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Opening and managing a restaurant requires a lot of work, and, at times, it may not seem like the long hours are worth it. Even if you have a great menu full of delicious entrees and fantastic customer service to boot, the only way a restaurant can succeed is by making a profit. The beginning stages of any restaurant business are expensive, but if your restaurant makes more money than you’re spending, your business should withstand the time and energy required to get it off its feet.
To determine how much revenue your company is actually generating, you must calculate the profit margin. But what is it and why is it important? There are many factors that contribute to your restaurant’s worth, and we’re here to help you learn more about them.
What is a restaurant profit margin?
Before learning how to calculate your restaurant profit margins, it’s best that you fully understand what it actually is. Businesses all over the world aim to generate profits, but gross sales, business expenses and earnings don’t always provide a clear picture of what you’re actually taking home: That’s where profit margin enters the scene.
Your profit margin takes all of the money that your company is both spending and making and figures out what your actual in-pocket profit is. Simply put, the profit margin — represented by a percentage — indicates how many cents of profit your company generates for each dollar of sale.
For example, if your restaurant reports that it achieved a 35% profit margin during the previous quarter, it means that it had a net income — the total sales minus the cost of goods sold, general expenses, taxes and interest — of $0.35 for every dollar of sales generated.
It sounds easy enough to calculate the profit margin and actual earned money for your restaurant, but there are various types of profits that you need to understand:
Gross profit margin is a metric used to find out if a company is in a healthy financial position. This is done by calculating the amount of money left over from product sales after subtracting the cost of goods sold. It’s often called the percentage of sales or the gross margin ratio.
Operating profit margin is sometimes referred to as the operating margin. You calculate this number by subtracting the selling, general, administrative and operating expenses from the company’s gross profit margin number. The total is the operating profit margin or the earnings before interest and taxes are taken out.
Your pretax profit margin helps you measure your restaurant’s operating efficiency. It’s a ratio that gives you the amount of cents of profit the business has generated for each dollar of sale before deducting any taxes. This type of profit margin is often used to compare your profitability compared to other businesses in the same industry.
Net profit margin is generally what you will look at when asked about your profit margin. To find the total net profit, subtract all the associated expenses (including costs toward raw materials, labor, operations, rentals, interest payments and taxes) from the total revenue generated.
According to Restaurant Owner and Manager Magazine, the average restaurant profit margin ranges from 0 to 15%, but it depends on the type of restaurant. Most restaurants end up with profit margins that are between 3 to 5%. Take a look at the average restaurant profit margin by restaurant type:
A full-service restaurant typically involves table service and a much more hands-on customer service experience for diners. Since this type of restaurant comes with greater labor costs, this dining style falls between the 3 to 5% profit margin range.
Fast food restaurant
Fast food restaurants are quick for diners and less labor-intense for restaurant owners, which makes the average profit range about 6 to 9%. Although this earned amount is higher, it can be influenced by whether the restaurant is chain-owned, independently owned or franchised.
As the popularity of food trucks increases so does their profit margin. This style of restaurant has discovered ways to decrease overhead costs and labor fees. The average profit margin for food trucks is about 6 to 9%, similar to that of the fast food restaurant industry.
Catering businesses range in size and business model type, but generally, restaurants that cater can operate with lower costs overall. For caterers, profit margins average from 7 to 8%.
Although every restaurant is different and profit margins vary within the industry, your restaurant’s profit is important to understand and pay attention to. Want to know why? Keep reading to find out.
Why is your restaurant profit margin important?
Profit margins have become the global standard for most industries to indicate how much money is being made. Essentially, it’s understood that your profit margin shows the success and potential of your company as a whole. It’s generally one of the first few key figures to be quoted in the quarterly reports that businesses issue, and it can also be used internally to address performance and seasonal patterns. It’s important!
As a restaurant owner or operator, you are most likely in charge of setting your yearly or quarterly budget. That being said, to plan effectively and stay profitable, you need to understand how much money your business is spending and making. Here’s how you can use your restaurant profit margins:
Securing a loan
If you currently need to borrow money from a bank or anticipate that you may need to in the future, you might need to use your profit margins as proof that you’re able to afford loan repayments.
Knowing your profit margin can help you understand if you need more of a buffer between the cost of goods — in a restaurant’s case, the cost of food, labor and general operational costs — and your menu prices. Especially in times of rising interest rates, your menu prices may need to be adjusted so you can afford the essential items and still make a decent profit.
Although your restaurant can gauge success in many ways — like more walk-in traffic, reservation increases or a growing number of employees — your restaurant’s profit margin is the best way to determine your company’s financial success. You may spend a large sum of money on local ingredients or high-end equipment, but if you’re making more than you’re spending, then you can consider your restaurant financially successful.
If you calculate your net income and realize that you’re not making as much as you thought you were, don’t worry. There are ways to increase revenue and raise your profit margin.
How to raise your restaurant profit margin
Before you can increase your restaurant profits, you have to understand and manage the important metrics that influence your cash flow. Here are the main factors to pay attention to:
- Cost of goods: As previously mentioned, your cost of goods refers to the total cost of the inventory used to create food and beverage items during a specific time period. Keep track of your inventory and use what you already have to avoid food waste or overspending on products. According to Altametrics, a profitable restaurant spends about 28 to 35% on food costs, but this number can vary depending on your menu prices.
- Labor: Labor will most likely be one of your restaurant’s highest costs. It includes all wages for salaried and hourly employees, in addition to other expenses associated with labor, including overtime, payroll taxes and employee benefits like sick or vacation days.
- Overhead expenses: This type of cost is an umbrella figure that covers expenses like supplies, repairs, marketing, rent, utilities, operating cost and insurance.
Now that you have a grasp on what affects your overall earned amount, let’s dive into some ideas to help your restaurant increase your profit margin:
Increase menu prices
This is the first thing that most restaurants will do to balance out spent money and profit. But, how can you do this without losing customers? You must know how much you’re spending on the cost of goods. If you’re spending the recommended 28 to 35% on food, then ensure that you don’t raise prices astronomically. But if the food cost percentage of your menu items is falling above this range, then you can comfortably raise prices deterring customers.
If you don’t want to raise your menu prices, then you can also try increasing sales through various methods. Here are some ideas to generate more sales:
- Run promotions: Maybe you run the same promotions on a daily basis or you haven’t attempted to run any in the first place. Having sale prices or promotions run during less busy times of the day or switching up your current deals can get more foot traffic through your restaurant door.
- Update your menu: It may seem like a small thing, but changing your menu layout or switching up the design can intrigue your customers, or maybe they’ll notice an entree they haven’t tried before.
- Create a customer loyalty program: If you already have a customer loyalty program, great! But if you don’t, it may be time to test one out. This program may motivate people to stop by your business more often in an attempt to earn rewards or extra promotions.
Last (but definitely not least), one of the most vital ways to increase your restaurant profit margin is to lower your overall spending. Some tips to cut costs include:
- Reduce your food waste: Keep track of your inventory and buy only what you absolutely need. One way to decrease food costs is to have a seasonal menu that you can trade out as certain produce and food items become less expensive.
- Negotiate with suppliers: If you’ve been using the same vendors for some time, review what you’re spending on supplies and attempt to have a discussion if the prices have been hiked up over the years.
- Reword your menu: If you notice that a few of your meals don’t sell very well, switch out those dishes for ones that you believe will do better. That way, you reduce food waste and can earn more by having a more popular menu item in its place.
One final way to boost your restaurant’s profit margin is to partner with Grubhub.
How Grubhub can help your restaurant’s profits
We know that you understand your restaurant better than anyone else, which is why we want to work on your terms. We don’t need to tell you how to run your business — you already do that well! What we can do is help you streamline your procedures to lower costs and boost sales. Here’s how:
- Grubhub Marketplace: Reach over 33 million diners who are hungry and searching for the next restaurant to try out. Get access to a technology stack that fits your needs and works alongside your existing solutions as well as consultations with your designated Grubhub team member.
- Grubhub Delivery: If you already have a team of drivers, that’s great. We’ll work with you to ensure you have everything else you need to succeed. If you don’t, you can use our flexible driver management system that we coordinate for you.
- Grubhub Direct: Manage your own commission-free website that integrates perfectly with your existing webpage. Let your customers order off of your site directly at no extra charge to you.