Profit is one of the most important things for any business. So it is crucial to understand the profit margins of your food business.
In this article, we will talk about how you can calculate profit margins for your business. We will also reveal some ways to increase your profits.
Let’s get started!
What is the average profit margin for a restaurant?
The truth is that the average profit margin for a restaurant varies greatly according to different factors. Nobody can predict a definite number for your restaurant’s profit.
The profit margin varies greatly depending on your geographic location, current trend, seasonal availability of certain items, the economic condition of your region, and a range of other factors.
For example, in the U.S.A. the average profit margin is around 10%. However, in Mexico, a restaurant can expect an average of 20% profit margin. So it depends on the location and a wide range of other factors.
Additionally, remember that even though profit is calculated in your currency (like USD, CAD), the profit margin is always expressed in the terms of percentage.
Gross Profit Margin And Net Profit Margin
It’s common for restaurant owners to get confused between gross profit margins and net profit margins. However, to understand your restaurant’s finances clearly, it is important to know the difference between these two terms.
Let’s clarify this topic:
What is the gross profit margin for a restaurant?
The gross profit is what is left after you deduct the cost of goods (ingredients) from your restaurant’s revenue.
- Gross profit = Selling Price - Cost of goods (inventory)
- Gross profit margin = (Gross profit / Selling price) x 100%
Let’s take the example of a burger. Suppose you are selling the burger for
$5. But your cost of goods (like beef, cheese, etc.) for making the burger is $2.5.
- Gross profit = 5 - 2.5 = $ 2.5
- Gross profit margin = 2.5/5 x 100 = 50%
This number gives you an idea of your restaurant’s efficiency, however, it does not reveal your restaurant’s real profit. This is because gross profit doesn’t account for all the costs of running your restaurant.
What is the net profit margin for a restaurant?
The net profit is the number you get after deducting all the costs of running your business from your gross profit. This includes rent, employee salaries, administrative costs, taxes, maintenance, etc.
Net profit is the most important because it shows you how successful and profitable your restaurant is.
Here’s the formula for calculating the net profit margin of a restaurant:
- Net Profit = Total Revenue – Total Expenses
- Net Profit Margin= [Net Profit ÷ Revenue] x 100
Suppose you are trying to calculate your net profit for your previous month. Your total revenue was $100,000 and your total costs were $70,000.
- Net Profit = $100,000 - $70,000 = $30,000
- Net Profit Margin = 30,000/100,000 = 0.3 = 30%
Profit Margins For Different Types Of Restaurants
Like we explained, it is hard to assign a specific number to the ‘average profit margin’. But we can compare the relative profit margins between different types of restaurants like ‘Full service’, ‘Fast food’, ‘Food truck’, etc.
- Full-service restaurants: Normally, the profit margin of full-service restaurants is the lowest among all other types of restaurants. However, with proper management and business strategy, full-service restaurants can be very profitable.
- Fast food restaurants: Fast food restaurants normally have the highest profit margins. This is because they need less staff and use less expensive ingredients. Also, they have a high volume of sales.
- Food trucks: Like fast-food restaurants, food trucks also have a very high-profit margin. Sometimes, food trucks have a higher profit margin than fast-food restaurants, but they normally have a lower volume of sales compared to fast-food restaurants.
How Can You Improve Your Restaurant’s Profit Margin?
To improve your restaurant’s profit margin, you can follow two methods:
- Increase your sales
- Reduce your costs
Let’s talk about how you can implement them:
A. Increasing Your Sales
Note: Increasing your sales would not reduce your cost of goods, so your gross profits will be the same. However, your net profit margin will increase due to fixed costs like rent, utilities, and maintenance.
1. Accept Online Ordering
If you aren’t offering delivery or takeaway services yet, you should start it as soon as possible. Nowadays, customers always order online when they need food delivery or takeaway services.
So having your restaurant’s website that can accept online orders can increase your revenue significantly.
But most restaurant owners are concerned about the difficulties and expenses of building and maintaining a restaurant website.
Fortunately, technology has improved a lot. There are services in the market that builds a restaurant website for you without needing to hire a software engineer. For example, Waiterio restaurant website builder automatically builds and maintains a website for your restaurant for free.
So take your restaurant online and start receiving more orders!
2. Make changes to your menu
The menu is an important part of a profitable restaurant. The price of your menu items has a great influence on your restaurant’s profitability.
There might be items that have a high-profit margin but they are not very well-known among your customers. Use your menu to sell these items more.
Put them higher on the food list or highlight them using some creative methods. You can also hire a graphic designer to make your restaurant menu more attractive to your customers.
In this way, you can increase the sale of your most profitable menu items.
3. Tracking sales report
You can’t increase your profit if you don’t understand your sales reports.
Sales reports reveal important business information like which items sell the most. It will also help you calculate your total profit coming from each menu item. Use this information to grow your business strategically.
For example, after looking at your sales report you find out that 42% of your sales are coming from large chicken burgers. So you can ensure that you always keep your burgers in stock. You can also start offering variations of your burger like ‘Double chicken burger with extra cheese’.
You can also slightly increase the price of your burger to generate more revenue for your restaurant.
Note: It’s important to get a POS system that offers your detailed sales report for every item in your menu.
4. Build an online presence
Did you know that 85% of people check your restaurant on Google before visiting your restaurant? So it’s important to register your restaurant on ‘Google My Business’.
You should also get some positive reviews for your restaurant. You can also have a social media presence like Facebook, Instagram, and Twitter pages for your restaurant to build a broader online presence.
5. Advertise your restaurant
There are a lot of ways to advertise your restaurant. I am not talking about huge marketing campaigns that require a lot of money.
There are many ways to advertise your restaurant for free or at a cheap price.
For example, getting search engine rankings and organic traffic from social media are methods for receiving more customers for free. Using Facebook ads or local newspaper listings are some cheap methods for getting more guests.
Learn more about marketing your restaurant in this article.
B. Reducing Costs
Reducing costs directly increases your profits. Let’s talk about how you can reduce your restaurant’s expenses.
1. Reduce Cost Of Ingredients
Costs of ingredients is the biggest expense for a restaurant. Let’s talk about how you can reduce the cost of inventory:
- Find cheaper vendors: If you can obtain the same quality of ingredients at a lesser price, it will obviously reduce your food cost.
- Reduce the portion of your dishes: For example, sell a 230g large burger instead of a 270g
- Reduce the quantity of the ingredients used: For example, slightly reduce the amount of cheese and chicken you use for cooking your burger
2. Control labor costs
You need to maintain a balance between keeping your staff happy and making a decent profit for your restaurant.
Do some research on the average pay for restaurant staff in your location. In this way, you can make sure that you are not overpaying your staff. Also, you can give small bonuses to improve the performance of your staff.
3. Analyze your menu
Like we discussed earlier, keeping track of your restaurant menu is crucial.
A good way to set the price of your menu items is by using the 'food cost formula’. We have discussed more about this topic in our ‘Calculating food cost percentage’ article.
In summary, your food costs should be 25-35% of your selling price. For example, if the cost of ingredients for a large burger is $3.5, you should set the price of your burger to at least $10. (35% of $10 = $3.5)
So make sure you’ve set the price of every menu item correctly. Learn more about menu engineering here.
4. Reduce wastage and theft
Wastage is a common problem with restaurants. Unfortunately, theft is another common problem too.
It’s important to keep a track of your restaurant’s inventory. In this way, you can spot these kinds of problems. However, in reality, it is never 100% accurate.
Learn more about managing your restaurant’s inventory in this article.
Tip: Use A Restaurant Management Software To Manage Your Business Better
Like we mentioned before, technology has evolved a lot and there are tons of systems to make managing restaurants easier for restaurant owners.
This software can generate sales reports, manage your orders, keep a track of your staff, and do a lot of other things.
There are a lot of options in the market. But if you haven’t chosen a software yet, I would like to recommend you to try out our restaurant management software Waiterio since it’s easy to use and you can try the software for free.
Click here to download the Waiterio software.
Conclusion
So let’s summarize everything we have discussed so far.
What is a good profit margin for a restaurant or a food truck?
There’s no definite answer for it. It varies greatly with location and a lot of other factors. However, we can say that food trucks and fast-food restaurants relatively have a higher profit margin than full-service restaurants.
How to calculate profit margin for restaurants?
Here’s the formula:
- Profit = Total revenue - Total operational costs (ingredients+salaries+rent+other expenses)
- Profit margin = ( Profit / Total revenue) x 100%
How to improve your profit margins?
You can improve your profit margins by:
- Increasing your sales
- Reducing your costs
That’s all. Thank you for reading.
