Expense Ratio

What Is an Expense Ratio?

Every rupee that enters your restaurant has a destination, whether it’s food costs, staff wages, rent, or marketing. The expense ratio helps you see how much of your revenue goes toward these operational costs.

It’s calculated by dividing total expenses by total revenue, then multiplying by 100 to get a percentage.

Formula:
Expense Ratio = (Total Operating Expenses / Total Revenue) × 100

If your restaurant earned ₹10,00,000 in revenue last month and had ₹7,00,000 in expenses, your expense ratio would be 70%. That means you spent 70% of your earnings running the business.

Why Expense Ratio Matters

In the restaurant industry, where margins are razor-thin, knowing your expense ratio is like knowing your pulse. It shows whether your operation is efficient or overspending.

Here’s what tracking it reveals:

• Profitability health: Lower ratios indicate better cost control.

• Operational balance: Helps ensure labor, rent, and ingredient costs are in proportion.

• Decision-making clarity: Provides data for pricing, menu engineering, and hiring.

• Investor readiness: Investors often review expense ratios to assess business efficiency.

For example, if your food cost ratio alone is 35% and labor is 30%, you’re already at 65%—before accounting for rent and utilities. That signals a need for optimization.

How to Manage and Improve Expense Ratios

1. Audit your costs regularly: Review supplier invoices, energy usage, and payroll.

2. Optimize menu design: Promote high-margin dishes or use cross-utilization to reduce waste.

3. Track labor efficiency: Schedule smartly based on sales patterns.

4. Negotiate rent and supplier terms: Long-term contracts can stabilize recurring expenses.

5. Leverage technology: POS and analytics tools can flag inefficiencies automatically.

Restaurants that consistently monitor expense ratios tend to have more predictable profits and better scalability.

Ideal Expense Ratios for Restaurants

While benchmarks vary, most profitable restaurants maintain:

• Food Cost: 28–35%

• Labor Cost: 25–30%

• Overhead (Rent, Utilities, etc.): 10–15%
  Keeping your total expense ratio under 75% typically signals healthy operations.