Overheads and Calculating the Cost of Overheads

Profitability essentially means any money that you are bringing in after all your expenses have been paid. Obviously successful businesses make a profit. If a business is not profitable, the owner will have to ‘put money in to keep it going.

It therefore goes without saying that owners and managers want to ensure the business stays profitable and this can be done by lowering overheads.

As mentioned earlier in the course, a restaurant will have fixed and variable overheads. Fixed overheads include salaries, rent, telephone, insurance whereas wages, advertising, laundry, repairs, and maintenance many of which can fluctuate.

Understanding restaurants cost of overheads is very important as it tells you exactly how much the overheads are in a given period, for example per hour, per day, per week. Let’s take an example, Susan Smith has a restaurant and wants to know how much her hourly overhead cost is as she wants to reduce the hours of operation and would like to see how much this decision will cost the business.

Susan will add up all the overhead costs and then divide that by the period that she wishes to measure.

The above calculation, Susan has done is to see how much her hourly overhead rate will increase if she reduces her operating hours by 27 hours. Her hourly overhead cost will go from $175.00 to $202.31!

This will mean that is Susan wants to reduce her operating hours she will need to reduce her operating cost.

Costs can be reduced by reducing overheads.

• Reduce wastage.
• Focus on savings such as electricity, water.
• Optimise technology.
• Reduce inventory.
• Reduce labour costs.
• Reduce other costs such as finding more reasonably prices chemicals for example.

Of course, we are just looking at overheads but another way to increase profit would be to increase sales.

Discussion

If you were starting up a restaurant business what overheads would you consider budgeting for?