Why Is My Restaurant Losing Money

The short version

If your restaurant is busy but you're still bleeding cash, the problem isn't your volume. It's that your two biggest cost buckets—food and labor—are eating too much margin, and your menu pricing hasn't kept up with reality. The math is simple: when prime cost (food + labor) runs over 60%, you're working for free. Everything else is just noise.

Why "we're slammed every night" doesn't pay the bills

Walk into any struggling restaurant on a Friday night and you'll see a full house. The expo rail is packed, tickets are printing nonstop, and the owner thinks this should be a winning shift. Then they check the P&L at the end of the month and wonder where all the money went.

Here's the brutal truth: high traffic with low margins is just expensive theater. If you're selling $18 burgers that actually cost $14 to make and serve when you include the real labor and waste, you're not building wealth. You're subsidizing the neighborhood's dinner plans with your retirement fund.

Volume can't fix fundamentally broken unit economics. You need contribution margin on every plate—the amount left over after you subtract food cost, packaging, and the labor that touched that order. If your margin per plate is thin or negative, selling more plates just digs the hole deeper.

The real culprits: prime cost breakdown

Most restaurants that are "busy but broke" have one thing in common: their prime cost is over 60%. Prime cost is the sum of your Cost of Goods Sold (food + beverage) and your total labor (wages + taxes + benefits). It's called "prime" because it's the first place profit goes to die.

Food cost creep: the silent margin killer

Your recipes might look good on paper, but if nobody's checking portion sizes or running yield tests, your theoretical food cost is fiction. Here's what happens in real life:

• Portioning drift: Line cooks eyeballing scoops instead of using standardized tools. That "8 oz" burger is actually 9.5 oz by the time it hits the plate.
• Vendor price increases: Your chicken went from $2.80/lb to $3.40/lb and you never updated the menu. Now your 28% food cost item is actually 34%.
• Waste & spoilage: Over-prepping, improper storage, and "family meal" that turns into a free buffet. These costs don't show up on recipe cards, but they show up on your P&L.
• Theft and comp abuse: Staff giving away free sides, managers comping entire checks without tracking it, and the occasional ingredient that walks out the back door.

If you're running 32–35% food cost when you priced your menu for 28%, that 5–7 point gap is the difference between profit and just paying rent.

Labor cost: the other half of prime cost

Labor is typically 25–35% of sales in most concepts, but it's easy for it to balloon into the high 30s or low 40s if you're not watching scheduling, overtime, and labor-to-sales ratios by daypart.

• Overstaffing slow shifts: Running the same crew on a Tuesday lunch that you need for Friday dinner. Labor doesn't scale with revenue automatically—you have to manage it.
• Overtime bleed: Managers working 60+ hours because you're understaffed in leadership. Kitchen staff clocking 45–50 hours every week. Overtime is 1.5x the base rate, and it stacks up fast.
• No labor standards: If you don't know how many labor hours you should be running per $1,000 in sales, you're just guessing. Spoiler: guessing is expensive.
• Poor prep efficiency: Everything made to order instead of batching prep work. Staff standing around during slow periods instead of getting prep done for the rush.

When food cost is 33% and labor is 38%, you're at 71% prime cost. That means you've got 29% of revenue left to cover rent, utilities, insurance, marketing, repairs, debt service, and maybe—if you're lucky—take something home. Spoiler: it doesn't work.

Menu pricing: the math most owners ignore

Here's the hard question: when was the last time you actually repriced your menu based on current costs? Not when you first opened. Not when you printed new menus. When did you sit down, recalculate every recipe cost card, and adjust prices accordingly?

If the answer is "more than six months ago" or "I'm not sure," your menu is lying to you. Vendor prices don't stay still. Your costs went up, but your prices didn't, and now your margin is gone.

How menu pricing actually works

Most operators price using a "food cost percentage" target—usually 28–32% depending on concept. Here's the basic formula:

Menu Price = Recipe Cost ÷ Target Food Cost %

Example: your pasta costs $4.20 in ingredients, and you're targeting 30% food cost.

Menu Price = $4.20 ÷ 0.30 = $14.00

But here's the catch: if your actual ingredient cost drifted to $4.80 because your vendor raised prices and you didn't notice, and you're still charging $14.00, your real food cost is now 34.3%. That's 4+ points of margin you just lost, and nobody told you.

Now multiply that across your entire menu. If 15 items drifted by 3–5 points each, your overall food cost percentage is in the mid-30s, and you're wondering why you can't make payroll.

The menu engineering trap

Not all menu items are created equal. Some are high-volume with low contribution margin (Plowhorses). Some are high-margin but low-volume (Puzzles). Some are both high-margin and high-volume (Stars). And some are just dogs—low margin, low volume, and they should be killed.

If you don't know which category each item falls into, you're flying blind. Menu engineering is the process of plotting your items based on popularity and profitability, then making strategic decisions:

• Stars: Promote them. Upsell them. Protect them.
• Plowhorses: High volume, decent margin. Try to raise the price slightly or reduce portion size to boost margin.
• Puzzles: High margin, low sales. Reposition them on the menu, rename them, or bundle them with popular items.
• Dogs: Kill them. They're taking up menu real estate and kitchen bandwidth for no return.

If you're selling a ton of low-margin items and ignoring your high-margin items, you're just running a high-stress, low-profit operation.

Hidden profit killers: the stuff that doesn't scream

Beyond food and labor, there are a handful of smaller expenses that quietly chip away at what's left. None of them will kill you on their own, but together they're the difference between breaking even and actually making money.

Credit card processing fees

Most restaurants are paying 2.5–3.5% of gross sales in card processing fees. On $50,000/month in sales, that's $1,250–$1,750 going to your processor. Many operators don't track their effective rate (total fees ÷ total card sales) and have no idea if they're getting a fair deal.

If you're paying 3.2% and you could negotiate down to 2.4%, that's a $400/month swing on $50k in sales. Over a year, that's $4,800 in profit you just gave away because you never asked.

Third-party delivery commissions

DoorDash, Uber Eats, and Grubhub typically charge 15–30% commission per order. If you're not adjusting your delivery menu prices to account for that, you're subsidizing the platform with your margin.

A $16 entree that costs you $5 in food and $3 in labor has $8 in contribution margin at full price. But if you're paying 25% commission ($4), your real margin drops to $4. Add in packaging ($0.75) and driver tip passthrough, and you're down to $3 per order. If your rent and utilities are $0.08 per dollar of sales, and your payment processing is another $0.48, you've got maybe $1.50 left. That's not a business. That's a hobby.

Waste and spoilage

Most restaurants lose 4–10% of food purchases to waste. That's prep mistakes, over-ordering, improper storage, spoiled product, and "mistakes" that get eaten instead of tracked. On $15,000/month in food purchases, 6% waste is $900/month or $10,800/year.

The fix: track waste daily. Use a waste log. Make it visible. When staff know someone's watching, waste drops.

How to diagnose your profit problem in 3 steps

If you want to know exactly where your money is going, you don't need a consultant or a six-month project. You need three numbers and three hours of focused work.

Step 1: Calculate your prime cost

Pull your most recent P&L. Add up your total Cost of Goods Sold (food + beverage) and your total Labor (wages + payroll taxes + benefits). Divide that by your total sales.

Prime Cost % = (COGS + Labor) ÷ Total Sales

If you're over 60%, you're in trouble. If you're over 65%, you're in crisis. If you're under 55%, you're doing better than most.

Step 2: Run a menu engineering matrix

Pick your top 20 menu items by volume. For each one, calculate:

• Recipe cost: What the ingredients actually cost today, not six months ago.
• Menu price: What you're charging.
• Contribution margin: Menu price minus recipe cost.
• Sales volume: How many you sold in the last 30 days.

Plot them on a 2×2 matrix: popularity (x-axis) vs. profitability (y-axis). Now you know which items are making you money and which ones are dead weight.

Step 3: Track actual vs. theoretical food cost for one week

Theoretical food cost is what your recipes say you should be spending based on what you sold. Actual food cost is what you actually spent on invoices. The gap between them is your variance—the money you lost to waste, theft, portioning errors, or inventory shrinkage.

If your theoretical food cost is 29% but your actual food cost is 34%, you've got a 5-point variance. On $50,000 in monthly sales, that's $2,500/month in margin you're losing to operational sloppiness.

The RPS toolkit: what to use and when

Diagnosing the problem is step one. Fixing it requires the right tools. Here's how the RPS system plugs in:

• Prime Cost Calculator: Track your food + labor weekly. See your prime cost percentage in real time and adjust before the month closes. Grab it from the calculators page.
• Recipe Cost Card: Build accurate, up-to-date cost cards for every menu item. Know exactly what each plate costs so you can price with confidence. Start with the recipe cost card tool.
• Menu Engineering Matrix: Plot your items by popularity and profitability. Decide which items to push, reprice, or kill. Use the menu engineering calculator.
• Actual vs. Theoretical Food Cost Tracker: Compare what you should've spent vs. what you actually spent. Find the variance and fix the leak. Available in the profit toolbox.
• Delivery Margin Calculator: Factor in platform commissions, packaging, and tips. See if third-party delivery is actually profitable or just busy. Check the delivery margin tool.
• Break-Even Calculator: Know exactly how much revenue you need to cover your fixed costs. Understand your minimum volume before you start making profit. Grab the break-even calculator.

For operators who want the full system built and maintained automatically, the Live Menu Engine wires your recipes, vendor pricing, and delivery platforms into one live system that updates your menu pricing as costs move.

Simple next step you can take this week

Don't try to fix everything at once. Pick one high-impact move and execute it cleanly:

• This week: Calculate your prime cost percentage using your most recent P&L. If it's over 60%, you know where to focus.
• Next week: Pick your top 10 items by volume and recalculate their recipe costs using current vendor prices. Compare to your menu prices and see where your margin went.
• Week three: Run a menu engineering matrix. Plot your items by popularity and profitability. Decide which 2–3 items need a price increase or should be cut entirely.

If you do nothing else and just tighten your top 10 items, you'll see the impact in 30 days. The math doesn't lie.