What is the Profit Margin in Restaurants?

Do you run a restaurant? Well, there’s no doubt in my mind that you are a brave entrepreneur. The restaurant industry is very competitive, and it can be incredibly difficult to run a profitable restaurant that leaves a healthy profit margin. But why exactly does that happen? What affects the profit margin in restaurants? High employee turnover rates, expensive labor and equipment costs, real estate costs, and other factors make it difficult for restaurants to stay in business. But that doesn't make it impossible. In this article, we want to share with you how important it is to focus on increasing your restaurant revenue and profit margin. But first, let’s take a look at what profit margin is, what the average profit margin for a restaurant is, and how Camino Financial can help you increase your profits.

What is Profit Margin?

Profit margin is a ratio that measures what percentage of your restaurant’s revenue has turned into profit. For example, if your restaurant has a 25% profit margin, it means that your restaurant made $0.25 in profit for each dollar you made through sales. There are several types of profit margin, but the two primary types are the net profit margin and gross profit margin.

• Net profit margin is the most commonly used type of profit margin. This refers to your restaurant’s total profits after any and all expenses have been taken out of your total revenue.
• Gross profit margin, on the other hand, is the profit left over after subtracting all costs related to providing your product or service. Unlike net profit margin, gross profit margin doesn’t account for expenses such as taxes.

#CaminoTip Be careful: profit and revenue are not the same! Learn here the difference between both concepts.

How do you calculate the profit margin for a restaurant?

Calculating your profit margin is not hard at all. You just need some data from your business, like:

• Net profit: it's how much money you have left after subtracting all expenses
• Revenue: it's all the income you get in your business, including sales and other investments
• Total sales: it's the income that you get from sales
• Cost of goods sold: is the amount of money it takes you to produce the food you sell

The formula for net profit margin is:

Net Profit Margin = (Net Profit / Revenue) x 100

The formula for gross profit margin is:

Gross Profit Margin = (Total Sales - Costs of Goods Sold) / Total Sales

What is a good profit margin for a restaurant?

What should your restaurant’s profit margin be? The answer depends on the type of restaurant you run. Take a look at the average profit margin in restaurants for these common types of establishments: While these numbers can vary, they are a good indicator of where your restaurant’s profit margin should be. If you aren’t able to match these numbers, you should consider taking steps to increase your profit margin.

5 Tips to Increase Your Restaurant Profit Margin

A study by Perry Group found that the majority of restaurants usually fail in the first year. Of the restaurants that make it past the first year, 70% of them fail within the next three to five years. But you don’t have to become part of this statistic. The cost of goods sold (CoGS), labor costs, and overhead are the main factors that impact profit margins in restaurants. While these costs are necessary, there are many ways that you can cut these costs and boost your profit margin to ensure the success of your restaurant.

1. Reevaluate Your Food Costs

One of the best ways to boost your profit margin is to reduce the cost of goods sold. In the restaurant industry, this primarily refers to your food costs.

To reduce your food costs, you should:

💰 Negotiate with your suppliers

💰 Compare supplier rates

💰 Reduce food waste as much as possible

💰 Reduce the number of items on your menu

💰 Buy ingredients in larger quantities

These practices will help you cut food costs, which will help boost your restaurant’s profit margin in the long term.

2. Revise Your Business Plan

Your restaurant business plan is incredibly important to your business success. A solid business plan will help you evaluate your expenses, plan future purchases, and optimize your sales.

Whether you run a standalone full-service restaurant, a fast-food restaurant, or a food truck, a business plan will ensure that you are able to maximize your revenue while cutting costs.

Be sure to thoroughly evaluate your expenses, cash flow, financing needs, and other factors to identify where you can cut spending to help increase your profit margin.

3. Implement Loss Leader Pricing

Loss leader pricing in the restaurant industry refers to decreasing the prices of your best-selling items in order to attract more customers and boost your total sales.

While this means you will lose money on your best-selling dishes, this pricing strategy is meant to boost revenue from sales of your most profitable menu items.

This can be a risky strategy, but with careful consideration, loss leader pricing can be very effective in boosting your overall revenue and profit margin.

4. Decrease Employees' Turnover

Staff turnover can be an incredible burden on restaurants. When employees quit, you have to dedicate time and resources to hiring and training new staff members.

Additionally, the loss of your best employees can impact your restaurant’s service quality, leading to a decrease in your customer base and revenue.

In order to decrease turnover, it’s important to communicate with your staff, listen to their feedback, and implement new policies that encourage staff loyalty.

5. Get a Business Loan 

Aside from reducing costs, boosting sales is one of the primary ways to increase the profit margin in restaurants.

You’ve likely heard the phrase, “It takes money to make money.” This is particularly true for businesses and restaurants looking for ways to increase revenue through new business initiatives.

There are a number of ways a restaurant loan can help your restaurant boost revenue, such as:

💰 Purchasing new equipment to boost efficiency

💰 Funding new marketing strategies

💰 Redesigning your restaurant

💰 Redesigning your menu

💰 Hiring professional staff

These strategies can boost your profit margin by increasing brand awareness, attracting new customers, and encouraging customer loyalty.

Are You Ready to Increase Your Restaurant Profit Margin? Camino Financial Can Help

At Camino Financial we are driven by our motto “No Business Left Behind”, and that means we stand by restaurant business owners like you. Over the years we have specialized in the restaurant industry helping hundreds of restaurant owners like you with the financing they need to run a successful restaurant and with free tools and resources. Our loans are easy to qualify for, offer very favorable loan terms, have flexible loan limits, and other great benefits to help you achieve success in the restaurant industry. If you’re ready to apply for financing, we want to invite you to use our business loan calculator to see for yourself how our friendly loan terms and payment plans can help your restaurant grow. [business_loan_calculator]