A target for their restaurant profit margin may not be high on the list of priorities of those who dream of making a living from their love of good food.
Why worry about money when you’re going to provide the best cuisine and superb wines to discerning guests who will surely reward you handsomely for your artistic flair?
In reality, though, your restaurant is first and foremost a business which will live or die by its bottom line, no matter how great your passion for what you do
So when you’re starting out, to decide where you have a sporting chance of success or whether you’re at risk of making a very expensive mistake, you need to know what sort of profit margin you can expect to make and what will be the minimum your business can survive on.
Going forward, this figure will likely remain extremely important as a tangible indicator of how well or badly you are doing. And certainly it is one you will need to have to hand anytime you go looking for new finance to expand or develop.
So, just how do you go about calculating this vital financial metric?
Firstly, it’s important to distinguish between gross and net profit margin.
Gross profit is the difference between your revenues (sales) for a given period and the cost of your inventory, that is your menu ingredients, for that period. Your gross profit margin (GPM) is simply your gross profit expressed as a percentage of total sales.
Now, this is an important figure to know and to track, because it is out of this sum that all the other overheads and expenses of your restaurant have to be paid. And if it gets too low, either because your inventory costs are too high, or because you’re not making enough sales, you may soon be in bad trouble.
GPM figures vary widely according to the type of restaurant concerned, with some industry sources quoting a range as wide as 20%-80%, but 60-70% seem to be the more generally quoted figures. Fine dining establishments are likely to tend towards the high end of the range simply because they charge higher prices for the experience they are offering.
What’s important to your business, however, is not so much that you achieve a particular figure but that your GPM is sufficient to provide you with an adequate net profit margin, which is probably the most important metric for any business.
To calculate your net restaurant profit margin, simply deduct from your gross profit all other costs, which may include staff, rent and utilities, equipment rentals, loan repayments and marketing, to name but a few; then calculate the remaining figure as a percentage of total sales to give your net profit margin.
Like GPMs, net profit margins can vary significantly between industry sectors and individual outlets, but figures of anywhere between 3-6% are regarded as typical.
These numbers might seem scarily low (you would need annual sales of several million to be left with an average American salary), and indeed restaurant profitability has traditionally been lower than other sectors of the hospitality industry such as bars and hotels.
That said, there are important differences within the industry; fast-food restaurants for example, and particularly McDonald’s, tend to record significantly higher percentage profits than full-service restaurants.
But whatever sector you are in, there’s no doubt that the narrowness of this restaurant profit margin leaves little room for error; and a constant drive to control costs is essential for survival and success. So if you’re simply looking for a healthy return on your capital, there will probably always be better places to invest than in a restaurant.
Fortunately, however, the advent of the modern restaurant pos system has done a great deal to help streamline business processes, manage inventory and increase productivity; and the adoption of this technology will go a long way towards securing sustainable profit margins.
And in the end, how much money you need or want to earn from your business is primarily a matter of your individual lifestyle choices and aspirations. With sound planning and careful financial management, the figures show that it’s possible, though never easy, to make a healthy living from a passion for great food.