As anyone who runs a restaurant knows, profit margins are tight and tricky to control. You might be making a roaring trade, but if your restaurant profit margin is too slim, all that hard work hardly bears any fruit.
So many restaurant owners focus on sales volumes and turnovers but often neglect optimizing their margins. This is a big mistake, as your profit margins ultimately decide your business's success.
Here’s our guide to help you achieve the highest profit margins for your restaurant.
Understanding Profit Margins
To properly understand the financial health of your restaurant, you need to have a solid knowledge of how your profit margins work.
Restaurant profit margins reflect the percentage of revenue that remains after all costs are accounted for. Essentially, restaurant profit margins show how efficiently you convert sales into actual profit.
It’s easy to get excited by high turnovers and sales, but this doesn’t necessarily mean a restaurant’s financial health is in a good place. Instead, a profitable restaurant needs tight control over its gross and net margins.
Gross profit margin refers to the percentage of revenue left over after subtracting the cost of goods sold, which includes the direct food costs and materials. This gives insight into how well a restaurant is managing its production costs.
Net profit margin, on the other hand, provides a more detailed picture of a restaurant’s financial performance. It takes into account all operating expenses, including rent, utilities, payroll, and other overhead costs.
Restaurant owners need to carefully compare net income to total revenue to understand exactly how much of each dollar earned goes into their pocket. The restaurant industry is famous for slim margins, so keeping a close eye on this is essential.
Monitoring both margins is important for different kinds of insights. Your gross margin helps you assess operational efficiency, while your net margin shows the overall profitability and sustainability of the business.
The Average Profit Margin for Different Restaurant Types
First of all, there is no average restaurant profit margin. Restaurant profit margins can vary significantly based on the type of operation and the specific restaurant.
Full-service restaurants, which include establishments with table service and more involved dining experiences, tend to have the lowest profit margins. An average profit margin is typically around 3% to 5%.
This is because full-service restaurants have higher labor and operational costs. However, these restaurants can operate at a high volume, so slim margins are countered by high sales.
Fast casual restaurants, known for quicker service and counter ordering, generally have higher restaurant profit margins, averaging between 6% and 9%. This is due to lower labor costs and higher customer turnover. Quick-service restaurants also tend to use cheaper ingredients.
Catering services can enjoy some of the best profit margins, typically around 7% to 8%. This is because they generally have lower overhead costs compared to a full-service restaurant that operates all day.
Food trucks also have a better profit margin than a typical restaurant operation, as operational costs like staff or rent are a lot lower. However, sales opportunities are lower.
While understanding the average restaurant profit margin is important, it’s often more important to know your ideal food cost percentage. This is the percentage of profit you make compared to your direct food costs.
Most restaurant owners try to hit a 28% – 35% food cost percentage. Beyond this, your specific profit margins come down to your unique restaurant and how it operates.
If you know that your operational costs are higher, then you’ll want to try to improve your food cost percentage. Most restaurants increase profit margins this way by simply increasing menu prices.
Understanding averages can be useful for setting realistic financial goals based on your restaurant’s type and service model. But remember, the restaurant industry is diverse, and average profit margins are never set in stone.
How to Calculate Your Restaurant's Profit Margin
Here’s a basic restaurant profit margin calculator formula for measuring and monitoring your profits.
Calculating Gross Profit Margin
To calculate your restaurant’s gross profit margin, start with the gross profit, which is the difference between your total revenue and the cost of goods sold (COGS).
Use this formula to figure it out:
Gross Profit Margin = (Gross Profit ÷Total Revenue) × 100
For example, if your total revenue is $100,000 and your COGS is $30,000, your gross profit is $70,000. Then, divide the gross profit by total revenue and multiply by 100 to get the percentage.
In this case:
Gross Profit Margin = (70,000 ÷100,000) × 100 = 70 %
Calculating Net Profit Margin
To calculate your net profit margin, you need to know your net profit, which is your gross profit minus all operating expenses.
Use this formula to figure it out:
Net Profit Margin = (Net Profit ÷ Total Revenue) × 100
So, if your gross profit is $70,000 and your operating expenses total $60,000, your net profit is $10,000. Then, divide the net profit by total revenue and multiply by 100. For this example:
Net Profit Margin = (10,000 ÷ 100,000) × 100 = 10%
It’s important to use these calculations to help you understand how effectively your restaurant is turning sales into profit, both before and after accounting for operating expenses.
As you can see, restaurant profit margins are slim, and there’s an enormous difference between a $100,000 turnover and a $10,000 net profit. Plus, this is before considering taxes.
So, being able to maximize profit margins should be an essential focus of any restaurant owner or manager.
How to Maximize Your Profit Margins
Ultimately, there are two ways to improve your restaurant's profit margin:
- Increase your sales volume (turnover) relative to your expenses
- Reduce your operating costs and expenses relative to your sales
Most restaurants achieve this by increasing their prices or cutting costs by laying off staff, reducing food costs, or making portions smaller. However, this is also a fast way to reduce the standard of your restaurant and develop a bad reputation.
So, to help you improve your restaurant profit margin without making unnecessary sacrifices, here are a few strategies to follow.
Monitor Your Metrics
To maximize your profit margins, start by closely monitoring your restaurant's key metrics.
Track data on sales, expenses, and customer traffic to identify trends and areas for improvement. The more granular you are with this data, the better.
Regularly review your menu item sales, how you use utilities, and other operational metrics. Compare these metrics over different times of the day and different days of the week.
Understanding this information helps you make more informed decisions about where to cut costs or adjust pricing. Following these metrics is important to prevent expenses from spiraling out of control and to make quick changes that boost your profitability.
Implement Smart Scheduling
Effective staff scheduling can make a big difference to your profit margins.
Analyze your sales patterns to understand busy and slow periods, and adjust your staff schedules to match these patterns – helping you avoid overstaffing and under-staffing.
Efficient scheduling ensures you have enough staff during peak times while minimizing labor costs during quieter periods. This is important for striking a balance in service quality with cost control, ultimately improving your bottom line.
Take Advantage of Technology
Using the right technology is a great way to improve your restaurant’s efficiency and profitability. The right tech systems not only save time but also provide valuable insights into your restaurant’s performance.
A robust point of sale (POS) system can streamline order processing, track sales, and manage inventory. The more insights this system offers, the more room you have to optimize your profit margins.
Using restaurant-specific software for accounting and inventory management helps you keep costs in check more easily to optimize your operations. As there are so many costs involved in running a restaurant, you’ll need a detailed accounting system to manage every little expense accurately.
Using online ordering systems and mobile apps can boost sales and customer convenience while taking the pressure off your staff.
You’ll also want to have a powerful venue management system to provide more control over all elements of your venue. This is especially important for restaurants that host events. Check out Perfect Venue to see how it can help you optimize your operations.
Maintain a Strong Online Presence
Building a strong online presence through smart restaurant marketing is important for attracting and retaining customers.
While this won’t necessarily change your profit margins, it will help you keep a steady flow of customers coming through your doors, which is important for keeping your margins consistent.
Reduce Food Waste
Minimizing food waste can have a major impact on your profit margins.
Start by ordering only what you need and using inventory efficiently. Again, reviewing your restaurant’s historical data is necessary to get this right.
You’ll also need to strategically plan your menu to make use of all ingredients and avoid overstocking. Having flexibility around your menu is important here.
Properly store ingredients to extend their shelf life and reduce spoilage. Implementing waste reduction practices not only cuts costs but also supports your sustainability efforts.
Address Employee Turnover
High employee turnover can be expensive for any restaurant, so focus on retaining your staff.
Invest in training, offer competitive wages, and create a positive work environment to reduce turnover rates. Engaged and satisfied employees are more likely to stay, which helps avoid the high costs associated with hiring and training new staff.
Reducing turnover also improves operational efficiency, which lowers your overall expenses.
Prepare for Fluctuations in Sales
Most restaurants experience fluctuations in customer traffic, whether seasonal or customers drop near the end of the month. To avoid this, you’ll want to implement strategies to maintain steady sales throughout the year.
Develop loyalty programs, offer special promotions, and create seasonal menus to attract customers during slower periods. In some cases, you might lower margins by offering specials, but consistent sales on low margins are often better than fluctuating sales on higher margins.
Key Takeaways
How much revenue your restaurant generates doesn't really matter if your profit margins are off. By optimizing your margins, you’ll be able to run your restaurant business smarter and, ultimately, walk away each month with more cash in your pocket.
If your restaurant holds events, an essential tactic for boosting margins is using the right event management platform. Try Perfect Venue to see how it can transform your business’s profitability.
