Get Control of Your Restaurant Profit Margin With This Guide
As a restaurant owner or manager, you know how to calculate restaurant profit margins, but do you know how you can increase them? Calculating, tracking, and truly understanding your profit margin can give you insight into exactly where and how you can make improvements that will have a direct impact on the bottom line.
In this post, we will discuss net profit margins and gross profit margins for restaurants, as well as how the expense of labor, food cost, and other operating expenses can eat into your restaurant profits — and conversely, how you can manage them with technology to widen that notoriously thin profit margin.
Average Profit Margins by Restaurant Type
Restaurant profit margins are subject to a lot of variables, including
- operational procedures
- running costs
- location of the restaurant
- the service level (and labor costs) expected
- the type and quality of goods sold
- how established the restaurant is
It can be as high as 15% or as low as 0% (which no restaurant wants). The commonly accepted average restaurant profit margin, however, runs between 2% and 6%.
According to LightspeedHQ, these are the average profit margin ranges for different restaurant business models:
- 2% to 6% for full-Research from LightspeedHQservice restaurants (FSRs)
- 6% to 9% for fast food restaurants or quick-service restaurants (QSRs)
- 6% to 9% for food trucks
- 7% to 15% for catering businesses
A good profit margin is really the biggest profit margin you are able to make by reducing costs and increasing sales.
Calculating Net and Gross Profit Margin
It is essential to know all the factors that go into calculating net and gross profit margins for your restaurant. Some of those factors you can influence, but others may be beyond your control as a restaurateur.
It’s important to understand the difference between net profit and gross profit when calculating and comparing profit margins. When we talk about restaurant profit margins, we are typically talking about net profit margin.
What is the net profit margin for a restaurant?
Your net margin, net income, or net profit margin, is the revenue left after you remove the cost of goods sold (COGS) and other operating costs. Those other operating costs may include labor costs such as payroll and training, and overheads such as utilities, rent, and maintenance.
Your net profit formula is:
revenue - (COGS + operating costs) = Net profit
Let’s say your revenue for your first month was $600,000, your cost of goods sold was $200,000, and your operating costs were $350,000.
$600,000 - ($200,000 + $350,000) = $50,000
Your net profit margin formula is:
Net profit / revenue = Net profit margin
So, if your net profit is $50,000, the formula looks like this:
($50,000 / $600,000) x 100 = 8%
Net profit will actually show you how much your restaurant earned over a set time period.
What is the gross profit margin for a restaurant?
Your gross margin, or gross profit margin, is the revenue left after you remove COGS. On average, restaurant gross profits should be around 70%. Your gross profit formula is:
revenue - COGS = Gross profit
Let’s stick with our revenue of $600,000 and our COGS of $200,000.
$600,000 - $200,000 = $400,000
Your gross profit margin formula is:
Gross profit / revenue = Gross profit margin
So, we divide the $400,000 by our revenue and multiply it by 100.
($400,000 / $600,000) x 100 = 67%
Gross profit margins can be helpful for understanding the day-to-day and direct costs of running a restaurant, but they don’t give you the bigger picture that taking overhead and operating costs into account can.
Steps to Improve Your Restaurant Profit Margin
Your restaurant profit margin plays a big part in your strategic planning, particularly when it comes to menu pricing, projecting customer spend, and budgeting for labor or marketing to ensure you fill enough covers (and make enough cash flow) to turn a healthy profit.
While some factors that may affect your restaurant profit margin are completely out of your control, such as the weather affecting footfall, seasonality affecting supplier costs, or a pandemic affecting …everything, there are other factors that are completely within your control as a restaurant owner or manager.
Restaurant costs tend to be higher than costs in other sectors, and restaurant prices generally have to stay competitive, which can result in relatively lower profit margins across the restaurant industry.
When it comes to your restaurant’s profit margin, there are three key expenses you want to keep an eye on to improve profit margins:
Aside from a 2% to 6% profit margin, around one-third of restaurant costs should go on each of the big three expenses.
Improve Your Profit Margin by Reducing COGS
Properly tracking COGS helps you to understand the costs that go into your food and menu decisions. Monitoring COGS can keep inventory counts accurate, and help you spot areas for improvement. For example, you could reduce COGS by cutting food waste or negotiating with suppliers.
You can also reduce waste and cut costs by reviewing the most and least popular items on the menu regularly to ensure ingredients aren’t over-ordered and wasted. Another way to cut waste costs is to implement strict rotation protocols, following the FIFO method. This cuts the risk of food spoiling before it can even be used.
Improve Your Profit Margin by Reducing Labor Costs
You don’t need to cut wages to improve labor costs. In fact, the costs associated with high staff turnover (such as hiring and training costs) can far outweigh the cost of competitive wages and benefits.
Additionally, a fantastic server or head chef can bring return customers back to your restaurant, increasing your sales, your revenue, and ultimately your profit margins.
You can also reduce labor costs with proper sales training for your servers. If they know how to sell (and upsell) your menu items, they can bring in more revenue per table.
Improve Your Profit Margin by Reducing Overhead
Overhead such as rent, utilities, insurance, and maintenance may seem out of your control, but you may be able to negotiate some of these, such as rent and utilities, in the long term.
Preventative maintenance for equipment ensures you’re not caught with unexpected bills when equipment fails or breaks down. Switching to energy-efficient appliances can reduce your utility bills, as well.
You may also be able to increase covers (and therefore sales) without increasing your physical space, by re-thinking your floor layout to fit additional tables and chairs. For example, could a current lounge area be better utilized as more dining space?
Improve Your Profit Margin by Increasing Your Restaurant’s Sales
Menu engineering is a great way to increase sales without adding labor costs. From layout to colors, font size to pricing, there are numerous ways that changing your menu can lead to an influx in sales.
You could also add new sales channels, such as takeout or online ordering, to increase overall restaurant sales.
Improve Your Profit Margin by Keeping an Eye on Metrics & KPIs
Closely monitoring your key performance indicators (KPIs) and other important metrics — including your profit margins — is essential to get a complete understanding of everything going on in your restaurant. This is the first step to pinpointing areas for improvement.
Improve Your Profit Margins by Using Restaurant Management Software
Investing in technology such as restaurant management software can improve margins by automating some of the cost-cutting processes. You can use inventory management software to speed up the process of measuring and calculating COGS and cut the risk of error. An inventory management system can also improve accuracy, and show you where potential mistakes or thefts are occurring.
Cut payroll costs with scheduling software, which uses forecasting to budget the exact right number of staff for any given shift.
A point of sale (POS) system can increase sales by improving customer service and building loyalty with customer data. The right POS can also speed up and streamline service throughout the restaurant, whether that is through mobile ordering, self-service kiosks, or a digital kitchen display system.
Another way to increase sales with technology is by integrating an online ordering or app-based system, to meet your customers where they are: online. You can also make use of table management software, to streamline the process of booking a table for customers and staff.
By using restaurant management software to improve profit margin, restaurant managers and owners can cut food costs, decrease overheads, and increase the sales of menu items, to enable a healthy profit at the end of the day, week, month, and year.