Your restaurant’s profit margin defines whether your business is successful or not. No company can survive without earning enough money. Whether you’re just getting started or you have owned a restaurant for years, you should learn how to calculate and boost your restaurant profit margin.
Before calculating your restaurant profit margin, you first need to calculate your food costs, as seen in the infographic below:
Credit: Aptito
What is a Restaurant Profit Margin?
Restaurant profit margin (commonly known as net profit margin) refers to how much money your restaurant makes after you pay for all of its expenses. The restaurant profit margin measures your profitability ratio, which is how much you earn compared to how much you need to spend to earn that.
How to Calculate Your Restaurant Profit Margin
Before you can boost your restaurant profit margin, you need to learn how to calculate gross profit margins. Let’s start with a simple example before getting into the details that can make calculating profit margins more difficult.
At its most basic, a profit margin is the difference between how much your business spends and how much it earns. Let’s say you own a restaurant called Lilly’s Thai Food. Each week, your business spends about $10,000 and earns $12,000. The $10,000 represents your cost. The $12,000 represents your revenue, including restaurant billing.
You start your calculation by subtracting your cost from your revenue. In this case, you get $12,000 – $10,000 = $2,000, which means you have a $2,000 gross profit. Now, divide your gross profit ($2,000) by your revenue ($12,000). Here, you have 2,000/12,000, which gives you a 0.17 margin.
For the last step, multiple the margin (0.17) by 100 to get your restaurant profit margin (17%). With these three steps, you can always find your restaurant profit margin. Invoicing software can also help you keep an eye on your cash flow.
Getting Into the Details of How to Calculate Gross Profit Margins
Things get more complicated when you consider all of the things that your restaurant spends money on.
[bctt tweet=”You can’t really learn how to calculate restaurant profit and loss until you know where your money goes.” username=”gloriafood”]
Some of the biggest expenses that restaurants face include:
- Advertising
- Food
- Real estate (renting or owning)
- Payroll
- Equipment (including everything from ovens to carryout containers)
- Insurance
Before you know how to calculate gross profit margins, you need to know how to add up all of those expenses. If no one on your team has the skills to track expenses and incoming revenue, then you can add another item to the list above. You’ll need an accountant to do the work for you.
How Much Profit Should a Restaurant Make?
If you own or manage a restaurant, it’s only natural for you to ask, “How much profit should you make in a restaurant?” Since you know how to calculate restaurant profit and loss, we can dig a little deeper into average restaurant income.
The answer to how much profit should you make in a restaurant depends on things like where you’re located and what type of cuisine you sell. The economy’s overall performance also has an effect on average restaurant income.
In 2008, at the beginning of the Great Recession, many experts reported a >average profit margin for the restaurant industry of just 0.5%. In other words, the average restaurant income was only half a penny for every dollar spent.
The average profit margins for the restaurant industry have improved significantly since 2008. In 2017, most successful restaurants had profit margins of around 6%. When you look at the average restaurant revenue, you see that most eateries earned about 6 cents for every dollar spent. McDonald’s locations, however, reported average restaurant incomes between 10% and 22% at the same time.
[bctt tweet=”If you learn how to calculate gross profit margins, and you get a number greater than 6%, then your restaurant is doing pretty well.” username=”gloriafood”]
You do, however, have plenty of ways to increase your restaurant profit margin.
Strategies to Increase Your Restaurant Profit Margin
The highest profit margin in the restaurant industry usually goes to Italian restaurants that serve alcohol. Most Italian dishes don’t cost much to make. A good chef, however, can make inexpensive ingredients taste amazing.
Because of this, you can potentially boost your profit margin by adding a few pasta dishes to your menu. Knowing what cuisine has the highest profit margins for restaurants might help you increase your revenue. Unless you’re willing to change your restaurant to focus on foods that get the highest profit margin in the restaurant business, though, you should probably concentrate on other strategies.
Lower Your Food Costs
Food costs take up a huge portion of your restaurant’s budget. Lowering your food costs, therefore, can help you increase your restaurant profit margin. Reducing waste is the first step to lowering your food costs. Make sure that your kitchen staff doesn’t throw away useful ingredients. For instance, if you:
- put broccoli in your salads, save the stalks to make soup
- serve hamburgers, use leftover meat to make meatballs
- have fish nearing its expiration date, have a special on fish until you run out
You can also lower your food costs by negotiating with suppliers. If you’ve been buying from a supplier for a decade, that company doesn’t want to lose your business. It may give you a discount to ensure your patronage. If the supplier doesn’t want to lower its prices, talk to local farmers to get better deals on the produce you need.
Start Selling Alcoholic Drinks
Alcohol has a tremendous profit margin that can help your restaurant increase its revenue. Many restaurants and bars find that they can get an 80% gross profit margin from alcoholic beverages., so getting a liquor license is well worth it.
Increase Your Sales
If you can increase your sales, then you will improve your restaurant’s revenue. How you go about increasing your sales depends on your restaurant’s current popularity. If you struggle to get enough customers through your door, then you should start by focusing on local SEO strategies that will reach more people in your area. If you have a full house every night, then you should use your website to increase delivery and carryout orders.
Streamline Your Work Schedule
You don’t want your employees standing around without anything to do. Every employee costs money, so you need to streamline your work schedule to make sure you only have as many staff members as you need.
On slow nights, ask servers whether they want to go home. Most times, a few people will volunteer. When they go home, you lower your payroll expenses on days when you don’t have many customers. Improving your restaurant profit margin takes hard work, but you can reach your goal as long as you try a few strategies to see which ones work best for your business.
