July 24, 2018 glimpse_team

Average Profit Margin for the Restaurant Industry

At the end of the day, the two main financial metrics that matter between opening your restaurant’s doors another day or closing them for good are revenue and costs. You need to make more money than you spend in order to have a profitable business.

While it may seem black and white at the base level, the fact is that there are several key metrics that you and your restaurant or bar should focus on to help boost your likelihood of posting a net profit at the end of the year. We’re here to give you a little bit of background on some key financial performance metrics that you should be focusing on (hopefully you already are) and why they matter.

Profit Margin

A good place to start is understanding a baseline profit margin for the restaurant industry. To figure out your profit is simple – the money that is left over when you subtract all your expenses from your gross revenue (gross revenue – costs = profit). Profit margin is the amount of profit divided by annual sales and is thought of as a percentage (annual profit/annual sales = profit margin %).

The truth is that there are no one-percentage-fits all but the average profit margin for the restaurant industry is roughly between 3-5% and can typically range anywhere from 0-15%. It is important to consider that profit margin is not just determined based on food and drink sales but takes into account all other expenses as well.

There are two approaches that you can take in order to help increase your restaurant’s profit margin and they are:

  • Increase sales volume relative to expenses
  • Decrease expenses relative to sales volume – Biggest expenses in the restaurant industry are the cost of goods sold, labor and overhead

While these are pretty straightforward suggestions, they are in no way easy to execute. Proactive planning and close financial analysis can be the most beneficial methods for identifying areas of opportunity within your restaurant.

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Other key performance metrics that you should be tracking include:

Break-Even Point

This should be one of the very first numbers you should calculate to establish how much your restaurant needs to do in sales to earn back the investment and how long it will take as well.

How its calculated- Total Fixed Costs / ((Total Sales – Total Variable Costs) / Total Sales) = Break-Even Point.

Cost of Goods Sold (COGS)

This figure is a great representation of your restaurant’s inventory because it refers to the cost required to create each food and beverage item on your menu. To calculate this, you need to record your inventory levels at the beginning and end of a certain given time period- Beginning Inventory + Purchased Inventory – Final Inventory = COGS.

COGS is typically one of the largest expenses that restaurants face and by tracking it, you can better identify ways to reduce the costs. For example, negotiating better rates with suppliers and purchasing in-season foods are two easy ways to add more dollars to your gross profit number.

Overhead Rate

Sure, you probably get a stack of bills at the end of the month for you fixed expenses but breaking your overhead costs down to an hour- or day-to-day basis can help put things into a better perspective. To calculate your overhead rate per hour is- Total Fixed Costs/Total Hours Open = Overhead Rate and then you just multiply that number by the number of hours you are open each day to figure out daily overhead rate.

Prime Cost

Your restaurant’s prime cost is the sum of all labor costs (salary, hourly, benefits, etc.) and its COGS. To put this number into perspective, a typical restaurant’s prime cost will make up about 60% of the total sales. This metric is extremely important because it represents the all the controllable costs. You can’t control the price of rent but the variable costs are within your control (to some extent).

While these are just a few of the many important performance metrics that you should be paying attention to on a consistent basis, the crucial thing to remember is that you need to have your gross revenue cover all your costs. Glimpse specializes in helping restaurants and bars capture more revenue while reducing unnecessary costs that are impacted by customer service, POS transactions and adherence to SOPs. We would love to help your business reach its potential, so visit https://www.glimpsecorp.com/contact/ today to schedule your free demo and learn how we use digital images and your POS system to increase your bar or restaurant’s profit margin.