Being an entrepreneur is hard work. Isn’t it? You handle everything regarding liquor cost, food cost, and overhead costs. So what is the difference between these costs and the rest?
As a business owner, you must try to minimize costs at every opportunity. However, as we have seen the making of many online stores since the emergence of the COVID-19 pandemic, this causes the e-commerce overhead to appear quickly. Therefore, you have to be proactive with the overhead cost.
This article has put together a guide for you to understand an overhead cost’s domain, with examples and calculations. By following this guide, you will save your restaurant from a failure rate. We have also shared the link to the worksheet that makes it easy for you to do the calculations.
What do you mean by Overhead Costs?
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If you are a restaurant owner, you may have wondered about one thing. What are overhead costs? Well, the answer is pretty straightforward. They are the costs that are associated with the running of your business and not related to productivity.
An overhead cost is a cost that makes your business work. No matter the number of orders or the success rate, these costs are fundamental to your business. Facility and utility costs are both parts of an overhead cost. If there is a chance, we may even add eCommerce business insurance as part of these costs. You cannot run a restaurant or a bar without having these costs in your working panel.
There are three types of overhead costs. All of them have their associated costs. However, before you can minimize these costs, it is essential to know that you can further divide these costs into categories, making it easier to understand what you can remove and what you can contain. Therefore, we discuss these costs below:
• Fixed Overhead Cost
A fixed overhead cost remains constant at the end of every month. These costs include wages, property tax, rental expenditures, and more. In addition, these costs usually are associated with a contract that outlines a specific time in which the business owner will not change the rates. Therefore, the fixed overhead cost is crucial to the calculation of your business’ prime cost.
• Variable Overhead Cost
A variable overhead cost changes from time to time depending on your business’ workload. These costs include salaries, sale commission, raw material inventory, and more. If your business is highly productive, you will experience a high overhead cost and a high variable overhead cost. You must ensure that your variable costs do not overflow. This consistency will enable you to get a good restaurant profit margin.
• Semi-Variable Overhead Cost
Semi-Variable overhead cost comprises both fixed and variable overhead costs. If there is no productivity, you will get a fixed overhead cost. If productivity increases, you will eventually see a high overhead cost. These costs include staffing, telephone bills, overtime working, etc.
If you want to reduce your eCommerce overhead, visualize your variable and semi-variable cost, as the entrepreneur can minimize these costs with little planning and strategies. It is essential to make the right decisions.
Association with a Small Business
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Overhead costs for small businesses or new startups can be prescriptive. A low overhead cost will mean that your business can survive stagnant periods. Below, we have shared some of how you can associate these costs with small companies or startups:
• Making a list of expenses
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You cannot make the right decisions regarding your business costs if you do not understand them completely. Therefore, make a list of returning expenses. These expenses can be the weekly cleaning of your restaurants. It would be best if you tracked these costs actively.
You can also find these costs in your restaurant’s or bar’s balance sheet. In addition, this sheet will enable you to calculate a few other values, such as the cost of products sold.
• Have a look at the rent
Rent rates are almost like a distraction for small business owners. If your business isn’t productive enough, you cannot afford to pay your lease rates ultimately. However, if you can afford it, try to negotiate the rate of those aspects of the facility you are not using.
If negotiations break down, it is time for a change. Minimizing the rent rates and utility values and finding a smaller location may prove to be a big decision. However, it will be a forced decision.
• Modify staffing levels
Reducing salary costs is an ideal way of minimizing overhead costs. Many small business owners have tried this strategy and proved to be successful. Reducing these costs doesn’t mean that you have to fire people from their jobs. Instead, you can minimize these values by opting for more hourly workers and integrating them into the team appropriately.
Instead of making your employers work overtime during a low business productivity rate, create a timetable for them. By creating working schedules within your team, you will get the best results and improvement in productivity. Furthermore, you can invest in an exciting inventory panel like BinWise Pro.
This investment can minimize the labor cost associated with beverage inventory and enhance your profits. Minimizing an overhead cost should be integrated within your plans, along with ways to improve restaurant or bar sales. You can ensure this improvement via cost-effective ingredients, menu engineering, and visualizing advertisements of your business.
There are numerous company overhead costs in the practical world that an organization will sustain depending upon the type of business.
Below, I have shared ten overhead cost examples for restaurants and bars:
- Business Insurance
- Office accessories
- Business permit
- Alcohol permit
- Property Tax
- Accessory repairs
Formulae and Calculation
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If you want to calculate your overhead cost or your restaurant’s respective cost, you need to stick to the basics. You add all the costs together, except for those associated with food or drink making. The expenses include utilities, wages, rent, and many more.
Another critical factor in this calculation is the overhead rate. You calculate that by comparing your overhead costs or restaurant’s cost with the revenue. The formulae is as follows:
Overhead rate = Overhead Cost / Sales Income
Now, we head over to the calculation panel, where we use the formulae given above. This calculation will enable us to reduce overhead costs and enhance revenue.
For example, let’s say we have opened a restaurant called Waqar Restaurant. We are looking for both the overhead cost and overhead rate. Eventually, we will gather the findings of our restaurant’s overhead cost. They will comprise:
- Rent: $12,000
- Utilities: $6,535
- Taxes: $8,900
- Alcohol permit: $800 (this is associated with your restaurant’s license to sell alcohol. It shouldn’t be about its brands)
If we want to calculate the total overhead cost, we add all these values up. The calculation is shown below:
Total Overhead Cost = Rent + Utilities + Taxes + Permit
Total Overhead Cost = $12,000 + $6,535 + $8,900 + $800
Total Overhead Cost = $27,935
After doing the calculations, we find out that the total overhead cost of the restaurant in the past twelve months was $27,935. So now, we will compare this finding with our overall revenue to get the overhead rate. Next, we looked into our POS system and found out that our sales income is $220,000.
As we have the two values we needed, we divide them to calculate the overhead rate. The calculation is done below:
Overhead rate = Overhead Cost / Sales Income
Overhead Rate = $27,935/$220,000
Overhead Rate = 0.127 or 12.7%
As per the calculations, our overhead rate over the last twelve months was 12.7%. This calculation means that we invested 12.7 cents on our restaurant’s overhead cost per dollar we earned.
If you own a restaurant or a bar, you can easily manage your overhead costs via an overhead calculation worksheet. Download from the link provided and integrate it within your restaurant’s plans.
After downloading the worksheet, you can change the cells within the working panel, and the calculations will be done by themselves. Enter the overall costs for each phase, and the worksheet will do the math for you. You will be given an example of the expenses for a company overhead as a reference. Once you have a complete understanding of its working, try to enter the costs and do some of your calculations.
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Overhead costs are massively associated with the restaurant’s overall costs and expenditures. They integrate quickly, and ensuring that it doesn’t go out of hand is crucial for the growth of your business. Therefore, we can say that these costs depend on the fate of your business.
Using the worksheet and formulas given above, you can manage your costs effectively. If you want to know more business tips, place your trust in a top-order management system like Strikingly. Check out our blog and get to know about profitability, methods of upselling, and much more.