Working in the restaurant industry takes grit, determination and a whole heap of passion. And, if there’s one thing everyone in the industry can agree on, it’s that the restaurant biz is not for the faint of heart.
While passion is the fuel that fires your desire to succeed, it’s often not enough to run a thriving, profitable restaurant. Instead, crunching the numbers and keeping a tight grasp on your profit margins are the key to running a successful and sustainable restaurant.
Unfortunately, restaurant profit margins are notoriously razor-thin and have dwindled from a healthy 15% to an average of 4.2% in recent years. However, it’s not all doom and gloom. With a touch of forward planning, a firm idea of your numbers, and a helping hand from tech, it’s possible to grow your profit margins sustainably so that your restaurant can thrive.
In this guide, we’ll cover:
- The difference between gross and net profit
- What impacts restaurant profit margins
- Tips to improve restaurant profit margins
Before we dive into what impacts restaurant profitability and how you can improve yours, we need to distinguish between two types of profit margins: gross profit and net profit.
In a nutshell, your gross profit is the difference between your total revenue and the cost of goods sold (COGS). For restaurants, this would be the difference in value between the selling price of a dish and the cost of the ingredients and materials used to make that dish.
Gross profit hovers around 70% for financially viable restaurants, meaning that for every $100 a guest spends at your venue, $70 is gross profit.
To calculate your restaurant’s gross profit, you’ll need to subtract your total COGS for a specific period from your total revenue for the same time.
To calculate gross profit, apply this formula:
Total sales – COGS = gross profit
Once you’ve calculated your gross profit, the next step is to calculate your gross profit percentage by using the following formula:
Gross profit / revenue x 100 = gross profit percentage
Let’s say Bob’s Burger Bar generated $1.25 million in revenue from January to April, and their COGS totalled $400,000 for the same period. To calculate their gross profit, simply:
1,250,000 – 400,000 = 850,000
Next, calculate the gross profit percentage:
850,000 / 1,250,000 x 100 = 68
Bob’s Burger Bar’s gross profit margin is 68%, meaning that for every $100 a guest spends at their establishment, $68 is gross profit that can be used to pay for operating expenses.
Your net profit is the amount leftover from the gross profit after deducting operating expenses like payroll, rent, utility bills, ingredients, and equipment leasing costs.
To calculate your net profit margin for a specific period, you’ll need the following information:
- Sales revenue
Let’s use Bob’s Burger Bar as an example again. The quick-service burger restaurant has $1.25 million in revenue, $50,000 in gains, and $1.2 million in expenses from January to April.
To calculate the net profit, you should apply the following formula:
Revenue + gains – losses = net profit
Bob’s Burger Bar’s net profit calculation would be as follows:
1,250,000 + 50,000 – 1,200,000 = 100,000
To help keep track of your expenses, download Lightspeed’s free profit and loss template. This profit and loss template will enable you to examine the financial health of your business by highlighting exactly how much revenue is being generated versus what’s being spent.
To calculate net profit as a percentage, apply this formula:
Net profit / revenue x 100
For Bob’s Burger Bar, this would be calculated as follows:
100,000 / 1,250,000 x 100 = 8
This means that Bob’s Burger Bar’s net profit margin is 8% – for every dollar a customer spends, they’re keeping 8 cents as profit.
Many factors can contribute towards low-profit margins, and every restaurant is different. However, there are three common expenses that all businesses in the restaurant industry have to deal with, and these often have the most significant impact on profit margins.
Generally, one-third of a restaurant’s revenue is allocated to COGS, and another third to labour expenses. The remaining income must cover overhead expenses like utility bills and rent. Once all costs are paid, restaurants are typically left with between 2% and 6% in net profit.
COGS, labour and overhead expenses can vary greatly depending on a restaurant’s type and location. For example, a fine dining restaurant in Sydney will have vastly different expenses to a quick-service cafe in far north Queensland. Therefore, it’s essential to research the average profit margins for your restaurant type and set a goal based on this average.
Keeping a tight grasp on your margins is imperative if you want to build a successful and sustainable business. It’s important to constantly optimise your workflows and operations to increase sales and decrease overhead expenses – both of which will have a positive impact on your margins.
While there are many tactics that can help increase your sales volume and decrease expenses, we’ve put together a list of the most accessible ways to do so.
A simple way to increase your restaurant’s profitability is to optimise your menu pricing.
To run a financially healthy business, the average restaurant needs to keep its food cost percentage between 25% and 30%. While this number doesn’t directly translate to profit margin, it does give you wiggle room to account for overhead expenses like labour, rent, and utilities.
If the food cost percentage of your menu items falls above the 28-35% range, you’ve probably been underpricing those items.
“Savvy restaurant owners and operators price each of their menu items to account for overhead expenses—that is, fixed and variable costs that aren’t associated with the meal per se. Things like utility bills, rent, and labour costs,” says Cairns.
To account for your restaurant’s overhead expenses in the price of your meals, Cairns suggests tallying up how much those expenses cost you per month and dividing that amount by the number of menu items you have.
That number is how much you could increase the cost of each menu item to cover your overhead expenses.
Maximise your margins with Lightspeed’s free Recipe Cost Calculator. Get an in-depth breakdown of your recipes’ costs – from individual ingredients to COGS, profit margins and a recommended menu price.
Menu engineering is the deliberate and strategic construction of your restaurant’s menu using sales and COGS data to guide which dishes to feature and their price.
Surprisingly, there’s a lot of psychology behind menu engineering. The way your menu is presented and designed can impact the dishes your guests choose and the profitability of your menu. In fact, it’s been found that menu engineering can increase profits by as much as 20%.
The objective of menu engineering is to ensure that every item featured on your menu is popular and profitable. So, no matter what your guests order, it’s good for your bottom line.
The first step in engineering a profitable menu is analysing your restaurant’s sales data for a specific timeframe to understand which menu item’s:
- Sell the most
- Sell the least
- Have the highest profit
- Have the lowest profit
The next step is to create a menu matrix. A menu matrix helps you visualise which dishes are most important for your restaurant’s revenue.
Categorise your menu items into the following four categories:
- Stars: High-profit, popular menu items.
- Plough horse: Low profit, popular menu items.
- Puzzles: High-profit, low popularity menu items.
- Dogs: Low-profit, low popularity menu items.
Once you’ve created your menu matrix, you’ll be able to use it to inform your menu design and layout. Your goal is to draw as much attention as possible to your stars, plough horses and puzzles as they’re your most popular, high-profit dishes.
Consider tweaking or phasing out unpopular, low-profit items from your menu to keep your guest’s focus exclusively on high-profit items.
The way your menu is laid out can impact what a customer does or doesn’t order, so it’s essential to pay close attention to your menu’s design to ensure your most profitable dishes always draw your customers’ eyes.
Here are our three tips for a profit-boosting menu layout.
- Remove currency from your prices to take the emphasis away from money, resulting in the customer spending more than they intended to.
- Place your most profitable dishes in ‘The Golden Triangle’. When people are given a menu, their gaze usually follows a specific pattern of first, looking to the middle, then to the top right corner, and finally across to the top left, creating The Golden Triangle.
- Add a decoy dish towards the top of your menu that is priced higher than the rest. The goal is that all of the other dishes will look like a better deal in comparison, leading the customer towards ordering them.
The more customers you serve per service, the more revenue you’re likely to make. Therefore, optimising your table turnover (the time it takes to seat, serve and depart a guest) is a great way to boost sales.
To improve your revenue per service, your ultimate goal is to reduce the time a guest occupies a table while maximising how much they spend without making them feel rushed or impacting the quality of service. This, however, can be a delicate balancing act.
Serve a table too slowly, and you’ll miss out on a higher volume of customers. Serve a table too quickly, and you risk making them feel rushed and unappreciated.
The best way to speed up your table turnover and serve more customers per service is to equip your front of house (FOH) and back of house (BOH) teams with tools that speed up their workflows.
The first step to an optimised table turnover is seating your guests as quickly as possible. If guests are left waiting, this can create a bottleneck at the front door, which can slow your workflows down even more.
To prevent this from happening, Lightspeed developed an intuitive, adjustable floor plan that enables hosts to know in real-time which tables are free, check-in reservations, and seat guests more efficiently.
Once your guests are seated, the next step is to ensure their orders are taken and delivered promptly. To ensure this process runs as smoothly as possible, it’s imperative for your FOH and BOH to be in sync with an easy, open communication channel.
Rather than writing down orders and manually sending each of them to the kitchen, Lightspeed allows waitstaff to take orders at the table via a tablet or iPad. Orders automatically sync straight to the kitchen printer or bump screen – reducing food wait times and speeding up service.
For instance, if a guest orders a cocktail and an entree, both orders are automatically filtered by type (cocktail + entree) and sent to the bartender and chef’s separate bump screen or printer.
Bump screens, also known as kitchen display systems, filter orders chronologically, colour-code them and have audible alerts for incoming orders. These features make it easy for kitchen staff to get orders ready faster.
The final step to improving table turnover is quickly and efficiently processing payments. To do that, Lightspeed’s adjustable floor plan features colour indicators that let wait staff know which stage of their meal a table is at.
Rather than ask whether or not a guest is ready to pay (and risk making them feel rushed), staff will already know before approaching the table.
Equipped with that information, wait staff can approach a table when it’s marked as ready to pay, easily split the bill (if necessary) and accept payments right from the table.
Once you’ve optimised your menu and table turnover, it’s time to look at how you can reduce your operating costs to maximise your margins.
Improving your employee scheduling to cut costs is a great place to start. Labour accounts for around 30% of a restaurant’s outgoings and it’s often one of the expenses that a business has the most control over.
Over or understaffing can have a huge impact on your team, customers and bottom line. Schedule too many servers during a slow shift and you risk spending too much on labour costs. Schedule too few servers and you risk turning tables slower, spreading your staff thin and weakening the quality of your customer experience.
To avoid these scenarios, it’s important to dig into your data to understand when your lulls and busy periods are. This will empower you to always schedule the right amount of staff to meet customer demand and keep on top of your labour costs.
With Lightspeed’s Restaurant POS analytics you can clearly identify which of your servers generate the most revenue, as well as your restaurant’s busiest and slowest business hours.
Equipped with that information, it’s easy to schedule your top-selling servers during your busiest periods to maximise your revenue per service and minimise your labour costs.
The World Resources Institute found that for every $1 a restaurant invests in reducing food waste, they save an average of $7.
Wasted food means wasted money, and anything you can do to reduce or eliminate food waste in your restaurant will save you money and inject a few extra dollars into your profits.
Lightspeed has a handy waste management feature that lets you know your precise wastage and how much it’s costing you.
- Easily record waste, who entered it and why
- Inventory is automatically updated in the POS when wastage is recorded
- Minimise waste by running reports to spot trends over time
Restaurants consume an average of five to seven times more energy per square foot than other commercial buildings. For quick-service restaurants, it’s up to ten times more. And that consumption adds up to higher utility bills.
Investing in eco-friendly kitchen appliances and lighting can contribute to lower utility bills, which leaves more revenue from sales left in the bank.
The Australian Government’s Energy Rating system can help you cut down on how much energy your restaurant uses. While the initial cost of the investment may feel steep, the long-term savings on your utility costs more than account for it.
The benefits of eco-friendly appliances
- Consume less energy
- Lower utility bills
- High return on investment
Businesses that actively reduce their food waste and environmental footprint typically have margins 3.3% higher than businesses that don’t.
The restaurant industry is a tough business to succeed in and while there’s no one-size-fits-all solution for increasing your restaurant profitability, the above tactics are tried and tested ways to do so.
To make calculating your margins that little bit easier and to help inform your menu pricing, Lightspeed’s recipe calculator crunches the numbers for you. The easy to use tool gives you an in-depth breakdown of your recipes’ costs, from individual ingredients to COGS, profit margins and a recommended menu price.
Lightspeed builds end-to-end commerce solutions so hospitality venues can launch, manage and grow their business -now and in the future. We believe businesses of all sizes should have access to top-tier technology that helps them succeed in a hyper-competitive, quickly evolving industry. Our solutions centralise your inventory management, payments and business analytics into one fast, reliable, user-friendly platform that both your staff and customers will love.