How To Calculate the Average Restaurant Profit Margin

For those in the early days of your restaurant, this profit, loss, and restaurant profit margin calculation might be more crucial.

Robert Claussen
Robert Claussen | 3 weeks, 3 days ago | Restaurant
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Are you a restauranteur, manager, or employee in the foodservice industry? You can attest to the fact that maintaining a profitable restaurant is no walk in the park. It involves long hours and lots of impossible decisions. And this is not even considering the task of maintaining a good restaurant profit margin all year round. Just getting a restaurant off the ground poses enough challenges, not to mention the profits. 

However, with a bit of information, preparation, the right restaurant management tips, and adequate planning, you can get your restaurant off the ground and ensure your restaurant’s profit margin remains positive. 

Guess what?

It only takes a quick scan to know the current state of the restaurant industry. However, the landscape might seem bleak at first sight. You are likely to see expensive labor costs, massive employee turnover, negative reviews online, and many more. 

Nevertheless, your doors can remain open irrespective of the current state of affairs. Ultimately, this depends on your restaurant’s profit margin. You can calculate this margin using restaurant metrics and free restaurant profit and loss tools online. 

Most restaurants aim for success. To achieve and maintain a high restaurant profit margin, we’ve put together this article. Thus we begin by defining the restaurant profit margin.

Let’s begin!

A Look at Restaurant Profit Margin

restaurant profit margin

To better understand the term “restaurant profit margin,” lets first tackle restaurant profits. 

Profit is the total amount of cash you have left after deducting the entire cost of operations from gross revenue. Sure, there are multiple sources of income in many restaurants, apart from food and beverage sales. Other revenue streams may include co-working space sharing, venue hire, catering services, franchising agreements, packaged goods, branded merchandise, the list goes on. 

Ultimately, it depends on your creativity, and the kind of restaurant you envision running. Unfortunately, the unlimited streams of income are equally matched by the endless streams of expenses. If it’s not inventory, rent, marketing, or utilities, it might be payroll, POS system maintenance, or repairs. 

It’s natural to feel overwhelmed by the items on both sides of the profit and loss equation. For those in the early days of your restaurant, this profit, loss, and restaurant profit margin calculation might be more crucial for survival. 

The profit margin of your restaurant is the profit expressed as a percentage of your yearly sales. Usually, the higher this percentage, the better. However, business can be unpredictable, and your profit margin changes over time. Therefore, we will explore how to navigate these changes in profit margin. 

What is the Average Restaurant Profit Margin?

restaurant profit margin

Unfortunately, we can’t provide any specific answer to this question. Because at the end of the day, the profit margin is relative and depends on several contributing factors. Hence, you can expect different restaurants to record different profit margins, and this percentage will have different effects on the short term and long term health of the business. 

However, we can provide a range, if you have the right restaurant accounting measures in place. A healthy restaurant can record a profit margin that spans from 0 to 15 percent. However, the percentages of 3 to 5 are very common in the restaurant industry. 

A quick study of statistics shows some “outliers (data points on the far side)” on average. Thus, we recommend you research restaurant profit margins within your niche. 

The bottom line here is to determine an annual minimum average as your target profit margin that is specific to your restaurant, and it’s niche. To maintain this target and expect expectations, it helps to know how to improve your restaurant profit margin. 

Continue reading to learn how.

Ways to Improve Your Restaurant Profit Margin

Though there are multiple revenue streams you can use in your restaurant, increasing your profit margin isn’t the same case. Here you can only adopt two approaches. These are:

  • Increasing your total sales over expenses 
  • Reducing total expenses over total sales

One vital point to bear in mind, though these two approaches work, no two restaurants will record the same result because there are several other factors in play to determine the outcome of the restaurant profit margin. 

Related: Your Complete Guide to Restaurant Accounting 

Let’s take, for instance: Many FSRs and QSR think reducing the cost of their supplies or hourly labor will result in a drastic cut down of costs. Hence, resulting in a significant profit boost. However, this might not necessarily be the case. Inadequate preparation for the effects of such changes in operation may lead to negative customer experience, reduced staff morale, and others. All these are changes you don’t want for obvious reasons. 

Usually, the restaurant industry calls on the “Big Threes” anytime there is the mention of restaurant expenses. These are:

  • Labor
  • Overhead
  • Cost of goods sold

As our standard recommendation, you should allocate one-third of your revenue to offset the cost of goods sold. Next, labor costs receive another third. The remaining third you set aside against any overhead costs like restaurant entertainment

The Role of Proactive Planning

Proactive planning at this point is so vital; we cannot overemphasize it. 

Whether you operate a food truck, brick-and-mortar restaurant, or a simple food delivery service, proactive planning is crucial for the success of your business. Also, managing the expectations of profit and setting realistic goals will prepare you for any unforeseen circumstances. Examples like economic downturns and bad weather will not spell the doom of your restaurant. 

This post does not only seek to inform, but we also intend to see your profits grow. As such, here are three strategic steps to bring in more revenue, cut down costs, and help your restaurant thrive amid challenges. 

1. Monitor your Restaurant Metrics

restaurant profit margin

Considering the portion of your revenue that goes to expenses, you want to always keep a tight leash on them. You see, you can liken your expenses to your pet; they quickly get out of hand when left unattended. 

Hence, you should critically evaluate your restaurant metrics to keep a thump on expenses and control their direction. Good thing, the entire foodservice industry has metrics such as traffic patterns, menu item sales, and utility usage, among many others. 

The metrics also help indicate the general health of your restaurant. Also, you get to make reasonable profit-based changes with the help of these metrics. It could be making a switch to a solar-powered establishment or upgrading your restaurant POS system.

2. Adopt Smart Scheduling

Payroll expenses consume a sizable portion of the gross revenue of many businesses. As such, it’s only reasonable to streamline your staff schedules. This way, you can ensure the amount of staff your restaurant has is adequate to meet customer expectations. At the same time, you keep labor costs low.

Read More: Budget-Friendly Ideas for Fun-filled Restaurant Entertainment

A quick solution like a POS system made specifically for the restaurant industry, offers a smart restaurant scheduling solution. This saves you both time and money. 

3. Anticipate Drawbacks

Every business experiences downtime from time to time. Your restaurant will be no different. You need to anticipate such times and give your business some competitive edge during such times. Some ideas include promotions, loyalty programs, incentives, and special offers for guests. 

You can get creative with digital marketing and launch some great social media campaigns to engage your target audience. This is 24/7 publicity at virtually no extra cost. 

Conclusion

It is crucial to ensure you always have the latest information about your industry, whether you are in the retail or restaurant business. Trends like the average restaurant profit margin at any given time will help you make conservative targets. Therefore, you can follow this blog articles on vital topics like marketing initiatives, management tips, and many more.

Contact now for a POS advice that will boost you business.