Building a thriving food and beverage business isn’t easy. Once you pay employees, utilities, and food costs, there isn’t always a whole lot of cash left. However, your restaurant profit margin can alert you to substantial problems requiring action to keep your company viable.
Although the industry is well-known for slim profits, there are steps you can take to increase your restaurant’s profitability.
Overview: What is a restaurant profit margin?
A restaurant’s profit margin shows you how much money you have left after paying your bills. There are three key figures to consider:
- Gross profit margin: Your gross profit margin is the result of your total revenue minus the cost of goods sold (COGS).
- Net profit margin: Your net profit is your revenue minus all operating expenses and COGS.
- Profit margin percentage: This number tells you how much profit you earn on every dollar of goods sold.
How to calculate your restaurant’s profit margin
To calculate your restaurant’s profit margin, dig into your restaurant software to find your total revenue and expenses. Your profit and loss (P&L) statement, also called an income statement, documents these numbers for a set time period.
First, figure out your net income by taking your revenue minus your expenses. Divide this number (net income) by your revenue. This gives you your net profit margin. From there, multiply your net profit margin by 100 to get your profit margin percentage.
The math looks like this:
- Gross revenue - total expenses = net income
- Net income ÷ gross revenue = profit margin
- Profit margin x 100 = restaurant profit margin percentage
With this final number, you can now determine how much of every dollar remains in your pocket.
What’s the average restaurant profit margin?
Average restaurant profit margins range from 2% to 6%. However, this varies by restaurant concepts, location, and much more. There are no set figures for restaurants. In general, the goal is to get as close to 10% as possible. Yet, most restaurants never see this number.
Instead of comparing your restaurant’s profitability to other businesses, look at average margins for your company and closely watch your restaurant’s profit margins so you can take immediate steps if the number starts dropping.
The average restaurant profit margins by type of restaurant
The average restaurant profit margin varies by business because they pay different amounts for food and operating costs. Fine dining concepts often have a lower profit margin due to high staffing levels and more expensive food ingredients.
Also, catering companies without a brick-and-mortar building have fewer bills, even though they may use pricey ingredients.
Fast-food profit margins
Fast-food concepts often use less-expensive food products and require fewer staff members. These lower costs result in higher profit margins.
The average fast-food profit margin ranges from 6% to 9%. However, some businesses, such as McDonald’s, get better profit margins, thanks to automation tools and increased emphasis on standardizing and controlling food costs.
Full-service profit margins
Full-service restaurants require high levels of staffing, including servers, hosts, and a large kitchen staff. The locations may cost more in rent and upkeep, and higher-quality food also plays a role. Full-service restaurants typically only have profit margins of 3% to 5%.
Catering profit margins
Although catering expenses may include high-quality food costs, catering doesn’t require a large dining space or a full-service staff. This substantially reduces operating costs. Catering profit margins typically run 7% to 8%.
Food truck profit margins
Like catering, food trucks benefit from lower operating costs. While food trucks come with maintenance fees, you can’t fit a full staff in the confines of a truck, so your restaurant payroll is lower.
Nor do you need a brick-and-mortar building, which also leads to lower expenses. Food trucks often realize profit margins between 6% and 9%.
6 best practices for improving your restaurant’s profit margin
Although you rarely find high-profit margins in the restaurant industry, most restaurateurs don’t go into the business thinking they’ll get rich. However, financial problems are a big reason why restaurants fail.
Keep an eye on your restaurant’s profitability. If your numbers fall below the average profit margins, take steps to increase sales and decrease expenses. Use the following six tips to earn a higher percentage on every dollar of sales.
1. Track your restaurant metrics
Your revenue may fluctuate due to seasonal demand, while changes in supply costs or rent hikes can quickly tank your profit margins.
Stay aware of your average restaurant income by frequently reviewing your:
- Cost of goods sold: Use your inventory management system or point-of-sale (POS) software to see how food and beverage costs change over time. Your COGS helps you determine the profitability of your menu items.
- Labor costs: Calculate every dollar spent to maintain your staff, including wages, payroll taxes, benefits, and overtime pay. Labor costs tend to make up one-third of your operating expenses.
- Overhead expenses: Tally up fixed and variable expenses to understand the costs of keeping your doors open. These expenses include restaurant marketing, rent, insurance, supplies, and utilities.
2. Train employees to reduce costs
Many employees simply don’t understand how quickly small things add up. By setting standards early on, you can reduce waste without affecting your restaurant’s customer service.
For example, each individually packaged cracker or sauce cup costs you money. If every staff member hands out double the amount you calculated into your menu item’s cost, your restaurant profit margin won’t be accurate.
Instead, you may offer extras on demand. Your cups of soup may come with one package of crackers. A bowl may come with two packages. Guests will ask for more crackers if they want them, and your servers may keep a few spares to dole out. But if you give everyone double the number of crackers, you’re losing money when they pocket them.
The same goes for back-of-house staff. Food waste, over-portioning, and improperly prepared meals cost you money. Training and oversight reduce errors while increasing your restaurant’s profit.
3. Reduce operating expenses with automation
Although higher gas, electric, and water bills are unavoidable, small changes can reduce your costs throughout the year. Ways to lower operating expenses include:
- Using a time-controlled thermostat that turns the temperature up or down during slow hours
- Switching to LED lightbulbs with motion sensors in storage closets and restrooms
- Sticking to a regular cleaning and maintenance schedule for equipment
4. Maintain a profitable menu
Food costs also take up a big part of your budget. Recipe and menu engineering tools help you predict changes to your profit margin when you take actions such as changing the menu price or switching to lower-cost ingredients. Other ways to optimize your profits include:
- Substitute lower-priced ingredients: Look for ways to adjust recipes without sacrificing quality. You may negotiate with suppliers to find less-expensive components to reduce your costs per dish.
- Manage portion sizes: Make sure every dish uses the same amount of ingredients and that kitchen staff isn’t over-portioning items. Use a kitchen scale and pre-portion items for consistent results and costs.
- Use your POS system: Identify high-profit items and top sellers. Look for ways to increase sales by shifting high-profit dishes to prime menu locations or rewording your descriptions to be more captivating.
5. Use smart scheduling tools
Scheduling the right amount of staff is a huge restaurant business challenge because your volume of business may differ slightly, especially during your startup years.
Your POS system provides historical data so you can see your busiest hours and days. Moreover, you can view real-time labor calculations and recommend that managers cut labor once you hit a certain percentage.
Combine your data with scheduling tools that allow you to arrange schedules easily. You can make adjustments to avoid overtime pay and staff according to forecasted sales while tracking and preventing early clock-ins.
6. Increase sales volume
Along with reducing expenses, you should aim to increase your sales. Doing so helps boost your average restaurant profit margin. Consider the costs of implementing each tactic versus your expected gains. Increase sales and profitability by:
- Promoting high-profit menu items during a weekly special
- Diversifying your income streams with catering, delivery, or hosting events
- Designing happy hours or snack menus to generate business during slow hours
- Encouraging loyalty by offering rewards to frequent restaurant guests
- Offering experiences that cater to your target market
Remain aware to stay in business
Develop a plan that keeps your expenses at a sustainable level while increasing sales volume. In doing so, you can boost your restaurant profit margin, giving you more flexibility to take on more significant projects such as updating your interior or upgrading equipment.