Profit margin is a guidepost to the overall health of your business. If you have a solid profit margin, that means you earn substantially more than the cost of production on each sale. It’s common to target a certain profit margin in operational decisions.
Profit margin can be used as a tool for pricing, and as a measurement of production efficiency.
- As a pricing tool, profit margin can be used to reverse engineer the right price to sell a dish at. That is, you start with your expenses and desired profit, and from those numbers you calculate what the sale price of the dish should be. Let’s say you know it costs $5 to make a breaded chicken entrée, and you want to make at least $9 dollars in profit on the dish. Adding these numbers together, you can see that the minimum the dish can be sold for is $14.
- As an instrument for cost control, you can set a goal for a given level of profit from your operations. Say you want to clear 15% profit after all expenses are accounted for. You can then use this number to see the maximum allowable production expenses for a given level of sales. Say you have a busy restaurant that averages $10,000 in sales per night. If you want to maintain a 15% profit margin, then you cannot allow costs to exceed $8,500 per day. (10,000 * ((100 – 15)/100) = 8,500)
WATCH THE FULL VIDEO BELOW!
Restaurant Profit Margin Calculator: Benefits and Use
The restaurant profit margin calculator replaces manual procedures for determining your profit margin. The calculator takes your business data and performs the necessary computation to arrive at the margin of profit. Using this calculator is the best approach to how to calculate profit margin in a restaurant.
Understanding Profit Margin
Profit margin is fundamentally a measure of how much money the business makes above its costs, expressed as a percentage. You can think of profit margin as the remainder after all expenses have been accounted for. For 100 dollars of revenue, say that 90 dollars are consumed by expenses (labor, food costs, overhead). The remaining 10 dollars is the profit, and your profit margin is 10 out of 100, or 10 percent. That’s how to calculate profit margin.
Profit come in different varieties: gross and net. It’s helpful to think about these definitions in terms of the sale of a single dish at a restaurant. Gross profit is your sale price minus the cost of the ingredients. Net profit is the sale price minus all expenses, such as labor, utilities, rent and ingredients. Net profit measures the income that can potentially be distributed to owners.
Factors Affecting Profit Margin
To fully understand restaurant profit margin, it’s critical to know the most common sources of expenses. In restaurants the most important expenses are known as “the big three”. These are labor, cost of goods sold (COGS), and overhead. Roughly speaking, each of the big three expenses consume a third of the expense total. So, labor is 33% of your expenses, and so on. Each big three category presents the opportunity for cost reduction and optimization. Can you more strategically allocate shifts to exactly meet demand? Can you change suppliers to reduce your ingredient costs? Can you negotiate with your landlord for a better deal on rent?
RELATED: How Do Small Business Restaurants Make a Profit?
LISTEN TO THE FULL PODCAST EPISODE BELOW!
How to Use a Profit Margin Calculator
To calculate your restaurant profit margin, simply input your restaurant revenue, labor costs, cost of goods, and other expenses – then click Calculate Profit Margin! Once calculated, you’ll see your restaurant profit margin for both gross and net profit.
Tips for Improving Profit Margins
There are two approaches to a better profit margin—increase sales and reduce expenses. Increasing sales is the most effective of two methods, so we’ll examine it in detail. You can increase sales in a number of ways: engage in menu engineering, increase table turnover, add tables, and increase upsells.
- Menu engineering is the process of examining the menu for opportunities to increase sales and reduce costs. This is done by creating more popular dishes using favorite ingredients and favorite types of preparation, to increase sales. Then to reduce costs, you remove unpopular items from the menu, which allows you to stock less inventory, thereby reducing your food costs.
- Table turnover can be increased by using technology to process orders from servers and transmit them to the kitchen via a kitchen display monitor. Additionally, you can train your waitstaff to regularly check in on customers, and (without pressuring) swiftly deliver bills once guests are ready to depart.
- Adding tables is one of the easiest ways to increase sales. Review your table layout and see if there’s space for extra tables, a counter service/bar area, or additional seats at existing tables.
- Upsells are items added to the customers order. Beverages, appetizers, and deserts are the most common upsells. Train your staff to ask customers if they want these items, and encourage your servers to recommend their favorite appetizers, deserts, and drinks. Because they have the highest profit margin on the menu, alcoholic drinks are a particularly potent upsell.
