The right way to calculate restaurant profit margins | Flipdish

The hospitality industry is notorious for having lower profit margins than other business types. In fact, restaurant profit margins in the United States in 2019 hovered anywhere between just 3 and 9% and since then the world has been upended. 2021 averages are still very much to play for. Compare this 3 and 9% to bakeries, whose average gross profit margins hover around 56%, and you can understand why it’s tough for restaurants to overcome the stigma of being a “low reward” business type.

But as we always like to remind our readers, the success of a restaurant is a nuanced topic. You don’t need to be the standard — with the right tactics, your restaurant can be an exception to the rule, boast healthy profit margins, and stand the test of time.

Before you learn how to improve your establishment’s profit margins, though, let’s quickly go through a crash course on profit margins.

  • What are they?
  • How do you calculate them?
  • What’s the difference between gross and net profit?

Keep reading to learn more!

What are restaurant profit margins?

Profit margins are when you express your restaurant’s profit as a percentage of annual sales — this is unlike profit, which is when you express profit as a dollar value.

Profit margins are when you express your restaurant’s profit as a percentage of annual sales.

To find your profit margins, you must subtract all of your expenses (fixed, variable, and mixed) from gross revenue. This is where most restaurants lose out on profit margins. When operating expenses like your rent, utilities, labour costs, credit card processing fees, and food costs are too high, it can take a big chunk out of profit.

The higher your profit margins, the better. But as we’ll cover in the next section, profit margins will vary depending on your restaurant type.