How much profit does a Restaurant business make?
Getting a restaurant off the ground — and keeping it going — is no easy undertaking, as anyone in the foodservice sector knows. Long hours and difficult choices abound, but with a little (well, a lot) of planning and preparation, you can turn logistical and sometimes physical suffering into a financial benefit.
A short glance at the current status of the restaurant sector reveals a grim picture: excessive turnover, excessive labor and food costs, astronomically pricey rent, punitive internet reviews… the list goes on.
But, in the end, one factor determines whether a restaurant’s doors remain open or not: gross profit margin.
The Most Important Profit margin
The profit margin is defined as the amount of profit represented as a percentage of annual sales, where profit is stated in dollars and cents.
Profit is the money left over after operating expenditures are subtracted from gross revenue, and income can be generated in a variety of ways beyond food and beverage sales. Catering, venue hire, branded items, packaged goods, co-working space sharing, and franchising agreements are just a few of the revenue sources that could be included in total sales.
Unfortunately, even if your entire money comes from multiple sources when it comes to spending, the sky is the limit. After deducting labor, inventory, payroll, rent, utilities, advertising, credit card processing fees, equipment repairs, restaurant POS system technology, general upkeep, and the dozens of additional fixed costs, variable costs, and above-the-line charges imposed on restaurant owners, it’s typical to feel underwhelmed by what’s left.
It’s critical to control your average restaurant revenue and gross profit margin expectations during your restaurant’s early years. Of course, being the next overnight success story would be fantastic, but the reality is that the vast majority of restaurateurs take on large debt and achieve limited profitability when they initially open their doors.
When unforeseen start-up expenditures arise, making conservative estimates and targets will come in handy. When it comes to earnings, long-term viability is crucial.
It is preferable to have a bigger profit margin. However, as we’ll see in the next section, your restaurant profit margins are always vulnerable to fluctuation, sometimes due to factors beyond your control.
What is the typical restaurant profit margin?
The average profit margin for restaurants is influenced by a variety of factors, including average cost per customer (particularly if you’ve managed to upsell), the style of restaurant operation, and so on, just as a restaurant’s performance is not just affected by the food or drinks it serves.
Restaurant profit margins typically range from 0% to 15%, however, the average profit margin is usually between 3 and 5%.
Outliers – data points at the extremes of a spectrum — have an impact on averages, according to any Introduction to Statistics textbook. Between a QSR and a Michelin-starred restaurant, gross revenue and expenses differ dramatically. When calculating how much profit you should make in a restaurant, it’s useful looking into profit margins particular to your niche.
How can the profit margin of a restaurant be increased?
There are two approaches to this:
A. growing sales volume in comparison to costs, or
B. lowering costs with sales volume
It’s crucial to remember that when it comes to normal restaurant margins, as with practically everything else in the industry, what works for one person might not work for another.
As an example,
Many QSRs and FSRs feel that a simple reduction in hourly labor or supplies will result in a “fast win” in terms of cost reduction and profit rise. However, this is a strategy that should be used with caution, as failing to plan for the consequences of these changes might jeopardize your customer experience, employee morale, and bottom line.