Many people dream of owning restaurants. Does it make sense to enter this industry? Consider how the costs and potential profits might inform your decision.
How Much Money Does It Take To Open a Restaurant?
The amount of money needed to open a restaurant varies significantly depending on factors like your location and the type of foods you want to serve. Obviously, it will cost much more to rent prime real estate in a densely populated area than it will to rent a small cafe in a remote location.
Typically, you can expect to spend somewhere between $175,000 to $750,000 opening a new restaurant. Yes, that’s a broad range. Regardless, you will probably need funding to start the business. Most restaurateurs borrow money or find investors to fund their burgeoning ideas.
Before you solicit money from investors and lenders, write a business plan and gather your personal and professional financial documents. The more prepared you look, the more likely it is that someone will take a chance on your dream. If you end up borrowing money, you might even qualify for a lower interest rate that makes it easier for you to control costs and generate profits.
How Much Does It Cost To Open a Small Restaurant?
The size of a restaurant will impact how much it costs to open it. Don’t assume that a small floor plan always means that you will spend less money, though. Renting a large building on the outskirts of town might cost the same as renting a small space downtown or in other high-traffic areas.
Keep in mind, however, that you need more than real estate to open a small restaurant. You also need equipment that helps you store and prepare foods. You can expect to spend:
- $2,000 to $10,000 on a commercial oven
- $2,000 to $6,000 on commercial refrigerators
- $3,000 to $14,000 on commercial freezers
If you want to spend less money on commercial kitchen equipment, look for used options. They often sell at a fraction of the price.
Other items you might need to open a small restaurant include:
- Ranges and ventilation
- Pans, knives, and other cooking equipment
- Storage racks, shelving, and similar storage solutions
- Food preparation counters
- Ice maker
- Tables and chairs
- Plateware and cutlery
However, a small restaurant can potentially avoid some of these costs. For example, a carryout restaurant might not need tables and chairs. But you will have to account for spending more money on carryout containers.
How Much Does It Cost To Run a Restaurant Business?
Starting and opening your restaurant is just the beginning of your business expenses. Running a restaurant business comes with ongoing expenses that you will need to pay weekly, monthly, and annually.
Food costs should account for about 30% of running your business. If it swells above 40%, you will have a challenging time attracting price-conscious consumers. Unless you want to focus on fine dining, keep your food costs within a few points of 30%.
Of course, you don’t want to lower prices by choosing low-quality items. Doing so might bring first-time customers to your restaurant, but you probably won’t get much repeat business.
Labor also takes up a sizable percentage of your ongoing restaurant business costs. Luckily for business owners, tipped employees have a lower minimum wage. According to the federal government, you only need to pay tipped employees $2.13 per hour. The tips must equal the federal minimum wage, which is currently $7.25. If employees do not earn enough tips to average $7,25 per hour, you will need to increase the amount you pay them.
States can also enforce higher minimum wages. Washington, DC has the highest minimum wage ($16.50 per hour). Other states with minimum wages over the federal wage include:
- New York
- New Jersey
When in doubt, talk to a business lawyer in your state for more information.
Many of today’s successful restaurant businesses rely on technology to meet their goals. The right type of technology can help streamline processes, prevent mistakes that lead to higher food costs, and improve customer engagement.
Explore point-of-sale (POS) and online ordering software to find an option that matches your needs and budget.
Other costs that can vary significantly by location include:
- Insurance policies
- Delivery services
- Licensing (including a liquor license if you plan to serve alcohol)
- Utilities, which are often quite high for restaurants that use gas ovens and ranges
What Are The Highest Expenses In a Restaurant?
The highest expenses for running a restaurant usually include:
- Rent and utilities
These costs are in addition to the money you will spend on the essential items you need to start your restaurant, such as cooking equipment, refrigerators, and freezers.
How Profitable Is Owning a Restaurant?
On average, successful restaurants have profit margins between 3% and 6%. If you own a small restaurant that brings in $600 per day, 30 days a month, you have a revenue equal to $18,000. If you spent $17,000 running the business that month, you have a net profit margin around 5.56%.
In this case, you only profit $1,000 a month. You already have a robust profit margin for the industry, so you probably can’t cut costs by much. If you want to make higher profits, you would need to increase sales. Many restaurants do this by opening multiple locations, catering events, and offering delivery services.
What Type of Food Restaurant Is Most Profitable?
The type of restaurant you own will play a role in how much money you generate. Nothing guarantees financial success. If you want to give your business a better chance of thriving, consider the following options.
Farm-to-table restaurants attract people willing to spend more money for high-quality food. Also, you can develop relationships with farmers in your area to negotiate lower prices. You cut out the middleman by going directly to the source, which means you could increase your profit margin.
Delivery-Only and Virtual Restaurants
Don’t want to spend money on a dining room? Consider operating a delivery-only restaurant. You can cook in a small space and have employees or delivery services take food to consumers.
Just about everyone loves pizza. It’s a delicious, easy option. Rake in sales on Friday and Saturday nights by starting a pizzeria. Delivery could play a critical role in your success.
Although you need to meet higher licensing requirements to sell alcohol, running a bar can earn a lot of money. Having a bar in your restaurant might also encourage patrons to order more food. Research shows that alcohol makes people want to eat more. That’s a win-win for your restaurant.
Do Restaurants Have a High Success Rate?
You may have heard that restaurants have a very low success rate. In reality, people just notice when restaurants go out of business. About 20% of restaurants find long-term success, which is in line with other small businesses. On average, about 60% of restaurants close within one year of opening. Overall, 80% last less than five years.
How can you position your restaurant for success?
The answer usually lies in choosing an excellent location, controlling costs, charging fair prices that appeal to consumers, offering excellent services, and providing reliably good food.
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