Working in the restaurant industry can be so fulfilling. Your passion drives you, and nothing’s better than seeing those smiles on guests’ faces when they’re enjoying your delicious menu items with the ones they love. A thank you from a guest brings immediate satisfaction. That’s what makes the job all worth it, but at the end of the day, there are some realities to face.
While delighting customers is key, when it’s all said and done, you need to think about profit margins—because if your restaurant doesn’t turn a profit, it doesn’t survive. In this post, we’ll talk about the profit margins of restaurants, how to calculate them, and where yours should be.
What is a restaurant profit margin?
To put it simply, a restaurant’s profit margin is the difference between the money a restaurant earns and the money it spends. The higher your restaurant profit margins, the better your profitability. When restaurants first start out, it’s normal for profits to be lower, but as they gain popularity and sell more food, profits should steadily grow before generally stabilizing.
It should be understood that the profit margin of restaurants is not high. Like most of the service industry, the food and beverage industry is highly competitive making it difficult to achieve or maintain high-profit rates. Making good food and creating an enjoyable atmosphere to eat it in is just part of the equation for success. Restaurant management needs to be viewed with equal concern through the lens of finance.
What is the average restaurant profit margin?
The restaurant industry is one of thin margins. The average restaurant profit margin falls somewhere from 3%-6%. The highest profit margins can be upwards of 15%, but that’s not something you can count on, particularly if your restaurant is just getting off the ground, so it’s important to remember that the average restaurant profit margin is just that: an average. You should also remember that the average restaurant profit margin is an industry average. Your profit margin can vary from year to year.
How do you calculate a restaurant profit margin?
While calculating restaurant profit margin is easy in theory, it’s a bit more complicated in practice. Again, the general concept is to determine how much money you earn and subtract from that how much money you spend. There’s obviously a lot that goes into those two numbers, so let’s break it down a bit more.
To calculate your restaurant’s profit margin, you first need to understand the difference between gross profit and net profit. And even before that, you’ll need to be familiar with the main types of restaurant expenses. Here’s what you should know.
What are the big three restaurant expenses?
- Cost of Goods Sold (COGS)
- Overhead expenses
- Labor expenses
Cost of Goods Sold (COGS)
When you sell a hamburger, the costs of goods sold would include the price you paid for the bun, the meat, all the toppings, and any packaging. In other words, how much the food you sold actually costs you. This cost should be much lower than the sale price of the menu item because if it’s not, it’ll be difficult to turn a profit. That said, there are menu engineering strategies that can help you maximize profits.
Overhead expenses are often thought of as the expenses that “keep the roof over your head.” Think utilities and rent. Often these costs are more fixed than others. For instance, you can generally plan on the rent being consistent each month, while the cost of goods sold could fluctuate monthly depending on seasonality and general ebb and flow.
To keep your restaurant running, you need to hire employees—chefs to cook, servers to care for customers, restaurant hosts to greet, cashiers to handle payments, and even bussers to keep tables neat and tidy. When you calculate labor costs, you need to take into account everything from salaries and hourly wages, to insurance and benefits. Be sure you’re accounting for each employee and their hours spent working.
How do you calculate your restaurant’s gross profit margin?
To calculate gross profit margin, you determine the money you have left after you deduct COGS. Essentially, you take the price of a menu item and subtract the cost of the actual goods to make that menu item, and then you convert it into a percentage.
Here is the formula for calculating your restaurant’s gross profit margin:
[Selling Price – CoGS] ÷ Selling Price x 100 = Gross Profit Margin
Here’s an example.
If the selling price of a dish is $18 on the menu and the ingredients (COGS) were $9, the calculation would look like this.
[18-9] ÷ 18 x 100 = 50%
How do you calculate your restaurant’s net profit margin?
The net profit margin of your restaurant is a better barometer for success because it takes more numbers into account. Instead of just the cost of goods sold, it also factors in all other expenses including the rent or mortgage, payroll, administrative and insurance costs, utilities, and any other costs associated with running your business.
Here is the formula for calculating your restaurant’s net profit margin:
[Total Revenue – Total Expenses] ÷ Revenue x 100 = Net Profit Margin
Here is an example.
If total revenue is $120,000, and total expenses are $90,000, the calculation would look like this.
[120,000-90,000] ÷ 120,000 x 100 = 25%
So, to sum up, a simplified explanation of net income vs. gross income is that net income is gross income minus the various costs of doing business. Both are highly useful numbers, but net income offers more insights into the costs of running a restaurant.
What is considered a good profit margin in the restaurant industry?
What is considered a good profit margin depends on the type of restaurant you run, the geographic area you’re in, and many other factors. As was mentioned earlier, the averages generally run between 3 and 6%, but some restaurants can be in the high teens to mid-twenties.
You should also remember that if you’re a fast casual or a fast food restaurant, you can expect much different margins than a full-service restaurant or a catering service. Full-service restaurants average more in the typical 3-5% range, while fast casual can be in the 6-9% category, and catering services can be upwards of 7%.
Why are catering margins higher? Fewer expenses since they often require a smaller number of staff members and only kitchen space, since the events space is rented by the customer.
While full-service restaurants may have lower margins, they might make up for them with higher sales volume and higher priced menu items. A 3% net profit margin on $500,000 would obviously be substantially higher than that same margin on $100,000.
How do you improve your restaurant profit margins?
There are two basic ways to improve restaurant profit margins.
- Increase sales volume in relation to expenses, or
- Decrease expenses in relation to sales volume
In short, you either need to sell more items while keeping expenses the same, or sell the same number of items while cutting expenses. This could entail running a marketing LTO, optimizing your scheduling, or keeping a closer eye on costs from your suppliers.
What tools are helpful for improving your restaurant’s profit margins?
How are your restaurant margins? The concept of improving your profit margins isn’t too hard to grasp. But actually boosting margins? That’s a lot more difficult. The good news is that with the right software and tools on your side, it’s much easier to improve your restaurant margins. So what do you need? Here’s a helpful list.
Restaurant Reporting and Analytics Software
Gathering and interpreting the data is critical. Without real numbers, it’s impossible to know where you can improve. Our restaurant reporting and analytics software give you real-time sales data and a detailed view of profitability and admin costs. It will even give you featured reports including a product margin analysis, a daily store summary, and a geographical analysis. Take a look at our ROI calculator to determine if SynergySuite is right for your restaurants.
Restaurant Inventory Management Software
Reducing waste and cutting down on expenses will help you improve your profit margins and cash flow. Tracking your inventory is key here. With our restaurant inventory management software, it’s easy to ensure you have the right levels of food and other supplies in stock so you don’t run short while also avoiding waste.
Other Restaurant Software
In addition to reporting and inventory management software, we also offer solutions for cash management, purchasing, food safety, labor scheduling, and even HR.
With the average restaurant profit margin being somewhere between 3% and 6% your restaurant can benefit from any increase in efficiency or reduced expenses. If you’re looking to improve your restaurant profit margins, let’s connect. With our software, we can upgrade your restaurant infrastructure and improve your bottom line. From there, we’ll work together to grow your restaurant business. We’re always here to help, so don’t hesitate to reach out.