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How to Estimate Expenses for Your Burger Franchise Business

February 26, 2020

Foreword : Best Burgers in Kuta and Seminyak, Bali

Just a quick foreword. Everybody is talking about Dod’s Burger in Bali! We are well known for our fresh burgers and friendly service. If you happen to visit this beautiful island or if you are already here, please pop down to one of our outlets and try our famous gourmet burgers. We are located in Seminyak and Kuta Square. Check our locations on this website. Thank you !

Starting a Burger Franchise Business (in Bali and beyond)

Turns out, starting a burger franchise business is not as difficult as it sounds. The thing is, you need to know how to set things up at the start to avoid common mistakes when you become operational. The blogs on this website are full of practical advice and tips to help you achieve your dream of starting your own burger franchise!

Please note that since we are based in Bali, Indonesia, I will often give references to and advice on Bali. Having said that, the theory behind starting a burger business is the same whether you’re in Bali or in Texas.

Finally, don’t forget to sign up to our newsletter for tips and knowledge on how to open a burger franchise!

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Fixed and Variable Costs in your Burger Franchise

Once you have an idea of what your revenue will be, the next step is to estimate expenses.

Read : How To Estimate Revenue for your Burger Business

It is very important to differentiate between fixed and variable costs and to understand the relationship between profits, sales volume, and costs, which help to determine your break-even point.

Differentiating between fixed and variable costs will also be required to do your break-even analysis. Fixed costs, also referred to as overhead, generally remain the same whether your business is open or closed.

Examples of fixed costs are rent, insurance, licenses, fees, and loan payments. No matter how busy you are, these costs will remain the same.

For example, it is generally not possible to renegotiate rent after a lease has been signed. In a burger franchise business, other costs that tend to remain fixed over the short term include trash removal, utilities, managers’ salaries, and telephone.

The good thing about fixed costs is that they are predictable. That said, they change over time. For example, most leases will call for annual increases. Also, periodically you will want to give raises to yourself, your manager, and salaried staff.

Variable costs vary directly with your volume of business. As business volume increases, so will your variable costs and, similarly, when your business volume decreases so too will your variable costs.

Examples of variable costs are food, beverages, and labor. For instance, every time you sell a burger you will incur the cost of a hamburger patty, a bun, and so on. You can increase or decrease your food costs by increasing or decreasing portion sizes, changing recipe ingredients, or changing the quality of menu ingredients.

While your manager’s salary (this may be your own salary if you do not have a manager) may remain fixed, a certain amount of labor costs may vary with sales volume, most notably service and kitchen staff. During the slow season, many restaurants reduce the number of kitchen and service staff, and then increase them again when business picks up.

Having said that, just to stay in business, you are going to need a skeleton crew with a few waiters, cooks, dishwashers, and so on. Taken together, food, beverage, and labor costs—including payroll taxes (including the compulsory health insurance or BPJS in Indonesia ) make up the largest portion of total costs of almost all restaurant operations.

These costs will usually consume around 60 percent of a typical burger franchise’s budget (this number is perhaps only around 30% in Bali). That’s the bad news. The good news is that, unlike fixed costs, they can be changed relatively easily.

Your ability to manage and control your variable costs while holding your fixed costs steady in the short term can make the difference between profit and loss.

How to Estimate Fixed Costs for Your Burger Franchise

Estimating expenses for your burger franchise business is not nearly as subjective as projecting sales. In fact, after doing the right homework, you should be able to come up with fairly reliable expense estimates.

For example, you can determine fixed costs such as rent and other occupancy costs by talking to local commercial real estate brokers or property owners. You can estimate loan payments, if applicable, by talking to your banker about current interest rates.

Once you know the current business loan interest rates applicable in your location, you can go to www.score.org and go to Loan Amortization Schedule. There you will find a calculator that will help you figure out monthly payments on different loan amounts. Click the “Download Template” button to download the Excel file. Open the file on your Excel software and start entering the details of your loan. The calculator will calculate your repayment schedule.

Similarly, you can get good estimates of utility costs simply by calling up local utility companies (PLN in Indonesia), and telling them the number of, type, and size of ovens, fryers, refrigerators, lighting fixtures, and HVAC systems you plan to use, along with your hours of operation. They will give you an estimate. If you are opening your burger franchise in Bali, you can go to this link on the PLN website to get an online estimate of your monthly electricity bills : Estimate your electricity bills if you are opening in Bali. 

For telephone and Wifi, you can just go with the standard package – don’t go too fancy on this unless you are opening a co-working space and need high speed internet. For a burger franchise, the normal speed of 50 mbs would do just fine and most packages will include telephone lines as well as Wifi connection.

If you are opening in Bali, just go with a standard Indihome package which is around 450,000 Rupiah per month. This package gives you access to unlimited Wifi / internet usage, and a landline telephone connection. The telephone costs will depend on your usage (not unlimited).

You could also ask the owner of a local similarly sized operation what their approximate monthly costs are. Better still, if you plan to take over a closed restaurant operation or buy an existing one, the local utility company can provide estimates of the previous tenant’s average bills by season.

Estimates of other fixed expenses such as trash removal, pests and insects extermination, insurance, licenses, and fees are all easily obtainable by making a few phone calls to the respective service providers.

How to Estimate Variable Costs for Your Burger Franchise

Estimating food and beverage costs, which are variable expenses, can be tricky, since at this stage you probably have not developed a final menu. The best approach is to select a food and beverage cost percentage that is reasonable and consistent with other similar successful local concepts. I have covered food costing in a separate article so please do read that article.

For these estimates, you can also engage a local accountant, and ask him for food costs information on his clients with similar food & beverage concept as yours. Of course, the accountant is under no obligation to reveal the name of his clients, or even give you this information at all.

However most accountants will be eager to give you this information if they can secure you as a client. Make sure that he gives percentages from his profitable clients. If you are opening in Bali, avoid using national estimates because ingredient prices vary widely from province to province, and from season to season in Indonesia.

To estimate monthly payroll – your other major variable expense – you can get some ideas about staffing levels by asking owners of local restaurants that are similar in size and concept. In Bali, you can obtain estimates of salary rates by finding out what the current UMK (minimum standard wage) for your particular are is.

Currently as of 2020, the UMK set by the Bali government for the Badung District is at 2,930,000 Rupiah. You should not be paying staff under the UMK level as you will be breaking Indonesian law that can have you heavily fined, or worst case, land you in jail.

Many first-time burger business owners leave their personal salaries out of their projections. They usually assume that they will get paid when their business makes money. Do not do this ! Plan for your own success. As an owner, your time, effort, and hard work should be rewarded with a reasonable monthly salary. Besides, if you show banks or investors a pro forma that does not include your salary, they will want to know why.

Estimates of other types of variable costs—such as laundry and linen, cleaning supplies, paper supplies, tableware, glassware, and flatware replacement—will vary according to concept and volume levels. Again, with determined homework these can be estimated fairly accurately.

One thing you should note, and this is from my own experience when opening our Dod’s Burger franchise in Bali : I grossly underestimated the amount of printing paper we would be using. The fact is, you will probably have fairly high printing paper supplies costs especially if you are using a Point of Sales system that automatically prints the bill at checkouts.

If you plan on accepting credit cards, don’t forget to include a variable cost line item for credit card processing fees. Credit card companies take a small percentage of each sale as a fee. As of this writing, American Express charges around 4 percent and Visa and MasterCard charge between 1.5 and 2 percent.

Depreciation Expenses

An expense that deserves special mention is depreciation. It is an unusual expense because it does not require an actual cash outlay. Instead, it is what accountants call a cost-allocation expense, since it takes the cost of equipment, furniture, and building improvements and allocates them over a number of years.

Under Indonesian Tax Laws,  you can depreciate different types of equipment and tenant improvements over different periods of time. For example, if your equipment cost is Rp. 200 million and the applicable depreciation period is ten years, then you would deduct Rp 20 million in depreciation expense on your income statement and on your taxes every year for the next ten years, even though you would not have actually spent Rp 20 million on equipment each of those years.

This is a complicated expense, so the best thing to do is have a local accountant help you with the calculation.

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Author’s note :

Hello I am Eddy and co-owner of Dod’s Burger outlets in Kuta and Seminyak, Bali. I have been in the burger business for a number of years, and I can help you start your own burger business, from concept stage to operational. I also give advice to those who want to start a business in Bali. Please reach out if you would like me to help you at hello@dodsburger.com. 

 

 

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