Ultimate Guide To Restaurant Profitability: Ratios, Margins, And More – Groupon Merchant

Restaurant profitability is a crucial but challenging part of running your business. Find out all you need to know about restaurant profit margins and more.

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Is your restaurant’s profit margin rising or falling? Put simply, when you take off the various costs that go towards running your business – stock, salary, maintenance, and upkeep – is your bottom line in danger of bottoming out?

Large restaurant chains hold an advantage in that the strongest performers can compensate for less profitable locations. But if you’re working from a single location or even two or three, it can be difficult to make things add up when times are tight.

Knowing it can cost $2,500 per month just for utilities, how do you account for all your day-to-day expenses and still make a profit?

The good news is that some simple advice can get you on the right track. This ultimate guide to restaurant profitability will explain all you need to know, from what the average restaurant profit margin is to how to work out profitability ratios, as well as top tips for cutting down costs – and keeping profitability up.

Restaurant Profitability Ratios

These are the key financial indicators for your business’s performance. Monitoring costs and income allows you to calculate your ratios and determine whether they’re part of a successful financial formula.

By working out where and how costs are impacting your profits, you can apply just about any key performance indicator you can think of. Here are some of the industry’s most common restaurant profitability ratios to work from.

Prime Cost Percentage

Prime cost is the total cost of your company’s raw materials and labor. In a restaurant, that’s usually the price you pay for food plus your workers’ salary. To figure out how much of your takings goes straight back into the business, you can express it as this percentage:

Prime cost / total sales x 100
So, if you sell $25,000 worth of food and it takes $15,000 of prime costs to make it, that’s (15000/25000) x 100 = 60%

A 2019 report by Bloom Intelligence estimates that the prime cost percentage of your total sales should be 57.7%, up from 57.0% in 2016. (This figure is an average restaurant profit ratio for all types of food service business.)

That means almost 60 cents of every dollar you spend on food sales pays for its purchase and preparation. If your prime cost percentage is greater than 60%, you may need to look at sourcing cheaper ingredients, or managing worker-hours more effectively.

Inventory Turnover

Calculate your ratio of inventory turnover by dividing your net sales by the average cost of your inventory. Because you’ll be restocking inventory regularly, you’ll be able to see where the ratio is changing and work out why.

If the figure falls below average restaurant turnover rates, it means you might be into a slower season and won’t need to buy as much inventory. A higher average, meanwhile, may mean you’re not buying enough to meet demand.

Revenue Per Seat

For a dine-in restaurant, this simply demonstrates that some days, weeks, months and quarters may be quieter than others. It’s worked out this way:

Nightly takings / number of seats in restaurant

A lower revenue per seat means you may be struggling to draw customers. This ties in closely with what’s known as the “sales per square foot” metric. The calculation can help you determine whether you’re using the space that’s available to you effectively enough. Implementing strategies such as training your staff in effective up-selling or offering attractive promotions on days or nights that would typically be quieter can help you improve your revenue per seat.

Restaurant Profit Margins

Profit margins are probably your most reliable indicator of success in any industry. A profit margin that goes down over time means your restaurant is becoming less profitable – usually due to rising costs, a fall in revenue or both.

Understanding profit margins allows you to make changes where they’re needed, such as your menu prices or how much you’re paying for inventory. You can compare your results to the average restaurant profit margin to determine whether you need to make changes.

To calculate them, you need to consider the costs of not only your sales, but all other expenses too.

How to Work Out Your Restaurant’s Profit Margin

1) Start by calculating your restaurant’s gross profit. This is the total of all your takings (gross revenue) minus the cost of the goods you sell.

Gross profit = gross revenue – cost of goods sold

Your gross profit will tell you if the cost of your inventory is covered by your menu prices. However, this does not factor in other expenses like salary, bills, or what you’re paying for marketing your business.

2) Calculating your net profit will show you what you’re earning when all these other expenses are included. That means subtracting all outgoings and food costs from your gross revenue.

Net profit = gross revenue – cost of goods sold – other expenses

3) Now that you know your net profit, you can calculate your profit margin to determine how much “pure profit” you’re making from each sale. Expressed as a percentage, it’s basically cents on the dollar.

Profit margin = net profit / gross revenue
With a gross revenue of $100,000 and a net profit (after expenses) of $25,000, this is how your profit margin would look: 25000/100000 = 0.25 = 25%.

Now you can calculate this figure, you’ll be able to track it over different months or quarters to find out if it changes, and whether these changes are cause for concern.

What is the Average Restaurant Profit Margin?

The average restaurant profit margin is between 3-5%. However, different types of restaurants can claim different profit margins based on things like their overhead costs, and whether or not they have their own premises – most restaurants will fall somewhere between 0% and 15%.

So, while a food truck typically hires fewer employees and pays less to produce goods, a full-service restaurant must factor in running costs for the space it uses and the volume of food it prepares.

Because of the lower running costs, food trucks can often be the most profitable restaurant type, with an average profit margin of between six and nine percent. A full-service restaurant’s margin, meanwhile, should be operating within that three to five percent range.

Another thing to consider is staying competitive. Pricing your menu more affordably may mean cutting into profit margins, but it will also mean you attract more customers. Finding the balance over time is vital.

Top Tips for Improving Restaurant Profitability

Your profitability is determined by the gap between cost and revenue – so increasing your restaurant profit margin comes down to either (or both) of these things:

Reducing your costs per sale
Increasing sales volume

It’s about finding money-saving measures while maintaining efficiency, and/or finding ways to attract new customers and increase repeat business, enhancing your revenue per seat.

Reducing the Costs of Running a Restaurant

Lower Your Food Costs

The average food cost should be approximately a third of all costs – between 28% and 35% is typical. If you’re going above this figure, look at potential causes such as wastage or pricing. You should also consider your vendors’ price lists and renegotiate if possible.

Additionally, train staff to look for opportunities to save on costs. Maybe you should only bring out free appetizers if they’re requested rather than as a general rule. Do the same for staff in the kitchen, by being more measured with food portions if they notice there’s a lot of waste from certain dishes.

Decrease Overheads

Invest in things that will bring savings in the long run. This can be anything from more energy-efficient kitchen equipment to air conditioning and lighting which powers down during quieter periods.

Train staff to be more efficient – only running dishwashers when they’re full, for example, or not leaving ovens, gas burners or even lights on when they’re not in use. Ensure they can multitask and be mindful of other jobs to save on cleaning and prep costs. The more you can drive down day-to-day expenses, the higher your profit margins.

Increasing the Revenue of Your Restaurant

Change Up the Menu

Regularly refreshing your menu allows you to switch out the items that aren’t selling as well as you’d hoped and replace them with new and exciting options. You could even advertise dishes on the menu as only being available on a limited time basis to ensure customers come back for more. By monitoring the best and worst performers, you can balance your inventory more effectively too.

Offers and Incentives

From loyalty cards to special set menus, there are plenty of ways to increase your restaurant’s appeal to diners. Discounted weekday menus or one-off events can attract custom during quieter periods, while special introductory prices on new additions will pique diners’ curiosity.

Marketing

Word of mouth isn’t always enough to encourage customers through the door. Consider boosting your promotional efforts with a new restaurant website, social media campaign or email marketing. A survey by MGH shows that 45% of diners have decided to visit a restaurant for the first time because of a post on social media, while 22% have given a restaurant repeat business after seeing a social media post.

In Summary

Improving restaurant profitability is all about widening the gap between how much you’re selling, and how much you’re paying for it. By making efficiencies in costs like energy bills and ingredients, and boosting sales by getting more customers in, you can start to increase your average restaurant profit margin.

Keep an eye on important figures, such as how much you’re paying for your food versus what you sell it for – as well as how many butts you can put in seats on a regular basis.

Do this, and you’ll be well on your way to understanding what, if anything, you need to change – and how to achieve success. The Groupon Merchant program can help you attract business while keeping an eye on your costs. Sign up today and discover the benefits of a network of dedicated sellers.

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