Becoming a restaurant owner is not a guarantee that you will become rich. This industry is not for the faint-hearted. Passion motivates restaurateurs to chase their dreams, but profit margins determine whether they can consistently make those dreams come true.
What Are the Types of Restaurant Industry Profits?
Restaurant industry profits depend on 6 key factors:
- Cost of food
- Economic climate
- Seasonal changes
- Frequency of events
- Type of clientele
- Popularity of the establishment
The profit margin is the amount of profit expressed as a percentage. Your profit is expressed as a percentile of the annual sales or gross revenue.
Calculating the profit results from subtracting your expenses from your total sales. These costs of doing business include labor, taxes, and inventories, among other general expenses.
It is pertinent to know that you cannot always run your business with thin profits. More significant margins are always good, not only for you but also for your employees and customers.
Net Profit vs. Gross Profit
The gross profit will show you the amount you are left with after subtracting the cost of food and labor. The gross profit can be calculated using the following formula:
Gross profit = revenue – the cost of goods & all other expenses
On the other hand, the net profit shows the amount of money your business earned over a period. To find it, you deduct the money you spend on bills, salaries, and other expenses of running your business. You can calculate the net profit as:
Net profit = gross revenue – all costs
The gross revenue shows you if the restaurant is operating efficiently. The net profit shows you how much you have left after subtracting all your expenses.
After determining the gross and net profit, you will also need to know your restaurant industry margin profits. To do so, apply the following formula:
Profit margin = Net profit / gross revenue
Both gross and net are vital to let you know how your restaurant is performing.
What Are the Typical Restaurant Profit Margins?
The numbers can always vary due to different factors. But most experts suggest that the typical restaurant profit margin should be between 3% and 5% on average.
The highest the margin can go is 15%. These values sound low compared to other industries due to the cost of labor, overhead, and the cost of sold goods. They are also known as "the big three" expenses.
The most important thing is always to set goals and work on maintaining average or better profit margins. With these, most restaurants opt to use the 30, 30, 30, 10 rule, which looks like this:
- 30% labor
- 30% food costs
- 30% overhead expenses
- 10% profit
These can sometimes be good to employ, but remember that the percentages may constantly change, affecting your profits.
How to Increase Profit Margins
If you desire to increase your restaurant profit margins, consider increasing your sales and reducing your costs. Here are five key methods to employ to achieve this:
1. Optimize menu pricing
This is a simple way to increase your sales. But to do this, you need to know the percentage of your food costs and serving costs. These two factors are critical to optimizing your menu.
For an average restaurant to run a healthier operation, the food pricing percentage must lie between 28% and 35%. This percentile is only helping you to ensure that you're financially stable. If the food percentage of your menu items falls below this, it means you are underpricing, and it's essential to raise the price.
If raising the prices scares you that it may cause customers to run away, you can decrease the food cost. To reduce the cost of buying food, look for vendors with cheaper prices. Alternatively, you can get your products cheaper when you buy directly from farmers as opposed to middlemen.
2. Update your menu layout
You might also refer to this as the strategic construction of restaurant menus. It strives to increase profitability by ensuring that every item found on your menu is profitable and popular. It's essential to continually analyze your menu and find out which items sell the most and least.
Identify the vital food that increases restaurant revenues; you can use sales to determine these. The design of your menu can help attract attention to your best-selling dishes.
3. Drive marketing campaigns
The keys to growing your restaurant business lie in both meeting your customers' needs and attracting new customers to walk into to your restaurant. You can choose to reward regular customers, making them go out and say good things about your business.
Direct referral is the most powerful marketing tool. However, before doing this, you will have to turn new customers turn into loyal fans.
Today, "foodstagramming" has taken root. People prefer social media to market their foods and dining experiences. You can create hashtags and promote them, and if you do this correctly, you can increase awareness and grow your restaurant business.
Alternatively, you may decide to recruit social media influencers. This is an upcoming trend by which restaurant owners invite people who are active on social media for a meal or two. In return, the influencer gives positive reviews of your restaurant.
When you have won an honor or a trophy, immediately craft a press release about it. Such a technique is a way to gain more positive attention that will enhance your reputation and bring you new customers.
4. Speed up your table turnover
Table turnover refers to the time a customer spends at a table from arrival to departure. The less time they spend, the more customers you can serve. You need to minimize the time customers spend in your restaurant without making them feel rushed.
The first way to achieve this is by seating customers faster. You can also find ways to serve them faster. Shorter table turnover is an indicator of how organized your staff is. You can also shorten the menu and streamline the payment process.
5. Make sure you have the proper insurance
Restaurants need proper insurance to cover them in case something happens. For instance, if a customer slips and falls in your restaurant, general liability insurance would make sure you're covered. Having the right insurance cuts down on legal fees, saving you more money.
Increase Profit Margins by Reducing Costs
The other way to increase your profit margins is by reducing your costs. You can achieve this by employing three proven cost-reducing practices:
1. Lower your utility bills
Restaurants consume a lot of energy in terms of electricity. This raises the bills that the owner or management pays at the end of the day. These bills may account for up to 33% of total sales.
To mitigate this, you can invest in eco-friendly appliances and lighting. The latter will ensure that you remain with some revenue in your bank.
2. Schedule your employees' working hours
To reduce the labor cost while increasing the revenue per service, you need to consider leveraging employee data and the restaurant's sales. Scheduling many servers when you have few customers makes you spend more money. At the same time, having few employees when tables are full may lead to providing slow service.
While scheduling your employees, ensure that you meet the customers' needs at a particular time and season while also reducing your costs.
3. Reduce costs of the goods you sell
Costs of goods sold are one of the most significant expenses. Lowering the cost of goods sold will enable you to balance between providing high-quality meals and keeping the food costs low. You can achieve this by buying from vendors who provide high-quality food at the best prices, reducing wastage. Additionally, regularly take an accurate inventory.
While doing all these things, you can see your restaurant's profit margin increasing. The secret always lies in choosing what is ideal for your particular restaurant. Choose the correct methods, and you will see your restaurant business grow.
To find out more about growing your restaurant and making sure it has the proper insurance, visit us online today.