Fixed and variable costs: the split that decides

Two restaurants each take 50,000 pounds in a good month and make about 5,000 pounds profit. In February, both see sales fall by a fifth. One still makes a small profit; the other loses money. The difference is not the food, the service or the location. It is how their costs are split between those that stay the same whatever happens and those that move with trade. Fixed and variable costs decide how a restaurant feels in a quiet month, how much it makes in a busy one and how many covers it needs every week.

Most owners know their total costs. Fewer know how those costs divide between fixed, such as rent, salaries and insurance, and variable, such as food, drink and card fees. Yet that split drives the break even point, the effect of a busy or quiet week on profit and many everyday decisions, from opening hours to promotions to whether to sign a new lease.

This guide covers what fixed and variable costs are, how to sort a restaurant's costs properly, the costs that sit in between, what the ratio between them means and how to use the split in the budget and in decisions. Every venue and figure in it is an example.

The split between fixed and variable costs decides three things. It decides the break even point, the trade needed before the venue makes any profit. It decides how sharply profit rises or falls when trade changes. And it decides which decisions save money: cutting a fixed cost saves the same every month, while cutting a variable cost saves more in busy months.

Knowing the split lets an owner predict what a quiet month will cost before it arrives, and see which levers will move profit most.

A fixed cost is one that stays the same, within a period, however much the business sells. Rent is the classic example: it is the same in a busy month and a quiet one. If the venue closed for a week, much of it would still have to be paid.

Fixed costs are fixed only within a range and a period. Rent rises at a review; insurance changes at renewal; a second site doubles them. But from month to month, they do not move with trade.

A variable cost rises and falls with how much the business sells. Food is the clearest example in a restaurant: twice as many covers need roughly twice as much food. Drink, card fees, commissions and packaging behave the same way.

Variable costs are usually expressed per cover or as a percentage of sales. If food and drink cost about a third of what guests spend, and card fees about two per cent, those costs rise and fall with every cover.

Many restaurant costs are neither purely fixed nor purely variable. Hourly labour rises with trade, but a minimum team is needed to open at all. Energy has a fixed part, refrigeration and lighting, and a variable part, cooking for more covers. Repairs, laundry and cleaning are similar.

These are sometimes called semi-variable or step costs. The practical approach is to split each one into a fixed part and a variable part, using judgement and your own records, rather than forcing it into one bucket.

To sort costs, take each line from the profit and loss and ask one question: if covers doubled next month, or halved, would this cost change? If it would stay the same, it is fixed. If it would rise or fall roughly in line, it is variable. If it would change, but not in proportion, it is mixed, and needs splitting.

Do it once, carefully, with your accountant if possible, and write down the reasoning for each line. The sorted list then becomes the basis for the break even point, the budget and many decisions.

In a typical restaurant, fixed costs include:

These are paid whether the venue is full or empty. Together, they are the amount the venue's contribution must cover each month before it makes any profit.

Variable costs include:

These rise with every cover. Together, they decide how much of each guest's spend is left to cover the fixed costs and make a profit.

Labour is the hardest cost to sort, because it is often the largest and it behaves in both ways. Salaried staff are fixed. Hourly staff are partly fixed, because a minimum team must be there to open, and partly variable, because busier services need more hours.

A practical method: treat salaries and the minimum team for each service as fixed, and the extra hours added for busy services as variable. Our guide to labour cost in a restaurant, counted properly covers what to include in the labour figure.

For energy, laundry and other mixed costs, estimate the fixed part from a quiet period. The energy bill in a week when the venue was open but quiet, or the base charge on the bill, gives a rough fixed amount; the rest varies with trade. The estimate does not need to be precise to be useful.

Revisit the estimate once a year, or when something changes, such as new equipment or a new contract. A rough split, consistently applied, is far better than treating a mixed cost as entirely one or the other.

Once sorted, the restaurant operating costs below food and labour usually turn out to be mostly fixed: rent, rates, insurance, software, service contracts and much of the energy. Card fees and commissions are the main variable ones.

That is why operating costs matter so much in quiet months: most of them do not fall when trade does. Our guide to restaurant operating costs, listed and ranked lists them in order of size.

The ratio between fixed and variable costs describes the shape of the business. Add up the fixed costs for a typical month and express them as a share of a typical month's sales; do the same for variable costs. A venue might find that fixed costs are about half of sales and variable costs about forty per cent, leaving a profit of about ten per cent in a typical month.

The fixed share is the important one. The higher it is, the more the venue depends on keeping trade up, and the more its profit swings when trade changes.

A venue with a high share of fixed costs, such as one with expensive rent and many salaried staff, has high operating leverage: profit rises quickly when sales rise, because most costs stay the same, and falls quickly when sales fall, for the same reason.

It thrives in busy months and suffers in quiet ones. It needs a reliable flow of trade, careful planning for the quiet season and, ideally, a break even point well below its usual trade.

A venue with a low share of fixed costs, such as one with modest rent, mostly hourly staff and few long contracts, is more flexible. Its costs fall further when trade falls, so quiet months hurt less. But its profit also rises more slowly in busy months, because more of its costs rise with sales.

Neither shape is right or wrong. What matters is knowing which shape your venue has, so its quiet months and busy months can be planned with open eyes.

Take the two restaurants from the start. Both take 50,000 pounds in a good month. The first has variable costs of forty per cent, 20,000 pounds, and fixed costs of 25,000, so it makes 5,000 profit. The second has variable costs of fifty per cent, 25,000 pounds, and fixed costs of 20,000, so it also makes 5,000.

In February, sales fall by a fifth to 40,000. The first restaurant's variable costs fall to 16,000, but its fixed costs stay at 25,000: it loses about 1,000. The second's variable costs fall to 20,000, its fixed costs stay at 20,000: it breaks even. Same sales, same profit in a good month, but a different February, decided by the split.

The split is what makes the break even point possible. Fixed costs divided by the contribution per cover, spend per cover minus variable cost per cover, gives the number of covers needed to cover costs. Without the split, there is no way to work it out.

It also shows how to move it: lower fixed costs reduce the covers needed; higher contribution per cover reduces them too. Our guide to break even point: the covers you need by Tuesday covers the sum in detail.

Once fixed costs are covered, each additional cover adds its contribution to profit: spend per cover minus variable cost per cover. That is profit per cover above break even, and it is why a full room is so valuable: most of each extra guest's contribution becomes profit.

It also explains why discounts are so costly in a high fixed-cost venue. A discount comes straight off the contribution, and if it does not bring genuinely extra guests, it reduces profit on every cover it touches.

Build the restaurant budget on the split. Fixed costs go into every month at their monthly amount; variable costs go in as a percentage of each month's forecast sales. With seasonal sales forecasts, the budget then shows which months will be profitable and which will not, and by how much.

That makes the quiet months visible in advance, so cash can be set aside from the busy ones. Our guides to seasonality: planning for the quiet eight weeks and cash flow: profitable and still short in January cover planning for them.

The split helps with many everyday decisions. Whether to open a quiet service: if its contribution does not cover the extra cost of opening, it loses money. Whether a promotion pays: if the contribution given away exceeds the contribution from extra covers, it does not. Whether to take on a new fixed cost, such as a lease on extra space: it raises the break even point, permanently.

It also helps with pricing. A small price rise raises contribution on every cover, which lowers the break even point and raises profit above it, often by more than owners expect.

Some fixed costs can be turned into variable ones, which makes the venue more flexible in quiet months. Hourly staff instead of more salaried roles, equipment leased on flexible terms instead of bought, services paid per use instead of by annual contract.

Each change has a trade-off. Variable costs can be higher per unit, and flexibility for the venue can mean less security for staff or suppliers. Make the change where it genuinely suits the business, not just to make the numbers look better.

The opposite can also make sense. A fixed-price contract for energy, a flat monthly fee instead of a per-cover booking commission, a fixed price agreed with a supplier for the season: each turns a variable or uncertain cost into a predictable one.

For a busy venue, a fixed fee can be far cheaper than a commission that grows with every booking. For a quiet one, the commission may be cheaper. The split shows which suits your trade.

Review the split once a year, and whenever something significant changes: a new lease, a new wage rate, a change in suppliers, a new service. Costs drift between categories over time, and a split that was right two years ago may not be now.

Keep the sorted list with the budget, and update both together. A current split means the break even point, the budget and every decision built on them stay accurate.

A few mistakes are common. Treating all labour as variable, which makes the venue look more flexible than it is. Forgetting costs paid quarterly or annually, which understates fixed costs. Treating energy as entirely fixed or entirely variable. And sorting costs once and never revisiting them.

Each mistake makes the break even point look lower and quiet months look safer than they are. When in doubt, lean towards treating a cost as fixed: a budget that turns out slightly cautious is far easier to live with than one that turns out optimistic.

In a group, sort each venue's costs separately, because each has its own rent, team and trade. Then decide how shared costs, such as a central office, a head chef across venues or a shared marketing budget, are split between them.

Shared costs are usually fixed, and how they are divided affects each venue's apparent profit. Agree a fair method, such as sharing by sales, and use it consistently, so each venue's numbers can be compared.

Knowing the split helps set prices. Every price change flows almost straight into contribution, because variable costs barely change when a price rises. In a venue with high fixed costs, a small price rise can make a large difference to how many covers are needed and how much each extra cover earns.

Use the split to test price changes before making them: the new contribution per cover, the new break even covers and the profit at your usual trade.

Some costs that look fixed are really choices: opening hours, the number of services, the size of the minimum team, the subscriptions taken out, the space rented. They are fixed from month to month, but they can be changed with planning.

Review these choices each year. A service that does not cover its own costs, a subscription nobody uses or space that sits empty most of the week are fixed costs only until someone decides otherwise.

An invented bistro sorts its profit and loss into fixed and variable costs with its accountant. Rent, rates, salaries, the minimum team for each service, insurance, software and the fixed part of energy come to about 24,000 pounds a month. Food, drink, card fees and the extra hours on busy services come to about forty-two per cent of sales.

In a typical month of 50,000 pounds of sales, that leaves about 5,000 profit; in a February of 40,000, the same split predicts a loss of about 800. Knowing that in advance, the owner sets aside cash from December, trims the fixed part of February by closing two quiet lunches and agrees a fixed energy price for the winter. February comes in close to break even instead of a loss.

servearound does not record your costs or sort them: there is no accounts or expenses module and no field for a dish's cost, so the split in this guide is done in your own sheet, with your accountant. What servearound gives you is the trade the costs are set against: the dashboard shows revenue, covers and spend per cover against the previous period, and payment analytics show what was collected by day, by tender and by hour.

Reservation analytics show covers day by day and by meal period, the menu report shows units sold and revenue for every dish and category, so contribution per cover can be estimated from your own food costs, and table analytics show utilisation and revenue per seated hour. servearound itself is a fixed cost, priced per venue, per month. See Analytics and pricing.

A cost that stays the same within a period however much the venue sells, such as rent.

A cost that rises and falls with sales, such as food and card fees.

Ask of each line whether it would change if covers doubled or halved, and split mixed costs into fixed and variable parts.

Salaries and the minimum team as fixed, extra hours for busy services as variable.

Profit swings more with trade: higher in busy months, lower in quiet ones.

Fixed costs divided by contribution per cover gives the covers needed to break even.

Yes, by turning some fixed costs into variable ones or the reverse, where it suits the business.

Once a year and after any significant change.

Fixed and variable costs decide how a restaurant behaves when trade changes. Fixed costs, such as rent, salaries, insurance and the minimum team, stay the same whatever happens; variable costs, such as food, drink, card fees and extra hours, move with every cover. Sort every line of the profit and loss into the two buckets, split mixed costs such as labour and energy, and write the reasoning down.

The fixed share decides how a quiet February will feel: a venue with high fixed costs swings further in both directions. Use the split to calculate the break even point and profit per cover, to build a restaurant budget month by month, to judge opening hours, promotions and new commitments, and review it every year so the decisions built on it stay sound.