Whether you’re just looking into the restaurant business, or you already own a successful restaurant. You should always ask yourself: What is my profit margin?
Maybe you’re just starting out, and you’re still talking to leasing offices to confirm your next restaurant tour. Why would you want to calculate your profit margin at such an early stage? Because that determines how much you can afford for rent. It’s too late to find out your profit margin after you sign up for a 10-year lease.
When looking at bizbuysell.com the other day, I saw a modern and fully renovated restaurant listed for less than $80,000. The restaurant is located in an upscale downtown area with tons of foot traffics. It seems like a great deal until I realized that the rent is at $18,000 a month plus NNN. I doubt if that restaurant owner knows his/her profit margin before signing the lease. I doubt if he/she knows how many businesses he needs to do in order to breakeven every month. Restaurant owners have to achieve a balance between finding a suitable place and paying the least possible rent for it.
I often see restaurant owners calculate their profit margin without considering the overhead costs. If they sell a sandwich for $10 and it only costs them $5 to make it, then they would consider this as a 50% profit margin. Yes, this is your gross profit margin but not your true profit.
You will read a lot of articles telling you that a restaurant’s average profit margin is 3%-8%. I recommend you to have a minimum of 20% net profit margin for your menu items. With a 3%-8% profit margin, you won’t be able to afford any miscellaneous cost such as a maintenance fee for your refrigerators, decorating for Christmas days, inspection for pest and termites, and this list goes on and on. You also can’t afford any promotion or discounts for marketing, such as giving 10% off for happy hours or paying Google to put you on the first page.
(Gross sales – Cost of Goods - Expenses) / Gross Sales x 100 = Net Profit Margin
The calculation for the net profit margin is simple, but the key is: Do you know all your expenses?
As a restaurant owner ourselves, we will try to list out a breakdown of all the costs we can think of. You can use our tool to calculate your net profit margin and this should also help you determine your menu price.
This is simply the cost required to make each menu item you sell.
These are other recurring payments that most restaurant owners have, and you can determine if you want to calculate this as part of your expenses.
Side Note: Do not include sales tax as part of your gross sale. You might see your bank account growing but 7-9% of that is sales tax. Set this money aside to report your quarterly sales tax. You can also switch to a monthly plan if that works better for you.
Yes. You can lower your cost by turning off the lights at night, by not printing receipt papers every time, by getting a fan so you don’t have to turn the AC on. However, the most effective way of cutting restaurant costs down is to get more sales.
The only expense that will increase along with getting more sales is your labor cost. You will need to train and hire more staff in order to handle the increase in sales. This is where Reduce’s self-order comes into play. You should only train staff in the back to focus on cooking and prepping, take advantage of self-order kiosks to be your cashier.
In our next article, we will introduce proven ways that we’ve used to increase our sales. Stay tuned!Create free accountContact us