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A Brief Guide to Restaurant Profit Margins

Running a restaurant is notoriously hard work and isn’t a profession for the faint-hearted. You’ll need to abide by many health and safety requirements to serve food. There are numerous regulations to meet, and you’ll be subjected to frequent inspections by your local food safety authority.

While it may be hectic and chaotic at times, some people are well suited for the profession. If you’re one of those people who have natural chemistry with the restaurant atmosphere and an unbound love for great food, it might be the perfect career path for you.

So, how much money does a typical restaurant generate? Keep reading to learn how to manage and increase restaurant profit margins in the beloved industry.

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The average restaurant profit margin

The first thing to comprehend is that there’s more than one type of profit margin to consider: gross profit and net profit. Secondly, profit margins vary significantly between the different types of restaurants.

Gross profit

This is the profit margin that remains after deducting the cost of goods (CoGS), such as restaurant utensils and ingredients. This is useful for determining your overall costs. However, it doesn’t account for the cost of operations, labor and other expenses.

Net profit

The net profit margin accounts for all expenses, including the cost of goods, operations, taxes, labor, etc. You can discover how much profit you’re making on every dollar spent by dividing the numerical value of your net income by total sales.

Average profit margins by types of restaurant

There are many different types of restaurants, each with its own set of advantages and challenges. The average profit margin largely depends on the type of business you’re running.

Full-service

A full-service restaurant offers a full dining and table service experience. It differs from a cafeteria in that client needs are closely managed by experienced waiting staff, adding to the cost of labor.

The profit margin for full-service restaurants typically falls between 3 – 5%. In other words, earning between $0.03 and $0.05 for each dollar spent.

Fast food and casual restaurants

These restaurants have lower labor costs as they typically involve some degree of self-service. Furthermore, table turnover is usually much higher as cooks can quickly prepare food with minimal effort and skill.

As a result, the average profit margin is considerably higher than a full-service restaurant- The profit margin generally ranges between 6 – 9%.

Catering services

Catering services can generally operate at lower costs as they don’t need to spend as much on rent and labor. While catering services vary somewhat in size and business models, the average restaurant profit margin for this type of business usually falls between 7 – 8%.

Increasing your restaurant margins

Profit margins are not a fixed value that you are necessarily bound to —there are ways to strategically increase your business profits.

Monitoring metrics

By monitoring your business metrics, you’ll get a clearer view of where money is coming in and going out. Without this information, making effective changes will be a convoluted process with obscure results.

Optimizing menu & prices

The menu is the life and breath of any restaurant business. First, you’ll want to optimize your menu to offer something unique that customers like and consider valuable.

If you’re selling a regurgitated version of what your competitors sell, there’s no real reason for customers to choose you over them. Having a unique product distinguishes you as a brand, so don’t skip corners here.

After making sure your menu is as good as it can be, adjust your prices to correspond to the quality of the menu. People have an instinct for determining whether something is a good value for their money.

This is where having a top-notch menu benefits you — if the product is good, sell it at a higher price.

Cutting costs

Carving away any unnecessary expenditures can make a world of difference. You should pay just as much attention to where money is going as to where it’s coming in.

Goods

Ask yourself if you’re paying reasonable prices for your goods and raw materials? Could you be paying less without compromising much on quality? If so, make a detailed list of changes you’d like to make and take action to make them happen.

Labor

Organizing your employees so that the work process is highly-refined and each staff member contributes as much value as possible is challenging, yet rewarding.

You don’t want to be in a situation where you have too many staff members, and they end up standing around for lack of anything to do.

Of course, you don’t want to unfairly overwork individual staff members either, but you’ll want to make sure you’re not losing money with excess labor costs.

Introduce an online ordering service

By introducing an online ordering service to your restaurant, you remove space limitations. Instead of caring for the number of people your restaurant can seat at one time, you can provide food for as many people as the kitchen can manage.

Making your food available for carry-out and delivery may mean that you also need to increase the capacity of your kitchen. However, if done successfully, you may increase your profit margins by double or more.

Restaurant profit margin FAQs

How do I know if I’m spending too much on goods and raw materials?

Finding suitable suppliers can take a considerable amount of time and energy. So rather than settling for the most immediately available and convenient supplies, spend time shopping around.

You won’t know if you’re getting the best deal on goods until you have a comprehensive picture of your options. Try to find a supplier that offers the fairest prices at an acceptable quality. Even when you’ve located the right supplier, see if you can haggle the price down a bit.

Should I hire a professional to monitor the metrics of my restaurant business?

Hiring a professional could be a good idea unless you’re talented with numbers. However, if you have the extra time and are looking to cut costs in the long run, learning how to do this yourself might be preferable. It depends on you and what you can handle.

How will I know if I’m striking a good balance with labor costs and employee workload?

If you’re spending too much on labor, this will likely be reflected by employees not having enough to do — which you’ll notice if you’re paying attention.

On the other hand, if you’re not spending enough and your employees are under too much pressure, they’ll likely let you know. A perfect balance involves having happy employees that are productive throughout the workday without becoming overly exhausted or frustrated.

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