Tips About Restaurant Profit Margins

Restaurant Profit Margin May 06, 2021

Cynthia Vespia

Writer

What is the Average Restaurant Profit Margin?

Opening restaurant expenses like renting the real estate or using restaurant marketing make an impact on any small business in the restaurant industry. As business grows costs increase for restaurant operations.

But even as these expenses grow the restaurant management will be looking for ways to increase profits and reduce costs to make sure the restaurant continues to thrive. One of the ways to do this is to calculate restaurant profit margins.

What is profit margin?
Profit margin refers to the amount of profit from the percentage of annual sales. It's garnered by subtracting operating expenses from the gross revenue. That revenue will include any sales whether they be food and beverage or other revenue streams.

Just like there are many ways to generate total revenue the operating expenses can also come from multiple sources. Labor, real estate rent, employee payroll, restaurant advertising, credit card processing fees, and POS system technology and management software are only a handful of costs restaurant managers face.

The early years of a restaurant's it's important to have the average restaurant revenue and gross profit margin ideas mapped out. Most restaurant owners take on debt when first starting out. Having a higher profit margin is best but restaurant profit margins often fluctuate. The key is having sustainability with the goal to increase restaurant profit.

What is the average restaurant profit margin?
A lot of different factors will dictate what the average profit margin for a restaurants is. For example, full service restaurants will have a different profit margin than food trucks based on the average cost per customer.

The wide range for generating restaurant profit margins fall within 0-15% typically. However, most restaurants are usually within the 3-5% range for their average profit margin.

Gross revenue and operating expenses vary significantly between fine dining and fast food. Researching profit margins specific to the type of service restaurant it is will determine the margin net profit that should be made.

How to Determine and Improve Restaurant Profit Margin

Two figures are calculated together to achieve the restaurant profit margin- those are total revenue and total expenses. Total revenue is the full amount from sales made of all goods. Total expenses are the cost of goods sold (COGS) plus additional operating expenses like payroll or software used for inventory management.

These figures are easy to find through management software that provides a restaurant profit and loss statement. Next, total expenses from total revenue are subtracted. This sum will be the net profit that will then be divided by total revenue and then multiplied by 100 to get a percentage.

Profit Margin Formula
The profit margin can be calculated by using the net profit margin equation shown here-

Total Revenue - Total Expenses = Net Profit
(Net Profit Total Revenue) x 100 = Net Profit Margin

Having these figures will help to plan which menu items to include while avoiding food waste.

How To Improve Restaurant Profit Margin
Improving a restaurant profit margin comes down to- increasing total revenue, decreasing total expenses, or both.

Increase Total Revenue - Increasing sales won't improve a profit margin on its own. Sales need to be increased while expenses are dropped or remain at the same level. It's difficult to keep this gap between total revenue and total expenses because of the nature of the restaurant business. Usually as sales revenue grows the expenses increase too.
Reduce Costs- Decreasing expenses with a steady sales revenue maintained will help to improve restaurant profit margins. The focus should be on lowering controllable expenses like cost of goods sold (COGS) or direct operating expenses (DOE).
Simultaneously Increase Revenue and Reduce Costs - Increasing sales revenue while simultaneously lowering overall expenses is the fastest way to increase restaurant profit margin.

Conclusion to Restaurant Profit Margins

The biggest takeaway is to set goals to maintain or increase restaurant profit margins yearly.
Two figures are used to calculate restaurant profit margins- total expenses and total revenue.
The profit margin is calculated using the net profit margin equation shown here-

Total Revenue - Total Expenses = Net Profit
(Net Profit Total Revenue) x 100 = Net Profit Margin