An adequate profit margin is critical for the sustainability of a restaurant business, as it’s from the profits, however slim that owners get paid, and restaurants grow.
If a restaurant business cannot maintain a sufficient profit level, it may not be worth the time and money the owners put into it, therefore shutting down completely. Conversely, a healthy and growing profit margin for a restaurant will safeguard the future of the business and provide funds for improvements or even expansion to multiple locations.
What is the average restaurant profit margin?
The restaurant industry has, by and large, low-profit margins constrained by high capital, labor, and operational expenses. Yet there is a wide range of profitability within the industry, from white tablecloth establishments with low single digits profits to quick-service restaurants clearing over ten percent (if they’re really on top of their game). Despite this variability, average restaurant profit margins most commonly fall within three to five percent of annual revenue.
Gross Profit Margin
Operators calculate gross profit by taking the difference between your sales and your costs.
If you sell a taco for $10 that costs you $3 to make, your gross profit is then $7 on $10 in sales.
Gross Profit Formula = [Total Sales – Cost of Goods Sold (COGS)].
Gross Profit Margin Formula = [(Gross Profit / Total Sales) x 100].
Your gross profit margin is the profit on the item; in our example above, $7, divided by the sale amount, $10, multiplied by 100 to equal 70% –> [(7/10) x 100] = 70.
Net Profit Margin
Net profit is your gross profit minus all your additional expenses beyond your food costs. Think labor, overhead, maintenance on equipment, etc.
To calculate net profit, use the following formula:
Net Profit Formula = [(Total Food and Beverage Sales + Non-Food and Beverage Earnings (such as Rental or Merchandise Income)) – Expenses].
Once you’ve calculated you Net Profit with the formula above, we want to view that as
Net Profit Margin Formula = [(Net Profit / Revenue) x 100].
How to Improve Your Restaurant Profit Margin
Increasing Sales
There are two ways to improve a restaurant’s profit margin: increase sales or reduce costs. In a well-managed restaurant, operators pursue both approaches simultaneously.
Menu Engineering
Beginning with tactics to grow sales, a great point of leverage is the composition of the menu. The practice of strategically designing dishes for profitability is known as menu engineering and should be led by the chef, with support from a manager who knows food costs well. A well-designed menu will economize on ingredient costs while still building dishes that taste great and sell well. The key to proper menu engineering is accurate data and the knowledge of how to translate that data into your menu from a financial perspective.
Menu Specials
Additionally, menu specials are an underrated tool for the restaurateur. You can utilize menu specials to capitalize on vendor deals on ingredients (example: let’s say you get a great price on oysters for one week, how can you utilize that to your benefit?). You can also design specials for quick cooking times, allowing you to serve more people in the same time period; keep in mind that you never want to dilute the value of your menu and should keep customer value perception at the top of mind when creating specials.
Merchandising Menu Items
Beyond the makeup of the menu, an essential sales technique is to encourage the proper merchandising of menu items. This practice is only successful if your team understands the menu’s margins to promote the items with the highest contributed margins. Additionally, servers can encourage the purchase of additional items per ticket. This is known as upselling and is most commonly practiced with sides, beverages, and desserts. Training staff to upsell with value can make a lasting improvement to your bottom line.
Table Turns
A time-tested method of increasing the sales in your restaurant is to reduce the time the average party spends at a table, allowing for more table turnover. Table turnovers are defined as the number of times you can seat different parties at the same table throughout the night. For instance, you might seat 3 parties of 4 between the hours of 5 pm and 10 pm, making for 3 table turns. It’s a subtle art to encourage diners to eat and exit at a reasonable pace without actively rushing them. You probably already have specific servers who are better at this than others—try using POS data to evaluate your best table turner, and have them train other servers on their techniques.
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Reducing Expenses
Streamlining Your Inventory
A significant component of expenses for any restaurant is the cost of goods sold (COGS)—all the ingredients that go into your food and beverages. The first step in controlling COGS is streamlining your inventory: food that sits on the shelf (potentially even spoiling before use) isn’t contributing to your bottom line or your dishes. Track your ingredient usage and, based on those numbers, stock just enough inventory to meet your needs plus a small margin of safety.
Address Kitchen Waste
Once you have your inventory under control, tackle kitchen waste. Ask your cooks to record when they throw away food, and designate a receptacle just for food waste that can be weighed at the end of each day. Soon you’ll have the data to make changes in the kitchen based on how much waste is generated.
Standardize Portion Sizes
An additional step in controlling food costs is to standardize portion sizes. Cooks should measure the amount of each major component of a dish to ensure that it meets the guidelines set by the chef. An 8-ounce steak dish should contain 8 ounces of meat, not sometimes 7, sometimes 10, etc. By regulating your portion sizes, you reduce overall ingredient consumption while increasing the predictability of your inventory needs.
Take Advantage of Purchasing Programs
Moreover, many restaurateurs aren’t aware that they could substantially cut their food costs by participating in a purchasing program – these programs, leverage the buying power of multiple restaurants to negotiate ingredient pricing at better rates from vendors.
These steps to limit your COGS will make a substantial contribution to improving your profit margin and can boost your profits above the level of average restaurant profits discussed at the beginning of this article.
Selecting software to improve restaurant profit
Utilizing the right back-office software can be a considerable advantage when seeking to increase restaurant profitability. A solid restaurant accounting software solution should integrate with your POS system to contain the latest sales and performance data straight from the source.
Next, it should position you to manage the financial metrics that matter most to your business through customizable dashboards. RASI meets and exceeds these requirements, integrating accounting, compliance, payroll, cash management, treasury solutions, and financial operating metrics.
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Thousands of restaurant operators across the nation have made RASI their choice for restaurant management. When you sign up with RASI, a dedicated account team will onboard your management staff, configure the software to match your operational flows, and coach your team to properly use the software to set and meet financial goals.
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