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Tips for Optimizing Your Restaurant's Profit Margin

Disclaimer: This content is for informational purposes only and should not be taken as legal, accounting, tax, HR, or other professional advice. You are responsible for complying with the laws and regulations that apply to you. If you need specific legal or professional advice, contact an attorney.


Opening and running a restaurant is not an easy task. You will need to work long hours and make hard decisions. But if you plan ahead, you can turn these challenges into financial success.


It is important to remember that the restaurant industry is tough right now. There are a lot of restaurants, and it is hard to make money. You will need to be prepared for a lot of competition.


In the end, how well a restaurant does depends on how much money it makes. You can figure out how much money a restaurant makes by using our free restaurant profit and loss template. Keep reading to learn everything you need to know about restaurant profit margins so you can maintain profitability in your own business.


What is the profit margin of a restaurant?


The profit margin is the amount of profit expressed as a percentage of annual sales. This number is calculated by dividing the amount of money left over after subtracting operating expenses from gross revenue by total sales. The calculation may be more complex when revenue includes sources beyond food and beverage sales, such as catering, venue hire, branded merchandise, packaged goods, co-working space sharing, and franchising agreements.


Even though your total revenue may come from more than one source, the sky's the limit when it comes to expenses. Between labor, inventory, payroll, rent, utilities, advertising, credit card processing fees, equipment repairs, restaurant POS system technology, and general maintenance there are a lot of expenses that restaurant owners have to pay. This can make it hard to feel good about what is left after all the necessary deductions are made.


You need to control your restaurant costs so you don't spend too much money. This is especially important in the early years when your restaurant is starting out. Most restaurants do not make a lot of money when they first start, so it's important to be conservative with your estimates and goals. This way, you can be sure that your restaurant is sustainable and will be able to stay open for a long time.


The more money your restaurant makes on each sale, the better. But as we'll explore in the next section, your restaurant profit margins are always changing, sometimes because of things that are out of your control.


What is the average profit margin for restaurants?


This is a difficult question to answer because there are many factors that go into it. The average profit margin for restaurants can be affected by things like the average cost per customer, the type of restaurant, and more.


The average restaurant profit margin is usually between 3-5%. Restaurant profit margins can range from 0-15%, but the most common range is 3-5%.


Books about statistics will explain how outliers (very unusual data points) can affect averages. Restaurants that are very different in terms of their gross revenue and expenses (such as a fast-food restaurant and a Michelin star restaurant) have very different profit margins. So it is important to do specific research on the profit margins for your type of restaurant when determining how much profit you should make.


The most important thing to remember is to keep your restaurant's profits at or above average each year.


There are two ways to improve your restaurant's profit margin:


  1. Increase sales volume compared to expenses, or

  2. Reduce expenses compared to sales volume

It is important to remember that what works for one restaurant may not work for another. For example, many QSR and FSR restaurants think that if they reduce the hourly labor or the supplies they will see an increase in profits quickly. However, this can be a risky move because if you do not plan for the effects it can have on your customers, staff, and profits.


People often talk about the "Big Three" when it comes to restaurant expenses:

  1. Cost of Goods Sold

  2. Labor

  3. Overhead

Generally, one-third of revenue is set aside for COGS (Cost Of Goods Sold), another third for labor, and the remaining amount is used to cover any additional overhead costs.


You need to be proactive when starting or running a business. This means you need to have a plan and stick to it. It is also important for restaurants, no matter what type they are. This includes full-service restaurants, fast food restaurants, and food trucks. Having conservative goals will help you if something bad happens that you can't control, like bad weather or an economic downturn.

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