Question

What are examples of fixed and variable costs in a fast food restaurant? How do you think a firm will be able to maximize their profits if the economy starts to go into a recession?

Answer 1

Fixed costs in a food restaurant

Occupancy Costs

Whether buying or leasing restaurant space, the monthly payment is one of any restaurateur's major fixed outlays. Related fixed costs include local and state real estate taxes, as well as insurance. Rental space may increase in price over time, but restaurant owners typically can count on a certain period at a fixed price and will usually have some notice of a rent increase. Certain utilities, such as water, phone and computer lines, should be relatively consistent over time. Others, such as electricity, may vary considerably depending on seasonal demands for heating or air conditioning. Gas or oil, when needed, may also fluctuate in price depending on world markets.

Equipment

Normal operations and maintenance costs for restaurant equipment, such as stoves, grills, dishwashers and freezers, should remain constant from month to month. Notable exceptions to this fixed cost are the unexpected requirements to repair or replace broken equipment. Items such as dishes, flatware, pans and glassware require a considerable expense at start-up, but restaurant owners generally can plan for purchases of replacements. This category also includes decor-related items, such as candles, flowers or plants, light bulbs and window fixtures, as well as consumables, including napkins. These items are typically bought routinely and in bulk, allowing the restaurant owner to plan for such expenses.

variable cost

Food and Beverages

Food and beverage costs are among the greatest variable expenses restaurant owners and managers face. These costs fall under the category "Cost of Goods Sold," commonly referred to as usage costs. Successful restaurants skillfully manage the balance between buying in bulk to have enough food to meet customer demand and not buying so much food that it goes to waste. Menu prices for most items cannot change every time the restaurant's food costs change, so a restaurant's profit margin is affected if food costs fluctuate frequently or substantially. Restaurants are at the mercy of local and national supplies and markets, which means that when national milk or fruit prices go up because of shortages, they must absorb them.

Personnel

Labor and personnel expenses are variable costs, although restaurant managers can control the overall personnel costs by managing the number of shifts assigned and how much overtime is approved. Small, local restaurants with a relatively static customer base may experience only limited variation in the month-to-month costs of staff, but larger restaurants or those with a fluid customer base , such as a restaurant at a major highway intersection ,likely will have greater variability in staffing expenses. Staffing expenses also vary seasonally in certain restaurants, such as those hosting holiday parties. One key personnel expense , the manager's salary - falls under the fixed costs category.

Ways to maximize firms/business profits if the economy starts to go into a recession

Protect Your Cash Flow

Cash flow is the lifeblood of your business. Money must continue inflowing and outflowing for optimum business health, with the obvious goal being that you bring in more income than you must spend on expenses. You'll have expenses as long as your business exists.

It can be admittedly hard to keep the cash flowing in. Recession-proof your business by implementing strategies to keep the cash flow moving, from increasing sales or billable services to trimming unnecessary expenses.

Review Inventory Management

if anything can be done to reduce firms inventory costs without sacrificing the quality of goods sold or inconveniencing your customers. Maybe the firm ordering too many of particular items, or something can be sourced somewhere else at a better price.

Go for a drop-shipping alternative that will work for the firm so it can eliminate shipping and warehousing costs.

Focus on Core Competencies

Small business owners often simplify the concept of "diversification," translating it to simply "different."

Simply adding other products or services to your offerings isn't diversification. At best, it's a waste of time and money. Worse, it can damage your core business by taking your time and your money away from what you do best, damaging your brand and reputation.

Drop the extras and focus on what you do best that's most profitable.

Win the Competition's Customers

The firm must continue to expand their customer/client base.

Offer something more or different than what the other firms does. Research your competition and see what you can do to entice their customers into becoming your customers. How are your competitors advertising? Visit their business locations. Ask consumers what they like or don't like about those companies, then tweak your own business practices accordingly.

Don't Cut Back on Marketing

Many small businesses make the mistake of cutting their marketing budget to the bone in lean times, or even eliminating it entirely, but this is exactly when the small business needs marketing the most.

Consumers are restless. They're always looking to make changes in their buying decisions. Help them find products and services and to choose them rather than others by getting your name out there. Don't quit marketing. Step up your marketing efforts.

Keep tabs on your personal credit rating as well and do whatever is necessary to keep both in good shape.

You’ll stand a much better chance of being able to borrow the money you need to keep your business afloat if you have good personal credit as well. And keep in mind that the U.S. Small Business Administration makes easy-qualifying loans available during times of national economic crisis, in addition to its usual funding programs.

The Bottom Line

Nothing will make your small business 100% recession-proof, but implementing these can help ensure that your business survives tough times and possibly even profits from them. It all begins with analyzing how you're doing things now and looking for ways to improve.