Restaurant business is a highly competitive business. Everyone is trying to figure out the ways to stand out in the industry with innovative food or exotic ambience. There are restaurants in Italy where an alleyway is turned into a beautiful outdoor restaurant. Coming up with a different concept of restaurant can surely be an asset to your business but the one and only force that will drive business to you is the Food! If Food is good you have already done the major part of your job. You don’t even have to look for innovative ways to serve food you just need to serve good food!
Now you have entered the industry, then what? You have to think about the profits. You can’t run a business with quirky ambience and innovative ideas. You have to earn sustainable profit so you can keep up with your business. Keeping up with your books is mandatory for every business owner to understand where your money is going and where you can cut costs or invest more to run the business. Profits is the main goal of any business.
How is Restaurant Profit Margins Calculated?
1. Calculate Your Profit
To calculate your profit, subtract all of your expenses from your gross revenue:
Gross revenue – Expenses = Profit
So, What are the Expenses of a restaurant?
Let’s say your restaurant is an average performing restaurant so what are some of the areas that you’re likely to spend money on? Some of these particulars are more of long term investment, some of these are renewable on a periodic basis like licenses and some of these are more frequent. The following list will be different for different restaurants.
- Revenues for the Chart of Accounts
- Beverage Sales- It refers to alcoholic beverages
- Food Sales- It refers to the food item you sell.
- Raw Materials/Fresh Produce- it involves vegetables, meat, dairy etc.
- Glassware, Flatware, and Smallware- it involves the cutleries you serve your food in, utensils to cook food.
- Restaurant Décor- it refers to the seating arrangements, cushions, showpieces and anything to decorate your restaurant to set up a desirable ambience.
- Repairs and Maintenance- It refers to the fees you’ll bear to repair anything damaged or maintenance such as cleaning, sanitization etc.
- Utilities- Such as electricity, gas, water, cable and telephone.
- Disposal Services- Such as waste services for your business; including garbage collection, recycling etc.
- Miscellaneous Expenses- These are uncategorized expenses that you didn’t account for previously.
- Labor Expenses- Wages/Insurance(if any)- Refers to salaries of chefs, waiters, accountants etc.
- Rent Expense- Refers to expenses you pay for the space you’re established or any rented machinery.
- Liability Insurance- It provides protection against claims resulting from injuries and damage to people and/or property.
- Licenses and Permits- It refers to the fees you pay to obtain a license to operate a restaurant and bar.
- Marketing Expenses- Refers to the cost you bear to promote your business to increase visibility and exposure so you have a higher footfall.
- Legal Fees- it includes fees you have to pay to your lawyers and representatives,
- Accounting Fees- Keeping up with your accounting books requires you to pay an accountant.
- Music and Entertainment- Playing Music requires you to pay some fees. Similarly with entertainment if you’re going to screen matches or some series you’ll require a big screen and speakers.
- Telephone- A Telephone for people to call in to ask for directions or check about services, orders etc.
- Internet- Whether you provide Wi-Fi to your customers or not you do need it for your own systems.
- Office Supplies- It includes pen, notepad, printer, pages, etc
2. Divide Profit by Total Revenue
To determine your profit margin, divide profit by gross revenue:
Profit / Gross Revenue = Profit Margin
3. Multiply by 100
Multiply the profit margin by 100 to turn the number into a percentage:
Profit Margin x 100 = Profit Margin Percentage
From the list above, you are now aware where you have to invest money and those particulars are something you can’t cut cost from. But even after knowing where your money is going you won’t be able to predict where more of your money is going. So you have to consider unpredictable particulars too while calculating your profit margin. Some of the places where your profit margins are being chopped off are the following specifics:
Third-Party Apps have become increasingly popular and made it very convenient for people to be able to order from restaurants without having to keep a diary of their number. Zomato, Swiggy, FoodPanda dominated the food delivery industry and now UberEats also jumped into the market. More and more such platforms will be seen in the forthcoming future and you as a business owner have to adapt to such apps to be able to acquire new customers.
As a customer people are looking for options and convenience, they might switch between the apps to order food and if you’re available in one app and not on the other then you might lose customers. On top of that all these apps come with their own concepts and strategies to keep customers to keep using their apps such as Zomato has Zomato Gold and all the apps have some sort of discount going on. Restaurants have to let go of important margins up to 20% just to acquire or retain customers via offers or loyalty programs. So, you have to keep up with them too and that also slashed off the profit in a large way.
Restaurants now tie-up with online food aggregators like Zomato, Swiggy, UberEats to increase exposure and visibility. Since they are on these apps it is not feasible to have their own delivery staff while paying commissions. Commissions absorb anywhere between 10% to 30% of the revenue depending upon the delivery partner and deal.
After starting the business your main goal is to earn profit. You plan and strategies to reach your goal and without profits a business can’t sustain. Here are a few elements that you should monitor whilst you run your business to reach your goal to earn profit.
Operating profit reflects the residual income that remains after accounting for all the costs of doing business. A restaurant generates these profits from dine-in customers, online orders, catering. This is the main source of revenue so higher the operating profit higher the longevity of your business.
The break-even point can be defined as a point where total costs (expenses) and total sales (revenue) are equal. Break-even point can be described as a point where there is no net profit or loss. This is a boon to a new business owner. The reason for this is that a new business has lots of ups and downs and initially you’re just figuring out a lot of quirks about the industry. Businesses take a lot of time to earn profit even if it is a minute one so if you come to a Break-Even Point it means all revenues made from this point will be profit. The main purpose of break-even analysis is to determine the minimum output that must be exceeded for a business to profit.
Cost of operations
Operating costs are expenses associated with the maintenance and administration of a business on a day-to-day basis. First and Foremost cost of operation will be raw material, fresh produce which would be the cost of food. Depending upon the money you invest on the quality of raw material and cost of making the dish your final price of the item will be calculated with a profit of 20% to 30%. Cost of Operations includes everything that you have to pay rather frequently like monthly basis. For example salaries of staff, utility bills, marketing costs, commissions etc.
Revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Restaurants earn their revenue through a number of ways such as dine-in, online delivery, catering at events etc. Keeping good records of all transactions is the key to tip-top financial management and will help calculate the revenue of your business.
What are some Profitable Restaurants?
Bars- Alcohol has one of the highest markups of any restaurant item. So bar and grill, pub or restaurant that focuses mainly on alcohol sales could do fairly well, profit wise.
Cloud Kitchens- Virtual restaurants, or those that only offer delivery rather than dine-in or carry-out options, have increased in popularity in recent years, mainly in large cities. Still a relatively new concept, there’s not a ton of data available about earnings. But you can save significant money by skipping the storefront in an area where you’ll get more footfall. You don’t have to worry about or spend money on decor/ambience of the restaurant and hire staff to serve food.
Buffet Restaurants- Buffets eliminate the work that a lot of other types of restaurants cannot. In other words, customers are actually doing the work that staff would be doing at a regular table-service establishment. While sit-down restaurants typically serve your meal and deliver drinks to the table, at a buffet-style, guests serve themselves, making no need for waiters.
Quick-Service- Spending an hour in a restaurant is just not a feasible option sometimes! This is when they turn to quick-service restaurants to refuel before they carry on with their day. The food these types of restaurants serve are known for their good taste and something that you can quickly put together. Most of these places are fast food chains where frozen food is used.
Casual Dine Restaurants- Casual Dine Restaurants are also a favorite restaurant concept idea for new as well as existing restaurateurs. The investments incurred in these formats aren’t that high. When it comes to Casual Dining Restaurant, it does not demand a posh locality hence the preferred location is high footfall area, malls and shopping streets.
Restaurant Business is highly competitive but the only few can generate profits for years. This industry is not only about serving good food but also amazing service. A lot of restaurateurs start serving high quality food with high quality raw material to get the initial booming attraction from new customers. But with time this quality fades away in the run for earning more profit with less investment. You have to keep in mind that if you have attracted your customers with high quality food then that is something you can’t degrade. With time your restaurant should go up in hierarchy and not low.
Multiple restaurant business opens and closes down within the first 2 years but if you’re here to sustain then you have to strategies in a way where you are not only upping your service but also be able to earn sustainable profits. Always look into your books and plan to cope up with losses accordingly. Profits are hard to earn in this industry but once you understand the quirks of the industry then you can make a breakthrough in the industry.