 Hello Aces, welcome back to module four, lesson number four, understanding the difference between variable costs versus fixed costs. And this is what you're gonna be learning today. And it is super crucial for you to understand in order for you to build a profitable restaurant. Now, which one do you prefer? Being able to travel without any worries and being able to enjoy your life, having the financial and locational freedom or do you wanna be stressed out like the many different restaurant owners out there working 15 hour days, seven days a week and just working their lives away. The difference in the two, believe it or not, is in the numbers. And that's what I wanna be able to help you is to achieve being able to travel without any worries. And that's the reason why you guys are in this lesson because you want to be able to achieve that freedom. Now, I understand when it comes to math it is very, very complicated and a lot of people don't like math and which is the reason why I break it down as simple as possible for you to understand. And then that way you can actually take back your business in your own control. The most important step you need to overcome is math guys because I know 80% of the people fail because of their lack of understanding in the numbers. A simple tweak here and there would help you turn your business around and thus your life around because understand for one thing, a lot of times you're not just doing this for yourself, you're also doing it for the people around you, the people that you care about because if you are in a bad mood, if you're financially stressed, if your business is not doing well, it affects the relationship you cherish the most which is the people around you. And that's the reason why as much as some of you might not like dealing with this aspect or not paying too much attention to it, I highly, highly recommend that you put in some effort to make sure you figure out your math. Now, I've definitely been there, I'm not just preaching it because I totally understand. I didn't like math, I didn't like bookkeeping which was the reason why I was slapped with a big, big fine of $200,000 from Canada Revenue Services, right? And we actually was able to shake that off and turned and expanded our dessert chain internationally seven locations before it was acquired earlier on the year. And I'm sharing this as an example and really as a big, giant pitfall that I personally has experienced. And once again, I don't want that for you and that's the reason why you're doing this. Okay, now let's get right in. There are many expenses to account for. We talked about projections in terms of revenue and if you haven't done so already, check out the previous three lessons where we focus on the projected revenue. Now it is for us time to understand the expenses. We need to understand the variable cost and the fixed costs. Understanding the two allows you to figure out your different items and your expenses. Then you can figure out how much money you can put in your pocket. Now, why do we need to understand this? It is so then that way we can budget accordingly to each of these expenses. First of all, what are fixed costs? Listen, what does it mean? Simply put, these are costs that does not change regardless of the output that you produce. For instance, back to Ben's burger and once again, if you don't know Ben's burger, go back to lesson one. Ben makes 10 burgers. How much is rent for him? Ben makes a thousand burgers. How much is rent for him? The rent remains unchanged. It doesn't matter how much the output is. It doesn't matter how much Ben is making. The rent remains the same and that's the reason why this is a fixed cost. It's a cost that does not change regardless of the output. So simply put, think about this analogy every time you think of it, whether it's a fixed cost or a variable cost, whether it changes or not, okay? Rent is a fixed cost as an example. Now, what are variable costs? Cost that varies with the level of output back to Ben's burger as an example. Ben makes more burgers. Now he needs more patties. What's gonna happen is that he's gonna spend more money on patties, so cost of goods sold, COGS, cost of goods sold, is a variable cost because the more he makes, the more of this he needs. Thus, this is a variable cost. Now this is something that you should definitely take into consideration and really study in full. The variable cost and the fixed cost, okay? Variable costs, we have broken down it into more categories for you, okay? Within variable costs, there are costs of goods sold, which is your food cost, the labor, and also the operating cost, okay? Now let's break it down a little bit further. Within costs of goods sold, there's gonna be food costs and the beverage cost, and this should account for no more than 30%. So if your food cost alone takes up 50% of your expenses or your revenue, then that's a big no-no because it shouldn't take up more than 30% as a rule of thumb, okay? And if you wanna make money, your food cost should not be more than 50%. With labor, you have full-time labor, you have part-time labor, there's incentive, there are bonuses, there's recruitment costs, there's development costs, all this added together should not account for more than 25% of your costs. Okay? Operating, utilities, marketing, office expense, miscellaneous, and once again, these are over-generalizing it, so you may have other line items within your books. You can just throw them in here. At the end of the day, there's no point of going into the micro details. We just wanna be able to see from a high level where are we spending the most money and what is the percentage that it would account for. So for us, we don't wanna account for more than 15% in operating costs. So if you're spending like 20 to 30% on marketing, $10,000, $20,000 on marketing, is it justified? Probably in the beginning, if you don't know what you're doing, that's probably not justified. Those are the variable costs that we're talking about. Once again, we break it down into different categories, then we break it down into more micro line items here. And these are the rule of thumb. Once again, rule of thumb of percentages that you should aim for. And this is not a golden rule. It's something that for you as a benchmark to follow. So if you're at 32% cost of goods sold, it is okay. The world's not gonna fall down. You're not gonna have a bad business. You should just aim to actually decrease this percentage. Now for fixed costs, there's rent, there's miscellaneous. And as we go dive deeper, rent should account for 5% to 10% of your costs. And miscellaneous would be depreciation, interest that you'd be paying on some of your loans should not account for more than 10%, okay? And a pro tip for you, a lot of people are gonna be talking about prime cost. In the industry, prime cost stands for cost of goods sold and labor. So these two added together is your prime cost. So typically speaking, 55 to 60 to 70% almost is what you're talking about in terms of prime cost, okay? So typically we should aim to have less than 70% variable costs and less than 20% fixed costs. Why is that the case guys? Because the 10% is profit. We wanna be able to plan and budget for profit. A lot of people don't do that and which is the reason why they don't see profit because they don't plan for profit. They don't plan on how much they're making to put home and to bring home with them. And that's the reason why a lot of people fail. Once again, because they don't do the numbers, okay? Now in terms of the variable cost and the food cost, they vary depending on concept to concept because with fine dining, you're focusing a lot more on the labor. The expense for labor is going to be higher than your food cost. Why is that the case? It is because you're trying to hire good people, people that have service, people that knows how to make people feel being pampered because customer service is super high in the priority list which is very different when it comes to quick service restaurant like a Chipotle. The labor is gonna be less than the cost of good souls because they all care about is not customer service. They care about being able to turn out those Chipotle bowls on a very, very fast turnover. And that's the reason why cost of good souls would typically be more than the labor costs. You need to adjust and budget accordingly depending on your specific concept. This once again is only a rule of thumb for you to go by. Example of how Ben's burger plays into this whole budgeting piece. Rent, we talked about rent being in a range of five to 10% maximum of the revenue. So for instance, if we're talking about Ben's burger, he makes 24, 500 revenue per month. Now how much should they account for rent? We account for five to 10% of that. So what is that? Five to 10% of 24, 500 is this amount, 1,225 and 10% of this is $2,450. So the projected rent that we can afford for Ben's burger and to rent that location should not be more than 2,450. 2,450, it should be no more than this for that rental place. He needs to be able to find a place that is no more than $2,450 per month in order for him to achieve 10% profitability. Once again, this is a very, very simple way of approaching this. So for your specific restaurant, you need to account for how much revenue that you're projected to make. The revenue range is what we're talking about. So go back to lesson one if this is throwing you off, okay? If you haven't done this already, go back to lesson one. But nonetheless, five to 10% of this amount should be your projected rent and you should be paying no more than this one. So now that you understand this, it becomes a lot easier for you to go out and look for locations because now you just use this as a benchmark of, hey, how much is this place? How much is that place? This place is $4,000. It's gonna be a really, really tough battle for me to be able to make back that amount because it's not gonna fit into this projection. Then you're gonna find another place that is a little bit cheaper. Now, another example for you is labor. We talked about the initial labor should not exceed 25% of the revenue. So what does that mean? That means that 25% of the projected revenue, which is this amount for Benzburger, which is $6,125, is the projected labor amount. That means we should be spending no more than $6,125 per month on labor in order for us to be profitable. Just imagine we're spending $10,000 on labor due to poor management, due to poor scheduling, due to over-staffage or an underperformance. What's gonna happen? The extra three, four grand that you're spending on labor could be saved and that becomes your profit that you take home for you. And that's the reason why it is so insightful for you to have these numbers and budget out how much you should be spending on each aspect. So the labor costs should not exceed $6,125 per month in order for you to be profitable. This, what I just shared with you is a secret plan for a profitable restaurant. So now that you have that secret plan, I hope that you go out there, figure out all your budgeting so then that way you can start building a profitable restaurant. In the next lesson, we are gonna go over how to calculate your break-even point. That means what number you need to make in order for you to not lose any money. So knowing that is also key because sometimes things might not go the way you want. I'll see you guys in the next video.