurant for a day. It’s going to be a $14,000 event. Your heart sings. But because your heart is so big, you’re going to comp 50% of it. You’re going to comp $7,000. Now let me ask you a question.
Do you buy food and beverage for a $14,000 a day or a $7,000 a day? 14. Do you schedule to handle a $14,000 a day or a $7,000 a day? 14. To measure your management team’s success, you’ve got to do it off of gross sales. So total cost gets sold plus total labor costs, including taxes, benefits, insurance divided into gross sales gives us our prime cost by percentage. Now, where should I be? Well, in the old days, when I first started back in 2003, the experts right? The experts, I give air quotes, yeah, I air quoted it, would say 65% prime cost is your target if you’re a full service restaurant, 60% for a quick serve.
And one restaurant disaster after another throughout the years since 2003, from the Great Recession to COVID to the labor shortage to inflation that we’re living in right now. Those numbers don’t work anymore. And they really haven’t for almost 2 decades. I’m here to tell you if you do at least $850,000 in gross sales, your new prime cost target is not 65%, it’s 55%. And if you do under that, it’s 60%. Why? Because we have so many things taking money out of our back pocket.
If you listen to my last podcast, I believe it was episode 55, I talk about a tech stack, all the software that we have to have that you’re paying for, you didn’t pay for 20, 30 years ago. just to run your business. And our costs are through the roof from labor to cost of goods sold. You name it. You’ve got to run more efficiently to make the money you deserve. And it can be done. Now, I will tell you, do have to understand that prime cost is not just an industry standard. We don’t run, oh, the experts say a 34% food cost. The experts say a 32% labor cost. that’s a 66% prime cost. Hell, it’s even higher than the 65. So you cannot use that.
Do know that for some of you that are in a high labor cost state, you’re gonna have to run a really low cost of goods sold to make up the difference. You could run a 35% labor cost and a 20% cost of goods sold. 13 an hour to a tipped employee. because we’re going to make up the minimum wage difference in tips. You could run a 30% food cost and a 25% labor cost. So your core values, where you’re located, all those questions we talked about earlier twice now, those are important to say where your numbers should be. That’s why we can’t use national averages.
Now, generally speaking, when we start to look at this, We say, okay, where should my numbers be? Again, without going into food cost, poor cost by category. A lot of those are dependent on so many of the questions I’ve already asked. But generally speaking, I’m looking for an overall cost of goods sold around. 25% to give any of my members an opportunity to make money. Why? Because labor is so expensive anymore. Now, do I have members that are higher than 25% labor total cost good sold? Absolutely. Do I have members who are way under that? Absolutely. So it’s a generality. That’s all this is. It’s a general guideline.
Do not take me and quote me and go, well, David said it’s supposed to be 25%. No, I didn’t. Generally around 25% gives you an opportunity to make money, especially because labor is so high. So that means wherever your cost of goods sold is, and we’re going for 55% prime cost, we’ve got the rest in labor. And that’s how we start to look at it. So if again, I’m sitting there going, hey, I can’t cut labor any further. I need these people. I’ve got, mandated increases in minimum wage in my state that are coming in and going to rob me of $100,000 in profitability. Then guess what? Your menu is on the table.
You’ve got to look at your menu and you’ve got to make the changes necessary in order to keep people employed in your restaurant moving. You’re going to attack your cost of goods sold. So that’s why it’s general number. Now, after we do prime cost, all we have left is operating expenses. That’s the rest of that RNP&L. We go cost goods, sold, labor, and then every other expense to run the business. And we’re going to go through some of these numbers, some specific categories in general. Again, I’m shooting for in general, an overall operating expense target of about 25% of sales. 25% of sales. Do I see restaurants that are in the 30s, 40s?
Even higher? I do. Usually it’s occupancy cost and some other mismanagement that goes on. Low sales. But around 25%. Do you have to hit that? Again, do I have members making money with higher and lower? Yes. Generally speaking, I want to be very clear, crystal clear on that. Now with that said, here are some of the individual targets I want you to shoot for or I’m going to share with you in no particular order. Probably just me, putting together my notes and saying, this is what I want to talk about. Okay. So one of the big ones is paper expense. Generally speaking, I want about a 1 1/2 to 2% paper expense.
Now, if you’re putting gloves in this, is going to jump up as much as a point. But the fact of the matter is if you don’t have it in Jani, if you don’t have it in its own category, But generally speaking, 1 1/2 to 2%, unless I’m A to-go restaurant, a pizza place, where I’ve got a really high paper expense. And now I’m going to look at 2 to even 2 1/2%, especially if gloves are in there. OK, generally speaking, another general number is janitorial expense, anywhere from 1 to 2%. Now, what does that include? Janitorial cleaning supplies? It’ll be lower. If it’s actually, I’ve got labor internally or externally, it’s going to go up.
But generally, 1 to 2 percent. Comps is a big one. Remember, comps are, you said, I don’t want your money, guest. I’m going to write that off. I’m going to discount it. Well, for the most part, old timers like me, and I’ve been in this business 30 plus years, started as a kid underage. Generally speaking, old timers like me, Gen. Xers, we are shooting for a 2 to 4% comps, 3 1/2 to 4 really. And today, since COVID, most of my members have pulled so far back on discounting that they’re 2% and under. Understand that for every penny that you are giving up in a comp is money you’re taking out of your own back pocket. So it’s big. 5 to 4%.
Today, 2 or under is what we should be shooting for. Now that doesn’t include if you have marketing money going into your loyalty program or you are couponing as a discount strategy for marketing and that’s where you spend your money. And we’ll talk about that in a second. How about occupancy? This is the one that can kill restaurants. Absolutely kill restaurants. Now occupancy is your rent. It’s the SBA loan you have. It is your property taxes. It is the insurance, liability insurance to be in that building. Anything it takes to live in that space.
Now, the old number, me growing up in this business, I was working with members, hey, I want you to 5 to 8%, 5 to 8% of sales. I’m going to tell you many restaurants for the last decade plus, ever since the Great Recession, many restaurants are running 10 to 12%. Now understand, If you’re running 12% occupancy and I wanted you 5 to 8, 8 on the high side, now you’re at 12 on the high side, that’s four points that you’re robbing, being robbed from you in your back pocket. And I’m gonna tell you right now, anything above 12%, you’re now working for the landlord. You’ve got a sales problem. You need to renegotiate your lease.
This is how knowing some of these targets can be very helpful for you. might need to move. Now let’s get back to the comp slash marketing. Well, my marketing and advertising expenses, I generally are going to run around 1 to 2%. Now I do have some members in the past that have gone up to 4%. In fact, if you’re a part of a franchise group, odds are you’re going to spend up to 4% of sales. I want it to be measurable. I want it to be worthwhile.
But do understand that if you are comping with using discounts as a primary form of marketing, well, you could take some of those percentage and throw it into discounts, rob it from marketing and throw it up into discounts or move it into marketing that those comps are specifically marketing. So now all of a sudden that comp rate can go a little bit higher, but it needs to be a much lower number in your marketing and advertising. With that said, this is a generality. Because if I came up to you and I said, hey, if you give me a dollar, I’m going to give you $3 back. How many dollars would you find? As many as you could find?
Well, that’s what the principle behind marketing is, right? So if you got something that works, maybe we’re not so concerned with the percentage. Next big one can be a killer for restaurants is your credit card discount rate. That’s what the bank is charging you for taking American Express, MasterCard, Visa, Discover. Get the picture. 4%. 4%. Now that includes whatever cash sales. In my budgeting tool, Budget Builder MVP, it looks at total sales. It’s not saying we know how many of those transactions were cash versus credit card. So your discount rate is going to seem a little lower in the budget than the actual combined rate should be.
But I’m going to tell you right now, I come across so many POS systems now are month to month and the way they make their money is on the discount rate. That you’ve got to do credit cards through them. 2%, you have got to jump up and down on your head and the scream, you’ve got to lower my number. 4%. Unless you’re really low volume, you’re under $1,000,000, it’s going to creep up because you need volumes. But if you start doing $2,000,000, $3 million, $10 million, that number needs to drop like a rock because they are making a ton of money on you. Now, what about the final thing, the big number?
And yes, there’s other percentages and labor and things like that. But again, I wanted to stick to the general ones that I could give you general numbers that we can use at any point in time. Labor is very specific. Cost of goods sold is very specific to your restaurant. But one number we are shooting for is a target profitability percentage. To get there, I want you to understand where the National Restaurant Association says the average restaurant makes about 5 to 8 percent, a nickel to 8 cents on every dollar. I don’t know about you. I don’t want to work my *** off for a nickel.
Some of you are you losing money because you don’t have a budget and you’re not managing your restaurant with systems and putting managers in place and the controls that I teach and I want you to use things that I preach because I know what a change it can make in your business and your life. So some are losing money, but average restaurants making a nickel to 8 cents. Heck, I remember almost 20 years ago, Ohio State University did a study that said, showed that 62% of all restaurants fail in their first three years of business. Not that 8 out of 10 restaurants that we all were fed is the myth. 62%.
So we already know that it’s a tough business with nickel to eight cents. Heck, in three years, 6 out of 10 restaurants are going to fail. But here, I’m going to tell you this. If you use a budget, you implement the systems I teach, you lead your business, you hold people accountable, hell, you take action. If you do about $750,000 a year or less, Once you understand, you may be in a position where you purchased a job. 500 and under, absolutely. You have to be the manager. Somewhere around that $750,000 mark, we can start to bring in managers. We have money for it.
Especially at the 850 or higher, we can put a full management team in place, have two days off every single month, not be a manager on the floor and lead the business. With that said, if you’re doing 750, or lower, if we’re lucky, our goal is about a 10% profit margin. That would be high because there’s not enough dollars coming in to drop to the bottom line. So that’s why you have to be the manager. You’re basically paying yourself. It’s your job. Now, if you start going over that $1,000,000 mark, this is where we can start working towards a 15 to 20% profit margin with a full management team in place.
It is eye-opening when you do the budget because all too often people are like, they’re running it themselves with a couple supervisors. How, David, could I even find the money? Because as we go down labor and we start to discover your efficiencies in the kitchen are horrendous. People are standing around. What you’re doing is throwing money at the problem. Instead of having supervisors, you put more employees on the floor to make up for the lack of supervision.
by adding managers, having teaching our system, our process, our way, teaching them what the job is, how to do it, how well it should be done, more importantly by when, and holding them accountable to our systems, we now have the ability to impose our will without being there, to have the restaurant run our way when we’re there, but especially when we’re not. And now we can start achieving a 15 to 20% profit margin after paying a full management team.
to not have to be in the building, you not having to be in the building on a day-to-day basis, changing your role to working on budgets, marketing, leading the team, developing your managers, moving the business forward, holding them accountable, what a restaurant owner should be doing. But I’ll also tell you, if you get over the $2 million mark, we should see more efficiencies in labor because we can’t add another cook to the line, we can’t add another server to the floor, another cashier, whatever it may be.
And so the customers, there’s a line of customers and everybody gets to come in at the same time, everybody gets to leave at the same time and labor drops like a rock because the sales are so high and we couldn’t add any more labor if we wanted to. And your fixed costs are fixed. So as a percentage of sales, they drop lower and lower and lower, they drop like a rock. And this is where restaurant owners should be focusing on a 20 to even 25% profit margin. Life changing.
when you have those kinds of margins and a $2 million business is not so hard to hit anymore because we’ve raised our prices so high to combat all the challenges facing us now. the key to hitting these numbers is basically knowing your numbers. And the only way to know your numbers is to create a budget. I believe this is so important that again, we create budgets for all of our members.
Whether they’re part of the Restaurant Transformation Intensive program or they’ve graduated and become Mastery or Mastery Plus members and a part of the Mastermind team, a group of restaurant owners that get together three times a year in Vegas, does not matter where you are in my life. We’re going to get your budget done for you every year because it’s your plan for success. It’s that damn important. Because without knowing your numbers, your numbers, how can anybody help you create a plan for success? Heck, how can anyone help you? Because you can’t even help yourself. So here’s the deal.
You need to make creating and maintaining a budget your priority if you want to stop throwing your restaurant profitability to ******* luck if you want to have a life. Because I’m going to tell you right now, armed with the general numbers I’ve given you, can do a really good job on your own. But the truth of the matter is this. If you just have a budget in the 1st place, creating your plan for success, you’ve got a greater opportunity to make the money you deserve because you know your numbers, that which you measure improves, and we change the plan.
Making you a proactive management team, a proactive owner, somebody who can make change in their business instead of being a victim. I’m going to tell you right now, while I shared with you some key numbers, the number one takeaway I want you to get from this podcast is you must start creating your budget today. Hey, that was an awesome episode. I want to thank you for taking the time to take action on building a better, more prosperous restaurant. Before you go, I want to give you these three thoughts.
One, by combining leadership and taking action with systems and training, being checked by accountability, you are on your way to creating prosperity for you and your restaurant. Two, I have something I need from you. Please leave a review on Apple Podcasts, Spotify, or wherever you happen to listen to podcasts. By leaving us a review, other restaurant pros seeking out this information are able to find it. I read the reviews, and hearing how this information has benefited you does wonders for me. And 3, if you find any of the discussions helpful, share them.
The more restaurant pros who have access to them, the better we become as an industry. com. Be passionate about what you’re doing. Be persistent, but more importantly, become better and help everyone around you become better and your restaurant is going to kick some ***.