Welcome to the second installment of our series, Bar & Restaurant Management 101, written by Doug Radkey, founder and president of KRG Hospitality Inc. (you may remember Doug from his How to Build a Menu series).
Consider this series your course on the fundamentals of running a bar or restaurant. Over the next few months, expect articles on how to budget, market, retain employees, and more. This month, we cover budgeting. Miss a class and need to catch up? Find all installments of the series here!
Let’s start with a couple of questions.
One: Do you develop a thorough budget for your bar or restaurant each year? I’m hoping many of you reading this say yes.
Two: Do you break your budget down into micro segments such as quarterly, monthly, weekly, daily and—maybe even down to what the average operating hour looks like for you, financially? I’m guessing most say no.
Let’s be blunt. You can’t run a successful bar or restaurant while making sound business decisions without knowing your numbers with a detailed budget. Yet so many operators avoid building one of this magnitude because it seems complicated, overwhelming, or maybe even “too corporate.”
But here’s the truth. Your budget is your financial playbook. It’s not just about tracking expenses. It’s about making intentional, informed decisions that allow you to grow, adapt, and crush the year ahead.
What is a Budget in Hospitality?
Think of your budget as your financial roadmap. A winning budget outlines:
- How much money you expect to bring in (revenue)
- What it will cost to operate your business (expenses)
- How much you plan to invest (capital spending)
- What you want to walk away with (profit)
It gives you visibility, control, and strategic clarity. These are the three core ingredients every operator needs, no matter the size or style of the concept. Without a budget, you’re guessing. And in this industry, guessing can become very expensive and detrimental to your business.
Let’s Talk P&Ls
A Profit & Loss Statement (P&L), also called an income statement, is a historical document. It shows what you earned, what you spent, and what you kept (or lost).
It’s your financial scorecard, and it’s critical. But here’s the thing about your P&L, it tells you what already happened. A budget (or forecast), on the other hand, tells you what’s supposed to happen.
Both matter 100 percent. But if you’re only looking at P&Ls without using a proactive budget, you’re going to always be playing the catch-up game.
Start with Revenue Projections (But Be Realistic)
Many new operators overestimate how busy they’ll be. “We’ll do $2M in our first year!” Great. But how will you generate $2M next year?
Revenue projections should be built from the bottom up, not top down.
First things first—project your foot traffic. Build a chart of each hour you are open throughout the week and input estimated foot traffic / orders per hour Monday through Sunday. If you’re already operating, pull data reports to understand your historic traffic flow and daypart strategies.
Now that you have an "average week," create a month-to-month traffic projection by taking into account seasonality and other factors that may contribute to traffic fluctuations in addition to your intended marketing efforts.
With a strong understanding of foot traffic, you can now multiply your traffic by revenue projections per daypart. There is a good chance your lunch and dinner revenue per guest is different. Further, if you’re in a 40-seat restaurant and your average guest spends $35, and you turn tables twice on weekdays and three times on weekends, you’ll have a very different picture than someone guessing at a round number throughout the entire week.
Be realistic and conservative with traffic and revenue. You can always exceed expectations, but overestimating revenue leads to overspending and less profit.
Know Your Prime Costs
The formula: Prime Costs = Cost of Goods Sold (COGS) + Labor Costs
For the average restaurant, prime costs typically make up 60-70% (or more) of the total operating expenses. In an ideal scenario, however, your prime costs should not exceed 60%, which means controlling your prime costs is where the magic (or the chaos) begins to happen.
Food & Beverage Costs
To help control your prime costs, understand your theoretical food cost (what it should cost) and track your actual food cost (what it really costs you after waste, portioning, and shrinkage).
The same mindset goes for your bar program. If you’re pouring heavy, not tracking inventory, or ignoring fluctuating supplier prices, your margins are slipping fast.
As we outlined in part one of this series on food costs, the average benchmark within the industry is 28-32%, however, depending on your concept, market, operations, and executable strategies, it is not unheard of to be running overall food costs in the 24-26% mark.
Labor Costs
Labor is more than just an hourly wage. You also need to consider payroll taxes, training and onboarding, scheduling inefficiencies, and potential overtime.
The target labor cost percentages vary by concept, but the average concept should aim for 25-30% of revenue to help maintain the targeted prime cost objective.
More importantly, you should also be tracking revenue per labor hour to understand productivity. This is the real key performance indicator to understand to improve your profit potential.
Rent Costs: The Hidden Profit Killer
Your rent should not exceed 10% of gross revenue. If it does, you’ll struggle to create meaningful profit unless your volume is exceptionally high. Ideally, you’d like to be in the range of 6-7% of your revenue.
Imagine if your prime costs are 68% and your rent is 14%—this is a total of 82%, and you have not factored in other expenses yet. This is why many are failing or falling into the category of operating with the industry average profit margin of only 4-6%.
General Expenses
What about your general expenses? What’s your budget throughout the year for utilities, maintenance, insurance, POS and tech-stack subscriptions, music licensing, cleaning contracts, credit card fees, bookkeeping & accounting, legal fees, and office-related expenses etc.?
These costs often fly under the radar, but they add up fast. Ideally, these costs should add up to no more than 10% of your overall expense category in relation to your sales.
Don’t Forget Marketing & Development
Too often, marketing is an afterthought or is the area that gets "cut" when budgets are tight or overrun. But if you’re not driving traffic, you’re not driving revenue or profit.
Include in your budget a detailed cost line for marketing that takes into account social media ad spend, content creation, internal promotions, email marketing platforms, website maintenance, community events or partnerships, and other activations.
What’s the target? Set a target of 3-5% of revenue allocated to marketing and reinvestment.
Track Cash Flow (Not Just Profit)
You can be profitable on paper and still barely scrape by if you don’t manage your cash flow. This means tracking when money comes in, when bill payments go out, and when tax and payroll hits.
A budget should help you forecast cash gaps before they happen. Cash flow mismanagement is one of the core reasons a "profitable" business still closes its doors.
Contingency Plan
But we’re not done yet in building a winning budget. A truly resilient budget doesn’t just outline what you expect. It prepares you for what you don’t.
That’s where contingency planning and sensitivity analysis come into play. Smart operators build forecasts for best-case, worst-case, and realistic scenarios, asking: What happens if our revenue is 10%, 20%, 30%, even 50% off; either below or above budget?
If sales underperform, do you have a plan to scale back labor, adjust ordering, or streamline operations without compromising service quality?
If you exceed projections, can your kitchen and bar handle the increased volume? Do you have the team, inventory, and systems in place to scale without sacrificing consistency?
Sensitivity analysis helps you identify breaking points before you hit them and contingency planning ensures you can adapt with confidence instead of reacting in panic.
Review and Adjust Monthly
Your budget isn’t static. If you create a true financial playbook, it should be reviewed and revised monthly. Compare actual results to your projections. If you’re consistently over or under, ask why.
The best operators use budgets not as a restriction, but as a tool for clarity and control.
Budgeting Is Leadership
As you review your P&L or develop your next forecast, plan to work toward these benchmarks:
F&B: 28% / Labor: 28% / Rent: 6% / Tech: 1.5% / Marketing: 5% / Other: 8.5% = 77% (23% EBITDA) minus 8% average depreciation and other adjustments = 15% net profit.
While I just shared the ideal equation, at the end of the day, profitability isn’t just about math. It’s about leadership. Building and managing a budget isn’t about being a wizard with spreadsheets. It’s about being a disciplined leader.
A budget shows that you take your business seriously, that you understand your numbers, that you can make decisions based on data, not emotion, and that you are building something sustainable, not just exciting.
So if you’re asking, “how do I build a budget for my bar or restaurant," you’re already on the right path. You’re choosing to lead your business with strategy. You’re choosing clarity over chaos.
And that choice? That’s what separates the operators who last from the ones who don’t.
Let’s build smarter. Let’s start building for profit first.
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