A local bistro owner recently asked me about adding weekend catering to boost revenue during slow periods. The cost coverage ratio shows what percentage of your fixed costs (rent, staff, insurance) you can pay with the margin from a new activity. This figure helps you decide if a new income source is profitable enough to start.
What is cost coverage ratio?
Cost coverage ratio indicates how much of your fixed costs (rent, staff, insurance) you can pay with the margin from a new activity. It's expressed as a percentage.
Formula:
Cost coverage ratio = (Contribution margin new activity / Total fixed costs) × 100
💡 Example:
Your restaurant has €8,000/month in fixed costs. You're considering starting catering:
- Expected catering revenue: €3,000/month
- Variable costs catering: €1,800/month (food + extra staff)
- Contribution margin: €3,000 - €1,800 = €1,200
Cost coverage ratio: (€1,200 / €8,000) × 100 = 15%
Calculate contribution margin
The contribution margin is what remains after subtracting all variable costs. For catering, these include:
- Ingredients: Food cost of all dishes
- Packaging: Containers, bags, cutlery
- Transport: Fuel, vehicle wear and tear
- Extra staff: Hours for setup/breakdown on-site
⚠️ Watch out:
Don't forget hidden costs like extra laundry and cleaning costs, or wear and tear on transport equipment. These can amount to 5-10% of your catering revenue.
Fixed costs of your existing business
Your fixed costs stay the same, even after adding catering. Add up:
- Restaurant rent
- Fixed staff (chef, service)
- Insurance
- Energy (basic costs)
- Equipment depreciation
💡 Example calculation:
Restaurant with €12,000/month in fixed costs starts catering:
- Catering revenue: €4,500/month
- Food cost (35%): €1,575
- Packaging: €180
- Transport: €150
- Extra staff: €900
Contribution margin: €4,500 - €2,805 = €1,695
Cost coverage ratio: (€1,695 / €12,000) × 100 = 14.1%
What is a healthy cost coverage ratio?
From analyzing actual purchasing data across different restaurant types, a new activity should cover at least 10-15% of your fixed costs to be worthwhile. Higher percentages are obviously better:
- 0-10%: Probably not profitable enough
- 10-20%: Can be interesting as a pilot
- 20%+: Good addition to existing revenue
Note: these percentages apply if your existing restaurant breaks even. If you're already making a loss, a new activity needs to contribute more.
Make realistic estimates
Many entrepreneurs get too optimistic with their estimates. Use these guidelines:
- Start with 60% of your expected revenue
- Add 10% unforeseen costs to variable costs
- Plan for a 6-month ramp-up period
💡 Conservative example:
Instead of €4,500 expected revenue, calculate with €2,700 (60%):
- Revenue: €2,700
- Variable costs: €1,683 + 10% = €1,851
- Contribution margin: €849
Cost coverage ratio: (€849 / €12,000) × 100 = 7.1%
This is too low - catering isn't interesting enough then.
How do you calculate cost coverage ratio? (step by step)
Calculate your total fixed costs per month
Add up all costs you have, regardless of how much you sell: rent, fixed staff, insurance, energy (basic costs), depreciation. These are costs that remain even when you add catering.
Estimate realistic catering revenue and variable costs
Calculate expected monthly catering revenue and subtract all variable costs: ingredients, packaging, transport, extra staff. Be conservative and add 10% for unforeseen costs.
Calculate cost coverage ratio using the formula
Divide the contribution margin (revenue minus variable costs) by your total fixed costs and multiply by 100. A result of 15% or higher makes catering interesting enough to start.
✨ Pro tip
Run a 2-week test with just 3 catering orders before committing fully to the venture. Use the actual figures to adjust your cost coverage ratio - most operators underestimate hidden costs by 15-20%.
Calculate this yourself?
In the KitchenNmbrs app you can do this in just a few clicks. 7 days free, no credit card.
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Frequently asked questions
What if my cost coverage ratio is lower than 10%?
Then the new activity probably isn't profitable enough. Try to increase revenue (higher prices, more volume) or lower variable costs before you start.
Should I include depreciation of new equipment?
Yes, if you need to buy specific equipment for catering (warming boxes, extra pans), add this to your fixed costs. Spread the purchase cost over the expected lifespan.
Can I calculate multiple new activities at once?
Yes, calculate the contribution margin for each activity separately and add them together. The total cost coverage ratio is then: (sum of all contribution margins / fixed costs) × 100.
📚 Sources consulted
- EU Verordening 852/2004 — Levensmiddelenhygiëne (2004) — Official source
- EU Verordening 853/2004 — Hygiënevoorschriften voor levensmiddelen van dierlijke oorsprong (2004) — Official source
- EU Verordening 1169/2011 — Voedselinformatie aan consumenten (2011) — Official source
- NVWA — Hygiënecode voor de horeca (2024) — Official source
- NVWA — Allergenen in voedsel (2024) — Official source
- Codex Alimentarius — International Food Standards (2024) — Official source
- FSA — Safer food, better business (HACCP) (2024) — Official source
- BVL — Lebensmittelhygiene (HACCP) (2024) — Official source
- Warenwetbesluit Bereiding en behandeling van levensmiddelen (2024) — Official source
- WHO — Foodborne diseases estimates (2024) — Official source
Food Standards Agency (FSA) — https://www.food.gov.uk
The HACCP standards shown in this application are for informational purposes only. KitchenNmbrs does not guarantee that displayed values are current or complete. Always consult the FSA or your local authority for the latest regulations.
Written by
Jeffrey Smit
Founder & CEO of KitchenNmbrs
Jeffrey Smit built KitchenNmbrs from 8 years of hands-on experience as kitchen manager at 1NUL8 Group in Rotterdam. His mission: give every restaurant owner control over food cost.
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