While running a restaurant seems like a pretty straightforward thing, there is much more to it than meets the eye. For example, if you’re planning to open a restaurant and make some profit, the first thing you need to calculate is when you are going to break even.
ROI stands for return on investment. In simpler words, it’s a simple ratio between the net profit and the cost of investment. For example, a high ROI means it will take less time to break even, and vice-versa.
The industry standard restaurant ROI is about three to five years. If you manage to push through the initial year without too many issues, you can expect to hit your restaurant ROI in about four years on average.
How to Calculate ROI for Restaurant
While there are a couple of methods you can use in order to come up with a number, the one we’ll cover is probably the easiest to comprehend and execute.
The first thing you need to do is to identify your costs. For the most part, your calculations will include the following:
If you’re starting from scratch, you ought to consider startup costs and include them into your ROI restaurant calculations. These costs refer to the money you must invest in your business before even opening your doors to the public.
Therefore, you should include the price of rent, liquor licenses, inventory, and equipment into your startup cost calculations. In case you’ve purchased an already established restaurant, you probably won’t have to worry about this particular aspect.
Once you conclude the startup costs, it’s time to handle the costs of operation. These include your monthly expenditures such as taxes, salaries, utilities, insurance, entertainment, and goods.
On average, you should devote at least between $200,000 and $400,000 for startup and operational costs, depending on the size of your business.
How to Speed Up the Process
Instead of asking yourself what is the average ROI for a restaurant, you should think about how to speed up the process and start making a profit as soon as possible.
Advertising Campaigns Can Help
Well-executed advertising campaigns are the backbone of every successful business, especially if you’re starting from scratch. While they may cost a bit of money initially, they are quite beneficial for speeding up the ROI process. The more people hear about your business, the better the chances for swift profits.
Even though this is not as simple as it seems, it does tend to yield positive short-term results.
The Formula for ROI Calculation
Once you have all the necessary numbers, calculating the ROI is pretty simple. All you have to do is deduct the marketing costs from your gross profit. Subsequently, you should divide the amount you spent on marketing by this number.
For example, if your annual sales are $500,000 and you’ve spent $450,000 on startup costs, your gross profit would be $50,000 for the year. Now, if you’ve spent $50,000 on advertising campaigns throughout the year, that means you broke even and didn’t make a profit.
Naturally, you should draw bi-annual reports and follow your expenses closely in order to prevent a disaster. It may not seem like it, but it’s very easy to step over the limit and postpone your ROI significantly.
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