Restaurant profit margin is the percentage of annual sales revenue a business has left over after subtracting all expenses, including utilities, lease or mortgage, payroll, taxes, and insurance, from gross revenue. To determine gross revenue, subtract costs of goods sold (COGS) from total sales. Average profit margins for restaurants are typically between 3% to 6%.
How to Calculate Restaurant Profit Margin
To calculate profit margin, subtract all your restaurant expenses from total revenue to determine your profit. Then, divide your profit by total revenue and multiply by 100 to find your profit margin. Although average restaurant profit margins are around 6%, they can vary anywhere between 0% to 15%.
((Gross revenue – expenses) / gross revenue) x 100 = profit margin
(Profit / gross revenue) x 100 = profit margin
Calculate your restaurant profit margin in three steps.
1. Calculate Your Profit
To calculate your profit, subtract all of your expenses from your gross revenue:
Gross revenue – expenses = profit
2. Divide Profit by Total Revenue
To determine your profit margin, divide profit by gross revenue:
Profit / gross revenue = profit margin
3. Multiply by 100
Multiply the profit margin by 100 to turn the number into a percentage:
Profit margin x 100 = profit margin percentage
For example, let’s say your gross revenue is $100,000 and your expenses like food and labor costs are $90,000. Here’s what your profit margin would look like:
((100,000 – 90,000) / 100,000) x 100 = profit margin
(10,000 / 100,000) x 100 = profit margin
.1 x 100 = profit margin
10% = profit margin
In this scenario, you would have a 10% profit margin, which is higher than the average restaurant.
“Calculating the profits of a restaurant is pretty simple. It’s simply (selling price-cost of goods) / selling price = gross profit. However, when several other factors are included, it can make calculating your profits complicated. Variables may include selling prices changing in time, changing ingredient costs, and selling prices may vary based on locations as well as recipes. Use accounting software to help manage all external variables that may result in errors of profit margin calculation.”
— Joseph Brady, Senior Director of Digital Marketing, Reliant Funding
How to Improve Restaurant Profit Margin
Restaurant profit margin can vary greatly depending on a number of factors including your location and the type of restaurant you own. For example, the financials for a quick service restaurant will look a lot different from those of a Michelin starred restaurant. However, the restaurant industry, as a whole, has a notoriously low average profit margin. This is a result of many variables including high labor costs, soaring rent, increases in the cost of food, and, generally speaking, lackluster marketing efforts.
Restaurants can build higher profit margins and increase profitability by either increasing sales or by finding ways to decrease expenses without sacrificing revenue. The trick is not to cut expenses that will impact sales negatively or spend too much money trying to boost sales.
7 Ways to Increase Restaurant Profitability Relative to Expenses
There are a few tricks of the trade to boost restaurant profitability. The easiest and most effective options involve using point-of-sale (POS) data to optimize your menu to include only the most popular items with the highest profit margins. The harder, but still effective, methods involve diversifying your revenue streams by building additional sales channels.
Here are seven ways to improve your menu and revenue streams to increase your restaurant profit margin.
1. Increase Alcohol Sales
Restaurants, generally speaking, may have lower profit margins than other retail businesses. Bars, on the other hand, can have very high profit margins. An easy way to boost your profit margin quickly is by selling more beer, wine, and liquor.
Liquor has the highest margins of the group, so aim to focus on shots, cocktails, and mixed drinks. Have mixed drink menus that change every few days with bartender favorites and concoctions. Also, consider implementing a happy hour special with discounts on lower shelf liquor cocktails.
“One way that we see local restaurants working to improve margins is through expanding and updating their wine and beer lists. Restaurants that put some thought into sourcing can see an increase in sales of at least 20% by our internal counts.”
— Mark Aselstine, Founder, Uncorked Ventures
2. Optimize Your Menu
If you use a POS system like Lightspeed, you will have reports at your fingertips on food costs and profit margins for individual menu items and their popularity. Taking some time to dive into the data on what’s selling, what’s not, and what has the highest markups can help you revamp your menu so that every item is bringing in the best profit margins possible.
For example, if you have a dish that is popular, but expensive to make, see if you can switch any ingredients to make the recipe more cost-effective.
3. Sell Merchandise
An easy way to add on extra sales is by turning your register or host area into a mini retail store. T-shirts, branded glassware, stickers, magnets, and mugs are all popular options. This strategy is especially successful if you are in a touristy town, have a uniquely cool logo, or some kind of claim to fame.
4. Cater Events
Another way to sell more food is to reach beyond the walls of your restaurant. Advertise catering services for local events. The only extra materials you need are to package the finish products. You can go the extra mile and offer delivery to special events, but you can also choose to have your catering services as pickup only.
5. Rent Out Your Venue
Many restaurants are closed on Mondays, and others have separate dining rooms or areas that are not being utilized to capacity. If that’s the case with your restaurant, consider renting out sections of your space to private parties. If your business is typically slow during lunch hours or early afternoon, you can also rent out your entire venue for corporate lunches and meetings.
6. Set Up a Dessert Counter
It’s likely you’re already selling desserts at your restaurant. It’s also likely that they are hidden in the kitchen, long forgotten by guests who didn’t even look at your dessert menu. Increase your dessert sales by adding a display counter by the hostess area. Just like candy at a grocery store checkout, seeing your treats as guests are leaving or getting ready to pay their bills may have them thinking twice about taking a slice of cake for the road.
7. Offer Delivery Services
Offering pickup and delivery services are a great way to bring in extra revenue. Food delivery apps are increasingly popular, and many POS systems integrate with delivery services directly so that, when a customer places an order online, it is sent directly to the kitchen display system.
4 Ways to Improve Restaurant Profitability by Cutting Expenses
After exhausting all the possibilities for increasing your sales, the other way to increase restaurant profit margin is by reducing your expenses. This is an area where you have to be extra careful not to impact your business negatively.
Slashing employee wages or eliminating bonuses is a quick way to cut costs. However, your sales and overall profitability will suffer as well from employee turnover, low morale, and the high costs associated with hiring and training new staff.
Here are four ways to cut costs without sacrificing sales.
1. Use a Smart Scheduling Tool
Cutting existing employee wages is generally not recommended. However, that doesn’t mean you can’t save on staffing costs. Using an employee scheduling tool can help you plan shifts more accurately. Accurate staffing helps eliminate unnecessary labor expenses but also makes sure you have enough workers scheduled during peak times.
Homebase is a free online employee scheduling tool that also offers time clocks, employee communication channels, and hiring software. You can manage schedules and assign individual shifts right from your phone. Employees can submit time off requests and swap shifts. Visit Homebase to create a free account.
2. Reduce Food Waste & Improve Order Accuracy
Another way of reducing expenses is by reducing food waste. Many POS systems have kitchen display features to help manage orders and the cooking process. Once you’ve optimized your menu with best-selling and high-profit items, create a catalog with standardized recipes and help train your staff to ensure everyone is following the same methods, and not overusing any ingredients.
3. Reconsider Portion Size
Another way of reducing restaurant expenses is by reducing portion sizes. Many people expect to see generous portions when they go out to restaurants, but if you’re finding a majority of plates are coming back with food left uneaten that may be a sign you can reduce serving sizes.
4. Renegotiate Supplier Contracts
The fourth way to reduce food costs is by negotiating better prices with your supplier. Ask for better prices on goods that you order most frequently. Also, consider purchasing directly from local farmers and producers instead of working with national suppliers or wholesalers. This can reduce middleman and freight costs. Plus, farm-to-table food and locally sourced ingredients are valuable to consumers, so you have the opportunity to increase profit margins even more.
Tips for Improving Restaurant Profit Margin
Improving restaurant profit margin is a delicate balance of increasing sales while also decreasing expenses. Sustaining a healthy profit margin takes consistency and dedication. The right formula for increasing restaurant profitability won’t look the same for every business, but there are some tips that every business can use to make the process easier.
Pay Attention to Metrics
The only way to truly know if your margins are improving is by measuring them. In addition to looking at your overall costs, revenue, and profit margin, also consider examining your employee turnover rate, customer retention rate, and customer satisfaction scores. All of these data points can have a significant impact on your bottom line, even though they aren’t directly visible from just looking at expenses and revenue.
Set Small, Measurable Goals
Improving your profit margin can seem like a daunting task. There are so many different variables to consider and to adjust. Make your long term goal more achievable by setting smaller, measurable goals. For example, set a profit margin you want to reach by the end of the quarter. Then, outline ways to focus on optimizing your menu and cutting food costs during that period. For the following quarter, set a new margin to hit and outline a new strategy to reach it,
Calculating profitability requires numbers and data. Many people open a restaurant because they love cooking and food, not because they love math. Using a POS system will save you time and energy trying to gather data and crunch numbers on your own so, instead, you can focus on actually running your business.
A healthy profit margin is essential for success, especially in the restaurant industry where they are only around 3% to 6%. With margins that low, there is not a lot of room for error. Businesses need to be evaluating their menus, expenses, and sales channels constantly.