A restaurant is a business like any other, and it needs to make money to survive. This is why your profit margin is so significant. Your business may have excellent turnover and revenue, but you must consider the context of your restaurant's costs to truly understand your financial performance.
If your profit margins are failing to meet your expectations or needs, you need to take steps to improve them. Our complete guide has all the information you need about profit margins and what you can do to increase them in your venue.
Read on and get started on the pathway to a higher level of profitability.
What is a restaurant's profit margin?
A profit margin is the amount of money a business makes after its expenses have been deducted from revenue. It is usually expressed as a percentage of total revenue.
There are several different kinds of profit margins. The most holistic metric is your net profit margin, which takes into account all expenses. You can calculate net profit margin with the following steps:
- Find your total revenue over a given time period (such as a year).
- Calculate your total expenses over that same time period. Remember to include everything, cost of goods sold (COGS), operating expenses, taxes and anything else that takes money away from your business.
- Divide the resulting figure by your total revenue.
- Multiply the resulting figure by 100. This percentage represents your net profit margin.
Another form of profit margin is gross profit margin. To calculate your gross profit margin, rather than subtracting all expenses from revenue, you simply subtract your cost of goods sold. This can be a helpful figure when it comes to finding out how your food and beverage costs are eating into your profit margin.
The third major type of profit margin is the operating profit margin. When calculating your operating profit margin, you include COGS as well as other types of operating expenses including labour, rent and utilities. It excludes more granular costs such as taxes and interest expenses.
Why is a restaurant's profit margin important?
Your profit margins indicate how much return on investment the financial stakeholders of your business are receiving. Additionally, profitability is important when seeking further financial investment for your business.
The profit margin of your restaurant also informs future decision-making. Once calculated, you will understand which expenses in your business are simply too high. If your COGS is too expensive, you should find ways to purchase food and drinks more cheaply through methods such as wholesale buying.
You might find that your operating costs such as labour are too high. If so, you may need to consider transitioning to a different form of rostering system, such as a rotating roster.
As an all-important financial metric that also has significant operational implications, profit margin is a crucial key performance indicator for restaurants.
What profit margin should a restaurant make?
Hospitality is notorious for offering very slim profit margins compared to other industries. The average restaurant profit margin is typically cited at around 2%-6%.
Average profit margins for restaurants can vary wildly depending on the type of venue in question. Upscale full-service restaurants might experience lower profit margins. Meanwhile, a food truck with very limited overhead expenses should be able to enjoy a higher level of profit.
Seek the advice of a specialised financial advisor for more information on the exact financial health of your restaurant. They will be able to go over all of your financial records and let you know exactly what kind of profit margin you should be aiming for.
How to increase restaurant profit margin
Is your restaurant’s profit margin falling short of where it needs to be? Thankfully, there are several steps you can take to meet the specific goal of increasing your restaurant’s levels of profitability.
Increasing sales is the eternal quest of any business owner, and it is often a great starting point for increasing your restaurant's profit margin.
Keep in mind that increasing sales is not a fix-all strategy. It is most effective if operating expenses are the primary culprit eating into your profit margin. If COGS is the main issue, simply boosting sales will be less effective, as selling more dishes will also drive up your food and beverage costs.
Optimise your menu
Making alterations to your menu can have a significant impact when it comes to improving restaurant profit margins. Consider cutting out dishes that are full of expensive ingredients. Replace them with dishes that are comparatively cheaper to make, but have a high perceived value for customers.
High-profit margin dishes include:
- Fries, especially loaded fries
Your team of chefs might be disappointed to see more complex dishes removed from the menu. You can present this process as a challenge to jazz up these more profitable dishes. This will help to keep your team engaged and your customers satisfied.
Minimise food waste
Food waste is the bane of hospitality venues. Not only is it a major issue when it comes to sustainability, it also plays a major role in eating into your profit margin. Chances are your venue could be doing more to minimise food waste and therefore cut down on food costs.
Strong practices for monitoring food wastage is key here. Use a logbook to track all food wastage, from customer leftovers to expired inventory. This will help you identify the key problem areas to target.
You may notice that there is a lot of wasted food being produced by customer plates. This indicates you need to reduce your portion sizes. If food is being put in the bin straight out of inventory, look into your storage procedures. You may also need to ensure food is properly used by utilising First In, First Out (FIFO) practices.
These tips are just the tip of the iceberg when it comes to minimising wastage of food. For more information, check out our complete guide to reducing food waste in your restaurant.
Scrutinise your rosters
Breaking out your expenses into separate areas will give you a strong sense of where you should focus on cutting costs. You may come to find that your labour costs are completely unsustainable. In this case, it is a great idea to investigate how your rosters may be improved.
Overstaffing your restaurant with superfluous team members can be catastrophic for your venue's profit margins. One alteration you might make is to transition to using a rotating roster.
This offers more flexible working conditions when compared to a fixed roster, and will help you to create more optimised shift patterns. They can be easily adapted for varied business conditions, making it easier to ensure you have an appropriate number of staff on at all times.
Implementing superior staff training programs can also be useful for cutting down on labour costs. Better-trained staff will allow you to run your venue with fewer team members on a given shift, or operate your venue more efficiently, improving turnover.
More highly-trained staff can also secure more lucrative upsells and cross-sells and provide better general customer service to your diners.
Staff are one of your most crucial assets. Staff who are highly trained, capable of delivering great service and operate your venue efficiently lead to an all-around better experience for your diners.
In the restaurant industry, happy customers are returning customers. Best of all, returning customers tend to be bigger spenders.
Limit utility costs
With economic conditions worsening, one of the most effective ways to cut down on overhead expenses is by limiting your utility costs. Hospitality venues can be major drains when it comes to energy and water usage. Cutting down on the use of utilities in your restaurant can boost your profit margin and help your business become more sustainable.
Here are a few tips to cap utility costs in your hospitality venue:
- Use efficient equipment: Your local jurisdiction should have systems or ratings in place marking the energy and water efficiency of appliances. Keep these ratings in mind when purchasing appliances.
- Lighting: Consider investing in more efficient lighting and ensure the use of lights is minimised wherever possible. Make use of natural lighting to save on costs here.
- Thermal zones: Cooking is an art of temperature. Setting up various thermal zones in your kitchen means that appliances can expend less energy reaching desired temperatures. It can also speed up workflows and the overall efficiency of your kitchen.
- Maintenance: Take steps to ensure equipment like fridges and ovens are still functioning optimally and aren't expending unnecessary energy to operate.
Get a better deal
From rent to utilities to foodstuff, find any area you can either negotiate your costs down or find a different supplier and pay less.
Use the same tactics you would while shopping for something in your personal life. Perform extensive research, ask around the industry and don't rest until you have found the best possible deal.
Calculating your profit margins will help you realise which areas you are spending too much money on. Make them your key focus areas for negotiations and bargain-hunting.
Increase restaurant profit margin with ResDiary
Restaurant owners and managers are always on the lookout for ways to improve their restaurant's revenue and profit margins. These goals can feel incredibly daunting. Fortunately, ResDiary is here to help.
ResDiary is a comprehensive table management software that offers so much more. We offer over 60 integrations that can boost your operations across a wide breadth of your business. This includes superior data collection for bookings and inventory management.
We can also help you boost sales with promotional solutions, loyalty programs and more. Book a demo today and find out how ResDiary can help your restaurant run more smoothly and profitably than ever.