Understanding Restaurant Profit Margin

The average profit margin for any restaurant can be an essential but also tricky question to be answered. While profit margin may be a very widely available metric, it cannot be easy to understand everything that entirely affects the calculation fully. Your restaurant’s profit margin depends on several factors beyond anyone’s control.

However, understanding your average profit margins will help track your restaurant’s financial health and show you where to enhance the operations.

Average Restaurant Profit Margin:

While several restaurant owners would like a clear answer to such questions, the average restaurant profit margin varies widely across different restaurants. There is no single food or drink formula for restaurant industry success, and there is no simple formula for healthy profit margins. Your restaurant’s profit margin can be influenced by food and inventory trends, geographical location, the broader economy of the state, and a wide range of other factors.

Gross Profit Margin

Your gross profit margin is leftover from your revenue earned after deducting the cost of goods sold (CoGS) and the cost of all ingredients for your menu items. This number must be helpful to measure the restaurant’s efficiency, but it does not consider all of the restaurant’s operating expenses.

Net Profit Margin:

Your net profit margin is purely based on your net income, which is your total revenue minus the operating expenses. So, by dividing your net income by your total sales, you can account for all costs of running a restaurant and understand the percentage of net profit you receive for every dollar you get.

Average Profit Margins by Restaurant’s Type:

Full-Service Restaurants:

The full-service restaurants typically include table service and more involved customer service experiences, spanning fine dining to a sit-down dinner. As a result, FSR can fall into the three to five percent profit margin range with more significant labor costs, depending on restaurant size, menu item prices, turnover rates, and location.

Fast Casual Restaurants:

Fast-casual restaurants, also known as fast food or quick-service restaurant, involve ordering at the counter or getting some level of self-service. Although factors like franchise affiliation may affect profit margins, fast-casual restaurants typically have an average profit margin of six to nine percent. This profit margin indicates the lower labor cost for pre-prepared food and a higher table turnover rate due to faster services.

Catering Services

Catering business ranges in size and business models, but generally, CoGS may be the same b/w catering and FSR; catering can operate with much lower overhead costs. As a result, profit margins average seven to eight percent for a catering services business.

How One Can Improve Average Profit Margin:

Understand and Monitor Your Metrics Regularly

Understanding your margins is the initial step to improving them. Tracked through your restaurant accounting software, specific metrics are vital to getting the complete picture of your average profit margin. For restaurants expenses, restaurant owners focus on three primary essential metrics:

Cost of the Goods:

Costs of the goods sold (CoGS) refer to the total cost of the inventory used to create food and beverage items during a limited period. Understanding your CoGS through accurate tracking through restaurant inventory management software supports you monitor how much profit you get per plate, informing critical menu engineering decisions.

Labor:

Labor is one of your restaurant’s highest costs. Your labor cost includes wages for salaried and hourly employees and other expenses associated with delivery—overtime, payroll taxes, and employee benefits like health care and sick or vacation days.

Overhead:

Overhead cost includes your directly controllable expenses, like supplies, repairs, and marketing, as well as your non-controllable fixed operating expenses, like rent, utilities, salaries, or insurance.

Increasing Your Restaurant Profit Margin

Your restaurant can enhance profit margins and raise profitability in two primary ways: increasing sales or decreasing expenses. Although many restaurant owners focus solely on increasing sales volume, streamlining your costs while maintaining the revenue could also enhance your margins.

Upgrade Restaurant Technology:

The invention of restaurant technology can help you reduce the cost of restaurant staff, one of your most important, most manageable costs. Based on predicting and selling goals percent of working hours, restaurant planning software can help your management team manage your work hours while saving time and energy. In addition, dining technology as a mobile app can be a single point of contact for company-wide shift requests and messages, encouraging employee engagement.

Other restaurant technologies, such as a fully integrated point-of-sale (POS) system, restaurant-specific software, and performance reporting and financial reporting tools, can provide your management team with business insight. In contrast, innovative management software and actual reporting, compared to theory, can help you reduce food costs.

Add Online Ordering to Your Restaurant:

With 46% of smartphone users now using their cell phones to order restaurant releases or delivery at least once or twice a month, online ordering is a new tool to help boost sales. More restaurants add delivery as online orders grow and become more popular with Grubhub, Postmates, Uber Eats, and DoorDash. First, however, make sure you look at the results on your profit line by using your restaurant management plan to track the financial impact of adding a service delivery.

Manage Your Online Presence:

Your online presence is more significant than ever, with your new and existing customers looking online at your restaurant before visiting.

Engage with your digital-savvy customers, keep your website and menu updated, and, most importantly, make it easy to use. Make it a priority to manage your presence on major review sites, such as Yelp and Google, because this listing depends on whether you update or not. In addition, think of a strategy to respond to updates in a dignified, professional manner to keep up with your online reputation. With more customers relying on social media to be available, maintaining an aggressive social media presence can help you connect with new visitors and engage with regular ones.

Adopt a Customer Loyalty Program to Incentivize Repeat Customers

A loyalty program can be essential to create a deeper connection with your customers. Such a plan can reward your regular customers with points or discounts, increase sales volume, and visit the restaurant. A customer loyalty program can also aid you in tracking and understanding essential data about your customers, aids in menu changes, and inform business planning.

Conclusion:

Understanding the restaurant’s average profit margin requires you to keep track of important metrics about your expenses and sales. Understanding your profit margin ensures that your business is healthy today and sets your restaurant a long-term success.

If you want to track the restaurant profit line using asset management or thoughtful planning, consider an integrated restaurant management system, now with the new Smart Ops Release. Restaurant365 includes software accounting software, restaurant software, software management software, staff remuneration + HR software, and software management on a cloud-based platform fully integrated with your POS system, as well as your food and beverage retailers and banking.