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Unlike restaurants, which require you to staff a dining room and supply a kitchen whether or not you are busy, catering businesses allow you to tailor your staffing and food purchases relative to the number of events you have scheduled. As a result, catering businesses tend to have lower food and labor costs -- and therefore higher profit margins -- than restaurants. A typical catering company earns a profit of 10 to 12 percent, as opposed to the four to seven percent profit typical of restaurants.
The food costs for a typical catering business should total between 27 and 29 percent of gross sales. An event that generates $1,000 in revenue should incur between $270 and $290 in food costs. Food purchasing for a catering business offers the advantage of working with a set menu and purchasing for a specific number of guests. But purchasing food for a catering business can be tricky because menus tend to be tailored to the needs of individual clients, making it problematic to buy ingredients in bulk.
Labor costs for a typical catering business should be between 16 and 17 percent of gross sales, so it should cost $160 to $170 to prepare the menu for a catering job that generates $1,000 in revenue. Because many catering jobs such as weddings occur at irregular intervals, a caterer must decide whether to keep employees on staff or contract with a temp agency. Keeping a regular staff may increase labor costs by establishing an employment relationship in which you need to provide enough hours to make the arrangement worthwhile to your employees. But working with temporary workers can be inefficient if they are unfamiliar with your routines.
In addition to food and labor costs, a catering business will likely have to pay rent on a commercial kitchen. Established caterers usually have kitchens of their own, while beginning caterers are more likely to rent space in a shared kitchen facility. Either way, overhead costs for rent and utilities should total about 9 percent of a caterer's gross revenue. Caterers also incur expenses for equipment such as chafing dishes and hot-holding boxes, vehicle expenses, interest expense on business loans, insurance and advertising.
Some types of catering businesses incur higher costs than others do in particular categories. For example, a caterer specializing in fancy meals with themes and elaborate decorations will spend more on accessories, while a caterer who uses premium ingredients may incur especially high food costs. If a particular type of expense exceeds the industry average, a caterer should find ways to lower costs in a different area such as labor if her business is to succeed.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.