How to Calculate and Maximize Your Restaurant Profit Margin

Being in the restaurant industry is not without challenges, one of which is making enough money to keep your doors open. This is why your restaurant profit margin is one of the defining factors of the success of your business.

Profit is what’s left over after you subtract your expenses from your gross revenue. And you can’t run a good business on thin profits. Healthy margins are good for yourself, your employees and for your customers.

So, in this article, we’re going to look at what profit margin you should aim for, how to calculate it and the different ways to maximize the final figure.

Ready? Let’s go.

What is the average profit margin for restaurants?

The average profit margin for restaurants falls between 3 to 5% but can range anywhere from 0 to 15%.

This can be broken down into the average profit margin per different restaurant type:

Fast-food restaurant – 6 to 9%
Full-service restaurant – 3 to 5%
Catering service – 7 to 8%
Food trucks – 6 to 9%

When it comes to your own profit margin, aim for a number greater than 5%. With this margin, you’ll know that your restaurant is performing better than the industry average.

How to calculate your restaurant profit margin

First things first – there are two types of profit margin, gross and net:

Gross profit

Gross profit is what remains after you’ve deducted the cost of goods sold. This includes things like food and drink costs. You can use the gross profit margin to assess your restaurant’s financial health and overall business model.

Net profit

Net profit is what you’re left with as profit after deducting all the costs associated with running your restaurant from the gross revenue. This includes both cost of goods sold and your operating expenses like salaries, utilities, insurance, and taxes. The net profit margin shows the actual profitability of a restaurant and this is what we’ll use for our profit margin calculation.

To calculate your net profit margin, start by subtracting all expenses from your gross revenue for a given period, usually one year. Then divide this number by the total revenue and multiply it by 100. This final number is your profit margin percentage. Here’s a summary:

Gross revenue – total expenses = profit
Profit / gross revenue = profit margin
Profit margin X 100 = your restaurant profit margin percentage

How to increase your restaurant profit margin

Now that we covered how to calculate your restaurant profit margin and what to aim for, it’s time to look at the different ways you can influence the final figure.

1. Understand the Metrics

The hospitality industry, like any other, has key metrics that factor into the success or failure of your restaurant. Continually checking your metrics is a good way to stay on top of the health of your business when it comes to expenses and performance. Here are some of the metrics that can help you evaluate where to make changes and see more profit:

Cost of goods sold (COGS)

Your COGS metric lets you know how much it costs to make and sell each of the food and drink items you have on your menu. It’s also considered to be your total food inventory cost during a certain period of time. As one of the biggest expenses for any restaurant, this is one metric you’ll want to regularly calculate.

Overhead cost

Your overhead consists of those fixed costs that typically don’t change from one month to the next. When you calculate this rate, you know exactly how much you’re spending daily, weekly, monthly, and yearly.

Prime cost

Prime cost is the total of your food and labor costs and makes up a large amount of your controllable expenses. This figure usually fluctuates as your sales increase or decrease and excludes overhead costs.

2. Increase your restaurant revenue

To improve your restaurant profit margin, you’ll need to influence your revenue and/or expenses. Although there are some factors you don’t have firm control over, such as labor, COGS or overhead, there are some ways you can increase sales and efficiency.

Here are just some of the things you can do to boost your revenue to increase your profit margin:

Make the most of technology

Make use of technology wherever you can. While your POS system is good for accepting customer payments, you should be using it for much more than that. Make optimal use of your POS to keep track of employee performance, manage inventory, and get business insights.

Use smart scheduling

Smart scheduling software can help you manage staff schedules. There is a variety of different scheduling software available, all with the key function of letting you build a schedule and push it out to all your employees. You’ll be able to control and reduce labor costs as well as make sure that your business is adequately staffed during your peak times to ensure that you’re providing the best in customer service.

Be visible online

People are using their smartphones more than ever and that includes searching online for places to eat. This is quickly followed by reviews of their dining experience, bringing even more online exposure to restaurants. You can’t afford to be left behind your competition. So, if you’re not already online, it’s time to become as visible as possible. Here’s how:

Update your website
Even if it’s basic, you need a website for customers to find you when they’re doing a search for local restaurants. Key items that should be on your website are contact information, directions to get there, and a food and beverage menu.

Use social media
Setting up and managing popular social media accounts is going to give you even more exposure. Customers are quick and eager to post messages and photos about their dining experience on Facebook, Instagram, and Twitter. Not only does social media engage customers, it also holds you accountable for always striving to provide great quality and consistency in your food and customer service.

Online ordering and delivery
Diners today are looking for convenience. In fact, statistics show that 60% of U.S. consumers are ordering takeout or delivery at least once a week. By providing online ordering for delivery and/or takeout you’re offering your customers another way to dine with you

Optimize your menu

Items on the menu should include those that are profitable and those that are high sellers with your customers. So make time to regularly review your menu and replace those items that aren’t selling with new items, testing them out to see how they do in the first month.

In addition, look at those items that cost a lot to make. Are they selling well enough to bring in a profit or are they dragging down your restaurant profit margin?

More creative ways to drive customers and revenue

Coming up with new ways to generate revenue is essential to your success. Here are some creative ways to bring in more customers and increase your sales:

Provide loyalty programs to keep customers coming back more often.
Provide free WiFi to stay competitive, encourage customers to stay longer, and bring in tourists.
Offer Happy Hour to bring in revenue during what can typically be a slow period.
Offer an appetizer and dessert cart to encourage customers to spend more.
Launch new food items and drinks regularly to keep your menu interesting.
Improve and update your wine menu to stay current with the latest trends.
Host events in your restaurant, such as weddings and corporate affairs.
Provide catering services to local events.

3. Reduce your restaurant costs

Another way to improve your restaurant profit margin is by reducing your costs. Here are some of the best strategies to do this:

Prevent employee theft

One of the top concerns for restaurant owners is employee theft. Employees have easy access to eating food they haven’t paid for or taking food home. Another concern is employees serving free food to their family and friends. There are measures you can take to prevent employee theft:

Install video cameras.
Be clear about consequences for theft.
Use your POS system to spot check customer tabs to match with orders.
Lock up alcohol at night.
Limit and restrict access to storage rooms and refrigerators.

Reduce employee turnover

Having a high employee turnover means two things: 1) it’s expensive, and 2) it takes away from the customer experience. Training new staff takes both time and money that can lower your restaurant profit margin. And consistently having new employees can prevent customers from coming back after they’ve had a great experience with one or more of your employees only to find they’re no longer there. To improve employee retention, hold regular meetings and get feedback, working with your staff when you can to build loyalty.

Minimize food costs

A huge part of your budget are food costs. By lowering these costs, you can significantly improve your restaurant profit margin. Here are a few ways to do just that:

Modify recipes
Take a look at the ingredients that go into each dish on your menu. Are there more expensive ingredients that you can swap out with ones that are more cost-effective?

Buy local ingredients
Look for local ingredients – local farmers can often give you a better deal on produce. It’s also a good marketing tool when you can advertise that you’re using locally sourced food.

Negotiate with suppliers
One way to lower food costs is by working with your suppliers to negotiate better prices. Ask for a discount – if they’re unable to comply it’s time to talk to other suppliers to see if they’re willing to provide you with lower prices.

Reduce food loss and waste

As with food costs, food waste can have a big impact on your restaurant profit margin. If you’re not aware of this waste, you could be throwing out thousands of dollars every year. So, reducing waste makes good sense when you’re trying to increase profits. Here’s how to reduce food waste:

Portion size
Monitor how much food is left on a plate – if plates are consistently coming back with uneaten food, consider reducing portion sizes.

Store fruits and vegetables correctly
By properly storing produce, you’ll be able to extend its shelf life. Store in tightly sealed and labeled containers, being sure to include the date on the label.

Educate kitchen staff
Train your kitchen staff to correctly prepare foods. For instance, trimming too much fat off meats can result in a lot of edible food that’s being thrown away.

Disposable waste
It’s not just food waste you should be focusing on – disposable waste such as napkins can also add to your food cost. For example, you can lower this cost by switching to cloth napkins instead of paper.

Reduce energy costs

Energy costs can add up over the year. There are several things you can do to cut back on these costs:

Use motion light sensors in the restrooms and storage rooms.
Use energy-efficient LED and CFL light bulbs.
Regularly clean and maintain equipment to keep in optimal running condition.
Lower water consumption with dishwashers by using pre-rinse valves and turning water off between rinse cycles.
During slow hours, turn off idle equipment that isn’t being used, such as ovens and burners.

Final words

Having a strong restaurant profit margin is necessary for the success of your business. By following some of the guidelines here you’ll be able to improve your profit margin and see the kind of success you’ve been working so hard to achieve.

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