How to Improve Your Restaurant Profit Margin

Even though catering businesses range in size and business model, when it comes to determining the success of a restaurant business, financial metrics play an important role. They provide insight into how a company is doing financially and where it can improve.

One such metric is the restaurant profit margin, which is the percentage of revenue that ends up as profit. It’s easy to calculate and is a helpful measure of overall profitability in a restaurant operation. Your restaurant's profit margin is a measurement that both tells the story of your restaurant’s financial success and offers insights into where you can improve.

The average restaurant profit margin is around 2-6% but can vary widely across different types of restaurants and geographic locations. Understanding your restaurant’s profitability and how to increase it is key to long-term survival and sustainability.

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What is the Cost of Goods Sold

The cost of goods sold (COGS) is one of the most important restaurant metrics to measure and monitor in order to calculate the restaurant profit margins. It can help you make data-driven decisions about how to improve your restaurant, as well as your profitability and revenue.

COGS is the overall cost of all ingredients, garnishes, and condiments used to prepare menu items in your restaurant. This includes everything from meat and vegetables to sauces, spices, and condiments. This figure is easy to find on your restaurant’s POS system, and it’s one of the key metrics you’ll want to track on a regular basis.

How to calculate

Calculating the cost of goods sold (COGS) for restaurants involves determining the cost of the ingredients and supplies used to make menu items. Here are the steps to calculate COGS for a restaurant:

1. Determine the time period: Decide on the time period for which you want to calculate COGS. This could be a week, month, or year.
2. Determine the cost of all inventory purchased during the time period: This includes all ingredients, supplies, and packaging materials purchased during the time period.
3. Determine the cost of inventory at the beginning of the time period: This includes the cost of all inventory remaining from the previous time period.
4. Determine the cost of inventory at the end of the time period: This includes the cost of all inventory remaining at the end of the time period.
5. Calculate the total cost of goods purchased: This is the sum of the cost of all inventory purchased during the time period.
6. Calculate the cost of goods available for sale: This is the sum of the cost of inventory at the beginning of the time period and the cost of goods purchased during the time period.
7. Calculate the cost of goods sold: This is the cost of goods available for sale minus the cost of inventory at the end of the time period.
8. Calculate the COGS percentage: Divide the cost of goods sold by the total sales revenue during the time period to get the COGS percentage.

COGS = Beginning Inventory + Purchases during the period - Ending Inventory

Once you have calculated the COGS percentage, you can use it to analyze your restaurant's profitability and make adjustments to your menu prices and ingredient costs if needed.

How to improve

If you want to improve your restaurant’s COGS, you can do so by tracking your food ingredients and observing patterns in their prices. This will allow you to make adjustments before it’s too late and reduce your food costs.

Many factors influence the restaurant’s COGS including the size of your business, the type of products you serve, and the price point. You can use your COGS as a guide to making data-driven decisions about what you need to sell and how much to charge for each item.

In today’s high-cost, volatile environment with ongoing supply chain issues and acute labor struggles eating into bar and restaurant margins, a firm grasp of your COGS is vital. With a little bit of number-crunching and careful planning, you can optimize your COGS to increase profits and keep your restaurant running smoothly.

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What is the Net Profit

Net profit is a financial metric that represents the amount of profit a business earns after all expenses have been deducted from total revenue. It is also known as the bottom line, as it is the final figure that reflects the overall profitability of a business.

Why net profit important

Net profit is a crucial metric for business owners, investors, and lenders as it provides a clear picture of a business's financial health. It helps in evaluating the effectiveness of the business's operations and determining its ability to generate profits. A high net profit margin indicates that a business is managing its expenses efficiently, while a low net profit margin indicates that the business may be struggling with profitability.

Net profit is also important for forecasting future earnings and making financial decisions. It is used to calculate financial ratios such as the return on investment (ROI) and the earnings per share (EPS), which can be used to compare a business's financial performance to that of its competitors.

How to calculate

To calculate net profit, you need to subtract all the expenses of a business from its total revenue. Here are the steps to calculate net profit:

1. Calculate total revenue: Add up all the revenue that the business has earned during a specific period. This could include sales revenue, service revenue, and other sources of income.
2. Calculate total expenses: Add up all the expenses that the business has incurred during the same period. This could include the cost of goods sold, operating expenses, interest expenses, taxes, and other miscellaneous expenses.
3. Subtract total expenses from total revenue: Subtract the total expenses from the total revenue to get the net profit.
4. Analyze the net profit: Once you have calculated the net profit, analyze it to determine the overall profitability of the business. A high net profit indicates that the business is generating profits, while a low net profit indicates that the business may be struggling with profitability.

Net Profit = Total Revenue - Total Expenses

It is important to note that net profit is calculated for a specific period, such as a month, a quarter, or a year. To get an accurate picture of a business's financial health, it is important to calculate net profit regularly and compare it to previous periods to identify trends and make informed financial decisions.

The difference between net profit and profit margins

Net profit and profit margin are two different financial metrics that provide insight into a company's financial performance.

Net profit, also known as the bottom line, is the amount of profit that a company earns after all expenses have been deducted from its revenue. This includes operating expenses, taxes, interest, depreciation, and other costs. In other words, net profit is the profit a company has left over after it has paid all of its bills.

Profit margin, on the other hand, is a ratio that expresses a company's net profit as a percentage of its revenue. There are several types of profit margin ratios, including gross profit margin, operating profit margin, and net profit margin.

• Gross profit margin is the percentage of revenue that remains after subtracting the cost of goods sold (COGS) from revenue. Gross profit margins by restaurant type are different.
• Operating profit margin is the percentage of revenue that remains after subtracting operating expenses from revenue.
• Net profit margin is the percentage of revenue that remains after subtracting all expenses, including taxes and interest, from revenue.

The main difference between net profit and profit margins is that net profit is an absolute amount of profit, while profit margins are expressed as a percentage of revenue. In other words, net profit tells you how much profit a company has made in dollars, while profit margins tell you what percentage of revenue is left over after expenses are deducted.

Both net profit and profit margins are important metrics that can provide insight into a company's financial health and profitability. However, profit margins can be particularly useful for comparing the financial performance of companies of different sizes, as they provide a standardized way to measure profitability.

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What is Restaurant Profit Margins

Restaurant profit margins are the percentage of sales that an eatery keeps after covering all of its operating costs. It is a crucial metric that aids restaurant owners and managers in assessing the financial health of their company and informing choices that will increase profitability.

The profit margins of a restaurant are determined by deducting running costs and the total cost of goods sold (COGS) from the overall revenue. Operating expenditures are things like rent, utilities, salaries, and marketing costs, whereas COGS is the cost of goods sold, which includes the price of raw materials like food and drink. The net profit is the sum obtained, and the profit margin percentage is the outcome of dividing the net profit by the total revenue.

Depending on the sort of establishment, the location, and the operating expenses, restaurant profit margins can differ significantly. Fast food or quick service restaurants generally have lower profit margins than full service restaurants due to lower prices and higher operating expenses than fine dining establishments. Similarly to this, eateries in high-traffic areas may enjoy higher profit margins as a result of higher sales.

A restaurant's normal healthy profit margin ranges from 3% to 5%. The size, location, and operating expenses of the restaurant can all affect this, though. For the purpose of being able to pay their bills and make investments in expansion, the restaurant owner should make an effort to keep a consistent profit margin.

Why Restaurant Profit Margin Important

When it comes to a restaurant business, one of the most important aspects is the profit margin. A high-profit margin is the best indicator of whether or not your business will be profitable in the future.

A good profit margin is a key indicator of a healthy restaurant. It tells management teams and investors whether a business is growing at a sustainable rate. To be specific, a good profit margin means that you have enough money left over after paying all of your expenses to keep your restaurant open. In addition to that, a higher profit margin indicates that your business is growing in a healthy way.

It is important to measure a restaurant’s profit margin so that you can spot any problems and take action on them before they become bigger issues. This helps you avoid wasting time, money, and resources on unnecessary things that could be fixed quickly without affecting your overall profitability.

It also helps them gauge whether they need to make changes to their financial endeavors in order to increase profits. For example, if you’re making a lot of money but are spending a lot of it on operating expenses, then you may want to make some adjustments to your business model or menu.

Ultimately, a good profit margin gives your restaurant an idea of where to focus its energy and resources for future growth. The higher your profit margin, the more money you can spend to grow your business. You can use your net profit to pay off debt, save for future expenses, invest in new projects or products, or distribute it to investors.

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How to Calculate Restaurant Profit Margin

When it comes to running a business, a healthy profit margin is a critical part of ensuring your restaurant’s long-term health. You can’t survive in this industry on thin margins, which is why it’s crucial to keep an eye on your restaurant expenses and how they affect your profitability.

In order to determine a restaurant’s profit margin, you need to calculate its cost of goods sold (COGS) and other operating expenses. These include labor expenses, rent, utilities, supplies, equipment, technology, and any other expenses your restaurant incurs.

To calculate a restaurant's profit margin, you need to follow these steps:

1. Determine the restaurant's revenue: This includes all sales from food, drinks, and any other services provided by the restaurant.
2. Calculate the Cost of Goods Sold (COGS): COGS includes all direct costs associated with producing and serving food and beverages. This includes ingredients, packaging, and any other costs related to the production of the food.
3. Calculate the Gross Profit: Subtract the COGS from the revenue to calculate the gross profit.

Gross Profit = Revenue - COGS

1. Calculate the operating expenses: This includes rent, utilities, salaries, marketing expenses, and any other expenses associated with running the restaurant.
2. Calculate the net profit: Subtract the operating expenses from the gross profit to obtain the net profit.

Net Profit = Gross Profit - Operating Expenses

1. Calculate the profit margin: Divide the net profit by the revenue and multiply the result by 100 to get the profit margin percentage.

Profit Margin = (Net Profit / Revenue) x 100

For example, if a restaurant had revenue of $100,000, COGS of $35,000, and operating expenses of $50,000, the calculation would look like this:

Gross Profit = $100,000 - $35,000 = $65,000

Net Profit = $65,000 - $50,000 = $15,000

Profit Margin = ($15,000 / $100,000) x 100 = 15%

This means that the restaurant's profit margin is 15%, which is the percentage of revenue that remains as profit after all expenses have been deducted.

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How to Improve Restaurant Profit Margins in 6 Ways

Normally, increasing profitability refers to improve your restaurant profit margin. While restaurant profit margins are often low, there are ways to improve them. A restaurateur can increase sales, reduce costs and minimize food waste to boost their profit margins. The following is the guide to improve your restaurant profit margin.

1. Increase sales volume

Increasing sales is one of the most obvious and effective ways to improve a restaurant’s profits. Whether you’re implementing a loyalty program, offering tableside ordering, or starting a referral program, these tactics can help you build a loyal customer base and boost your bottom line.

Another effective way to boost your profits and gain higher sales volume is to increase your customer retention. Having a high turnover means you have to constantly train new employees and can leave customers with a less-than-favorable experience, which isn’t conducive to repeat business.

2. Reduce labor costs

Reducing the cost of labor is another strategy that can increase a restaurant’s profitability. Keeping your labor expense below 30% of your revenue is ideal.

Restaurant managers use sales forecasting software like 5-Out to reduce labor costs by predicting the upcoming sales volume for a given day or time period. By having an accurate estimate of expected sales, managers can schedule the right number of employees to work at any given time, reducing the need for unnecessary labor expenses.

5-Out uses internal data such as point of sales, labor scheduling, reservations, and events as well as external sources such as weather patterns, traffic, local events, and other factors to predict future sales. By analyzing this data, the software can provide accurate estimates of upcoming sales, enabling restaurant managers to make informed decisions about scheduling staff and managing labor costs.

By using sales forecasting software to optimize labor costs, restaurant managers can improve profitability and reduce waste. They can ensure that they have enough staff to provide excellent customer service without overstaffing and incurring unnecessary labor expenses. This approach can also help managers to identify peak sales periods and adjust staffing levels accordingly, allowing them to improve efficiency, reduce wait times, and ultimately improve the overall customer experience and restaurant profit margin.

Request a demo for sales forecasting in order to improve your restaurant profit margin!

3. Reduce overhead expenses

Overhead costs are the other big cost of running a restaurant, covering rent, insurance, supplies, and utilities. Keeping overhead expenses under 30% of your revenue is also essential.

To lower your overhead costs, make sure you’re shopping around for vendors. Try to switch to a supplier who offers the same products in bulk, or try negotiating with suppliers for better prices.

4. Improve inventory management

You can also decrease your labor expenses by reducing wastage and improving your inventory management practices. An average of 4-10% of food is never eaten, which can result in waste and a significant drain on your profit margins.

Sales forecasting software like 5-Out is a strong tool that can help restaurants handle their inventories more effectively and boost their profit margins as well. Restaurant managers can control their inventory levels and buying choices to make sure they have the proper amount of stock on hand to meet demand without spending money on excess inventory by forecasting sales volumes and trends.

5. Menu engineering

Menu engineering is a low-cost strategy that can increase your restaurant’s profitability by driving sales of items with higher profit margins. Using your POS system to determine which items are the most profitable and updating your menu layout to highlight those dishes can dramatically increase sales.

6. Direct reservation and ordering

Using direct reservations and ordering software instead of third-party tech tools can save you up to 40% commission on each order or booking, and help keep your restaurant in business. Send your diners who use third-party reservation or delivery platforms a link to your direct reservations platform so they can make the switch to a more cost-effective way to book a table or place an order.

Restaurant owners and managers can adopt a number of strategies to increase their profit margins, including decreasing food waste, negotiating better supplier contracts, optimizing menu pricing, and increasing organizational efficiencies. Restaurant owners can make wise choices to boost their company's financial performance and long-term success by carefully monitoring their profit margins.