How Do Small Business Restaurants Make a Profit?

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What is restaurant profit margin?

One of the most critical metrics to understand and track as a restaurant operator is your restaurant profit margin. Simply put, to remain in business, you need to understand your margins and everything that goes into them. This seemingly simple metric contains a fair bit of complexity under the hood.

The formula to calculate restaurant profit margin is as follows:

[(Revenue – Expenses) / Sales] x 100

The formula above represents your revenue minus your expenses in a given period, divided by your sales for that period. To understand your profit as a percentage of sales, multiply that number by one hundred.

It’s important to know there are two classifications of profit margins; gross and net. The difference comes from how you calculate your expenses. Gross profit deducts only your Cost of Goods (COGS), while net profit subtracts every type of expense you have.

Let’s break down the components of the formula for Net Profit Margin:

  • Revenue: Your revenue is the total of your restaurant’s income streams, such as Dining Room, Bar, catering, merchandise/retail, and banquets/venue rentals.
  • Expenses: Your expenses over all the money going out the door, like rent, payroll, food and beverage costs, and equipment depreciation or leasing cost.
  • Sales: Your sales are pretty self-explanatory – the sum value of everything your guests purchased.

Average restaurant profits across the industry

Happy business owner doing the books at a restaurantAverage restaurant profits across the industry vary; the range typically falls between 2%-6%. There is also variance within the industry: full-service restaurants usually fall on the lower end of the spectrum, while quick-service restaurants and food trucks will cluster higher. Wherever you sit in the profit margin range, you’ll need to run a tight ship to turn a regular profit. This comes with proactively managing your overhead, labor, and costs of goods. The first step to reliable profits is having accurate sales and costs figures, which are made markedly more accessible by using modern restaurant accounting software.

Restaurant break-even points

When discussing restaurant profit margin, it’s critical to also look at break-evens. When discussing restaurant profit margin, it’s critical to also look at break-evens. Understanding break-even points is one of the most reliable guideposts a restaurant operator can have in guiding more substantial margins. Break-evens indicate how much in sales you need to meet your fixed and variable costs, and they help create more precise budgets and accurate sales forecasts, improving the bottom line.

Break-evens fall into two categories:

  • Cash flow break-even: A cash flow break-even factors in your restaurant profitability plus your debt servicing, government assistance, and anything else that does not show up on your P&L but needs to be factored into your cash management strategy.
  • Operational break-even: An operational break-even helps determine at what point your sales meet your complete operational expenses. How much do you need to make in sales to live to fight another day? This type of break-even will assist you in determining budgets, goals, and operational directives.

TUNE IN AND WATCH THE FULL VIDEO ON RESTAURANT PROFIT MARGIN BELOW!

How to make a restaurant more profitable

There are two ways that operators can improve their bottom line.

  • Increase revenue relative to expenses
  • Decrease costs relative to sales

How to increase revenue relative to expenses

Offer great bar programs and strive for high table turnover

To increase revenue, focus on growing each of your primary revenue streams, typically Dining Room, Bar, Catering, Merchandise/Retail, and Banquets/Venue Rentals. Dining room and bar sales are usually the most significant contributors, so pay special attention to them. Firstly, looking at your bar, remember that margins on alcohol can reach 60%, making them by far the most profitable sales category. Lean into this advantage with appealing selections of wine, beer, and cocktails.

Your dining room profitability can be increased by making more money per customer or by increasing the number of customers served. For the latter goal, it’s key to establish a high table turnover rate. This means increasing the number of customers served in a given period by reducing the average time spent at tables. Fast-casual restaurants have customers dine and dash at an advantageous pace. The more people you can serve over a given period of time, the higher your profit. A high turnover rate also compensates for limited real estate, allowing you to effectively fit more people in your space.

Engineer your menu and merchandise the menu items

You can also increase revenue by working with your chef to engineer a menu with more profitable dishes. Additionally, you can train your team to merchandise your menu items. Upselling, or merchandising your menu, is essentially training your team to understand menu items in relation to their contributing margins, just like engineering your menu is creating a menu that caters directly to contributing margins.

RASI 4R Report - Enchiladas

Drive repeat business

Driving repeat business is another time-tested strategy to increase sales. Your best customers are the ones you already have. They’ve already made the decision to patronize your business, so your customer acquisition cost (CAC) on repeat visits is near zero. Take advantage of that by cultivating a regular clientele. Positive word of mouth can be one of the most potent advertising tools you have, and as a bonus, it’s free! An additional way to create repeat business, especially if you’re a QSR, may be customized rewards programs that incentivize repeat purchases.

Master your online marketing

Bentobox Restaurant Websites

Lastly, in the age of the smartphone, having an online presence has gone from nice-to-have to need-to-have. Prospective customers will look for information about your restaurant online. They’ll want to see your menu, address, and hours of operation at a bare minimum. Have an up-to-date website and Google My Business listing. A well-managed website can become a business asset with multiple advantages, from digital marketing to online orders.

How to decrease costs revenue relative to sales

Know your metrics

Understanding your KPI’s (key performance indicators) is critical to cost savings for a restaurant operator. Without these clear and timely financial indicators, you’re flying blind and will be unable to take proactive steps to control costs. Receiving real-time updates on business-critical metrics will help guide your areas of opportunity to see where you can decrease costs. RASI’s business intelligence and data analytics empower our operators to take swift action on financial metrics, drill down into sales trends, and use machine learning to make accurate forecasts.

Control your prime costs (COGS & labor)

RASI Payroll on laptopTo decrease costs, you’ll need to get a handle on your principal cost drivers, i.e., your Prime Costs: labor and COGS. Prime costs can fluctuate greatly depending upon what’s happening around the globe. Commodity prices, staffing challenges, and consumer behavior can all affect your prime costs. Therefore, the more frequently you review your prime costs, the better. We recommend a weekly manager meeting to review P&Ls for this reason. If you consistently assess your data, you’ll be better equipped to make educated business decisions based on opportunities presented in your analyses. Here are 3 strategies to help control your prime costs:

  • Review and forecast your labor to enable efficient staffing levels, then create your schedule accordingly. Additionally, another frequently overlooked cost savings method comes from payroll compliance. Substantial fees are levied on restaurants that don’t comply with the law on meal and rest breaks, overtime, and paid time off. These fees are easily avoided by conscientious management of your payroll.
  • Take control of your inventory to reduce waste, theft, and spoilage, and optimize your menu to par dishes that don’t sell and create dishes with high perceived value (and built-in profit margins).
  • Leverage relationships with your vendors to ensure you’re getting the best deals with constantly fluctuating prices or finding cost-effective sub-worthy items.

Review your financial statements regularly

Timely and accurate financials give operators the leverage needed to make necessary changes to their business. When you can view how your departments are performing relative to budget, how your sales are trending, and have the knowledge and understanding to forecast your primary cost directives accurately, you’re empowered to drive positive, consistent financial results. Every operator must become intimately familiar with their Profit and Loss Statement, Balance Sheet, and Statement of Cash Flow. Each of these measures is distinct, and each contributes a unique perspective on the overall health of your restaurant.

LISTEN TO OUR RESTAURANT PROFIT MARGIN PODCAST EPISODE BELOW!

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