What is your Profit Margin?
To put it simply, profit is what’s left after you subtract all of your expenses from your gross revenue. There is gross profit margin and your net profit margin.
Gross Profit Margin
The gross profit margin refers to the revenue remaining after taking into consideration all the costs involved in running your business, divided by the overall revenue. It serves as a reflection of how well your restaurant generates sustainable revenue. The higher the number, the more efficient you are in generating profit for every dollar of cost involved.
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue
Net Profit Margin
The net profit margin is the percentage of revenue left after all expenses have been deducted from sales. A high net profit margin indicates that a restaurant is pricing its menu correctly and is exercising good cost control.
Net Profit Margin = [(Revenue – Total Expenses) / Revenue] X 100%
Average Profit Margin for Restaurant Industry
Most restaurants have a profit margin between 3% and 6%, and sometimes up to 10%. The profit margin completely depends on your type of restaurant and its offerings. Here’s an overview:
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Restaurant Type
Average Profit Margin Percentage
Full-Service Restaurants
3-5%
Fast-Casual Restaurants
6-9%
Catering Services
7-8%
4 Ways to Protect Restaurant Profits
Before thinking about increasing restaurant profit margins, you need to know how to protect your current profits.
1. Understand and Monitor your Metrics
Building knowledge about your restaurant profits is the best protective measure there is. Here’s what you need to know:
- Be aware of the total cost of inventory used to create your menu so that you can monitor how much you make per plate/glass.
- Understand wages for salaried and hourly employees, as well as payroll taxes and employee benefits to protect your profits.
- Know where your money is going. Overhead involves all operating expenses like supplies, marketing, repairs, rent and utilities.
2. Keep Labour Costs Below 30%
If your labour costs are consuming more than 30% of your outgoing cash, your profits are in trouble. Keep labour costs between 20% and 30%. You can cut labour costs by:
- Reducing staff turnover. The average restaurant loses almost $150,000 annually to staff turnover. Our tip, hire intentionally and carefully. Keep good employees happy with rewards & appreciation and build loyalty through regular communication.
- Reducing employee costs. Monitor your staff’s hours to ensure they’re only paid when working. If you are paying too much for staff, consider reducing your staff and keeping an “on call” staff for when things get busy.
3. Track Inventory:
Food costs are one of big ticket items in a restaurant. Accurate restaurant inventory management shows the flow of individual items, highlighting the losses to address.
Accurate restaurant inventory management shows the flow of individual items, highlighting the losses to address.
4. Monitor your Average Bill:
Even a popular restaurant can average low profits if the average customer’s spend is low. Find upselling methods that suit your brand and train your employees.
How to Increase Profit Margin
So you’ve mastered how to protect your current restaurant profits. Now, you’re ready to make big moves and increase your profits.
Improve your online presence
Be active on social media. Running ads, posting, and interacting with your online audience will generate huge interest in your restaurant
Improve your restaurant's online food ordering and delivery options to reach a larger audience an
Upsell your side dishes, drinks, desserts and more
- Encourage your staff to sell additional items or “add-ons” to increase the price of an item. For example adding cheese or noodles to a dish. They can even suggest other drinks or desserts to complement their mains.
Invest in technology
- Invest in Point Of Sale (POS) systems that help predict and optimise sales
- Use smart scheduling to manage staff schedules to offload admin costs
Focus on food
- Launch specials regularly. As these are limited edition dishes, you can charge more for it.
- Modify recipes to minimize food costs
- Look for better deals from local farmers (added bonus: customers love locally sourced foods)
- Negotiate with suppliers for lower prices
- Reduce food loss and waste by altering portion size and storage methods
You may need to dig deep to find out how to increase your restaurant profits. Imagine surpassing 10% restaurant profit margin! We hope these guidelines will help increase your profit margin and you’ll get to enjoy its success.
