You're staring at your profit and loss statement, looking at line after line of expenses. Rent. Insurance. Food costs. Labor. Utilities. All of it adds up to more than you'd like, and your margins are thin. Sometimes, painfully thin.
When sales dip next month, which expenses can you actually cut? When you're making pricing decisions, which costs should you factor in? When you're trying to figure out your break-even point, which numbers actually matter?
If you can't answer these questions quickly, you're missing one of the most important distinctions in restaurant accounting: the difference between fixed and variable costs.
At Patrick Accounting, we've worked with Memphis-area restaurants (and beyond) for over 20 years, and we've seen firsthand how this one distinction affects pricing, staffing, and day-to-day decision-making.
For restaurant owners, understanding which costs you can control in real time and which ones you're locked into is essential.
In this article, you'll learn the difference between fixed and variable costs, why this distinction matters more for restaurants than almost any other business, and how to use it to make better pricing, staffing, and margin-protection decisions.
What Fixed and Variable Costs Actually Mean (In Plain English)
Let's start with the basics, because your accountant may have just thrown these terms at you without really explaining them.
Fixed costs stay the same whether you serve 100 covers or 500 covers. These are commitments you've already made. They don't change based on how busy you are.
Fixed costs in restaurants include:
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Rent or mortgage: You're paying $5,000 per month whether you do $50,000 in sales or $150,000 in sales.
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Insurance: Your premium doesn't go up or down based on how many customers walk through the door.
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Manager salaries: Your salaried kitchen manager makes the same amount whether it's a slow Tuesday or a packed Saturday.
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Equipment payments: That monthly lease payment on your ovens is fixed.
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Base utilities: If your utilities stay roughly the same every month, they're functionally fixed.
Variable costs go up or down based on your sales volume. The more you sell, the more these costs increase. The less you sell, the lower these costs should be.
Variable costs in restaurants include:
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Food costs: More customers means more ingredients purchased.
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Beverage costs: More drinks sold means more inventory needed.
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Hourly labor: More covers means more server hours and kitchen labor.
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Credit card processing fees: These are a percentage of your sales.
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Some utilities: Kitchen gas and electric that scales with how much you're cooking.
Here's the simple test: If it goes up the more you sell, it's variable. If it stays the same regardless, it's fixed.
Why This Distinction Matters More for Restaurants Than Almost Any Other Business
Restaurants operate on some of the thinnest margins in business. If you're making 10%-15% profit, you're doing well. Many restaurants make far less (or lose money).
When you're working with margins that thin, there's no room for guessing. You need to know exactly which costs you can control and which ones you're stuck with.
Here's why understanding fixed vs. variable costs changes everything:
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You can't control fixed costs quickly. These are commitments you've already made. Your rent is your rent. Your insurance is your insurance. You can't wake up Monday morning and decide to cut your lease payment in half.
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You CAN control variable costs daily (sometimes hourly). When it's a slow Tuesday night and you've only got 15 tables, you can send servers home. You can adjust your food orders. You can manage portions more carefully. These are the levers you can pull to protect your margins when business slows down.
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Fixed costs determine your break-even point. Before you make a single dollar in profit, you have to cover all your fixed costs. If your fixed costs are $40,000 per month, you need to generate at least $40,000 in gross profit just to break even. This number tells you if you can afford to close on Mondays, take a winter break, or survive a slow season.
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Variable costs determine your per-cover profitability. Once you know your variable cost per customer, you can make intelligent pricing decisions. If it costs you $11 in food and direct labor to serve one customer, and your average check is $25, you have $14 to cover fixed costs and hopefully make a profit.
Understanding this distinction helps you answer the big questions:
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What can I cut when sales drop?
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How do I price menu items profitably?
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Can I afford to hire another server?
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Should I add a new location?
What About Costs That Can Be Either Fixed or Variable?
Some costs don't fit neatly into one category or the other.
Utilities are a common gray area. Dining room and office utilities tend to stay consistent and function like fixed costs, while kitchen gas and electric increase as production increases and should be treated as variable.
The question to ask: "Does this cost increase the more we produce or sell?"
Labor also spans both categories. Salaried managers are fixed costs. Hourly kitchen and service staff are variable costs that should flex with demand.
If variable labor is scheduled the same way every shift “just in case,” it stops behaving like a variable cost and starts acting like a fixed expense.
So, what's your cost per cover? Per table? Per hour of operation?
How to Use Fixed vs. Variable Costs to Protect Your Margins
So, what do you actually do with this information? How does knowing the difference between fixed and variable costs help you run a more profitable restaurant?
When sales are down, you need to cut variable costs first…and fast.
The restaurants that survive slow periods are ruthless about adjusting variable costs. When traffic slows down, they send servers home. They adjust kitchen labor to match demand. They control portion sizes more carefully to reduce waste. They don't keep the same staffing levels "just in case."
This doesn’t mean you’re being cheap or providing worse service. You’re just matching your costs to your actual business activity. Keeping five servers on the floor when you only have 10 tables isn't good for anyone. It's bad for your margins and bad for the servers who are making less in tips.
Use fixed costs to calculate your break-even point.
Add up all your fixed costs for the month:
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Rent: $8,000
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Insurance: $2,000
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Manager salaries: $12,000
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Equipment payments: $3,000
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Fixed utilities: $1,500
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Total fixed costs: $26,500
Now you know that you need to generate at least $26,500 in gross profit every month just to break even. Anything less and you're losing money. Anything more goes toward covering your variable costs and (hopefully) generating actual profit.
This number helps you make big decisions. Can you afford to be closed on Mondays? Well, how much gross profit do you typically make on Mondays? If it's enough to meaningfully contribute to covering your fixed costs, probably not. If Monday barely moves the needle, maybe closing makes sense.
Prime cost is where these concepts meet.
If you're working with an accountant who knows restaurants, they should be tracking your prime cost. Prime cost is your cost of goods sold (food and beverage, variable) plus your labor costs (mostly variable, though some is fixed).
For healthy restaurants, prime cost is typically around 60%-65% of sales. This is the single most important number in restaurant accounting because it combines your two biggest variable expenses.
This is exactly why we track prime cost weekly for restaurant clients in our Advanced Package. When prime cost starts creeping up, you know immediately that either your food costs are out of control, your labor is too high, or both. And because these are largely variable costs, you can take action quickly to fix them.
One Way to Think About Your Variable Cost Per Cover
A simple analogy helps here. If you buy a baseball glove for $5 in materials and labor and sell it for $25, your variable cost is $5, and your gross profit is $20 per glove.
The same logic applies in your restaurant. If the food cost on a burger is $4.50 and the direct kitchen labor to prepare it is about $2.00, your variable cost per burger is roughly $6.50. Sell it for $15.95, and you have about $9.45 left to cover fixed costs and generate profit.
At a higher level, the idea is straightforward: Take your total variable costs (food, beverage, and direct labor) and divide them by the number of covers you served. That gives you a rough sense of what it costs you each time a customer sits down…before you’ve paid rent, insurance, or manager salaries.
This won’t be a perfect number, and every restaurant approaches it a little differently. But even an approximate variable cost per cover helps you answer the questions that matter most:
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Are we priced correctly?
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How many customers do we need just to break even?
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And what happens to our margins if sales drop?
Common Mistakes Restaurant Owners Make With Fixed vs. Variable Costs
Now that you understand the distinction, here are the most common ways we see restaurant owners get this wrong.
Mistake #1: Treating everything as fixed
We hear this all the time: "I can't cut anything." But that's not true. Labor is variable. You just need systems to manage it effectively. Food costs are variable. You can adjust ordering, reduce waste, and control portions. Just because something feels hard to change doesn't make it fixed.
Mistake #2: Not tracking variable costs consistently
Some restaurant owners just estimate their food cost percentage or guess at their labor numbers. By the time you realize your food cost has drifted from 28% to 34%, you've lost thousands of dollars. Weekly tracking catches problems, while they're still fixable.
Why You Should Run Your Restaurant Like A Math Equation
Every pricing, staffing, and scheduling decision in your restaurant ultimately comes down to whether revenue covers variable costs and contributes to fixed costs.
When you strip away the emotion, the busyness, and the day-to-day chaos, your restaurant is a simple equation. Revenue comes in. Variable costs go out. What’s left has to be enough to cover fixed costs. And then, if you’re doing things right, it generates profit.
This is why understanding fixed vs. variable costs matters so much. It gives you a clear filter for decision-making.
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Should you stay open on a slow night? Only if the revenue from that shift covers its variable costs and meaningfully contributes to your fixed costs.
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Should you add another server to the floor? Only if the additional labor cost is likely to increase revenue enough to improve your contribution margin.
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Should you discount a menu item to drive volume? Only if the new price still covers the variable cost per cover and helps move you closer to break-even.
When restaurant owners get into trouble, it’s usually because they ignore the math. They staff based on fear instead of demand. They price based on competitors instead of costs. And they stay open out of habit rather than profitability. Those decisions feel small in the moment, but they compound quickly when margins are already thin.
Running your restaurant like a math equation doesn’t mean ignoring hospitality or guest experience. It means making sure every decision has a clear financial justification. When you understand your variable costs, fixed costs, and contribution margin, you stop guessing and start making decisions with confidence.
Once you start viewing your restaurant through this lens, the next question becomes obvious: Which numbers should you be watching to make these decisions consistently and correctly?
Understanding fixed and variable costs is the foundation, but it only works if you’re tracking the metrics that tell you whether your restaurant is profitable or just busy. Without those numbers, even the best framework breaks down.
That’s why we created 7 KPIs Every Restaurant Should Measure. This free download outlines the specific metrics restaurant owners should track to manage food costs, labor, prime cost, and margins, all of which connect directly to the math you’ve learned here.
If you want to stop guessing and start making decisions backed by numbers, this is the right next step.
