Owning a restaurant is one thing, but managing it is a whole different thing. You need to serve delightful dishes, take care of guests, and of course, deliver an outstanding dining experience.
Simultaneously, you also need to keep an eye on material costs, restaurant staff, and inventory. No matter how much effort you give, you still end up with low-profit margins, which you may not realize unless you know everything about a profit margin for restaurants.
Right, if you figure out how to optimize restaurant profit margins, then you can stay on top of your business. The profit margin is one of the factors that decide whether you will continue running a profitable business or fall short of your business goals.
So, it’s important you know the average restaurant profit margin, make the right decisions, and catch the ideal profit margin to smoothly run your restaurants without any financial worries.
What is a Restaurant Profit Margin?
A restaurant profit margin is the leftover amount you earn after taking off business expenses. The cost incurred for shop rent, hiring staff, packaging goods, or food & beverage packets will be subtracted from the gross sales in order to find a profit margin.
A profit margin of the restaurant unravels how much profit you earn through product sales, portraying a bigger financial picture of your business.
Usually, restaurant owners consider the restaurant gross profit margin or net profit margin to gauge the actual profit. Such practices help you lower unnecessary costs and maximize your profit. Hence, you should make informed business decisions once the profit margin is known.
What is the Average Restaurant Profit Margin?
Generally, the profit margin for restaurants lies roughly between 2-5%, depending on yearly product sales. The increased number of happy customers doesn’t single-handedly contribute to the restaurant’s success. That 2-5% average profit margin refers to full service restaurants (FSRs). These are establishments that generally include bartenders, chefs, managers, servers, and a host.
It is a profit margin that provides the exact idea of how much you earned, highlighting the financial health of your business. Notably, many factors such as cost per meal, restaurant type (dine or takeaway), and other operational costs can have a significant impact on your restaurant’s profit margin.
If you own a quick service restaurant (QSR), then the average profit margin is slightly more i.e. between 5% to 8%. Whereas, those restaurant owners running catering services can consider more than 9% as their average profit margin. For bar owners, the average restaurant profit margin falls somewhere between 11-15%.
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How to Improve Restaurant Profit Margin?
Restaurant Profit Margin can be improved by either boosting sales or minimizing business expenses. In this restaurant industry, modifying a business strategy or making changes in operational activities may work but not for everyone.
If one day you decide to reduce food supplies or labor costs suddenly, profit may not be achievable unless you execute a plan with proper attention and a robust strategy. So, how to do that? Here are some ways to improve restaurant profit margin.
1. Evaluate Sales Metrics
Keep a tab on restaurant metrics that may see ups and downs due to fluctuations in food buyers’ demands. This is a very effective tactic to analyze and change a pricing plan strategically.
Based on the data collection, you can later update the menu option and gain maximum profit on sales. To calculate your menu item price, firstly figure out how much it costs you for making one dish. Thereafter, divide the cost by the percentage of your food cost. Such metrics analysis plays a vital role in lowering expenses and maximizing profit margin.
2. Scheduling
Besides financial management, you also need to ensure the store is fully staffed at all times. You must streamline the schedule of your employees. Customers can knock on the restaurant’s door at any moment and you can’t let them go.
So, focus on employees scheduling in such a way that there should be someone to attain customers and help them purchase their favorite meals. Neither over-scheduling nor under-scheduling will help you increase profit margins, so you need to identify peak hours and make the right decision.
3. Enhance Your Online Visibility
Develop a digital footprint or if you already have an online presence, then double your marketing efforts to enhance business visibility. It is a cost-effective way to reach your potential customers and drive more sales.
Since diners love to search for new restaurants and cafes on their smartphones, it is better to enhance online visibility. Also, you can list your business on Google My Business with all updated restaurant information.
4. Invest in Tech Tools
Adopt sophisticated software that helps you fulfill customer’s demands even in the absence of your staff members. You heard that right, Software like Moon POS is designed to help you confirm orders with a self-checking-out option that not only drives sales but also delivers an excellent buying experience. Even you can request customers to browse the menu online and place an order from a remote location.
5. Minimize Food Waste
Spending chunks of money on buying food packets is already increasing your expenses, from which some portion of food may go to waste or packets may expire if they remain unused. So, it is important to stock food ingredients that are in demand. To achieve this, you need to facilitate inventory management using advanced software like Moon POS. By doing so, you can reduce unnecessary expenses, see a surge in profit margins, and also keep customers satisfied.
How to Lower Overhead Costs
Overhead expense is one of the “Big Three”, which majorly contributes to your business expenses. Almost one-third of your rise in expenses is due to overhead expenses that need to be reduced anyhow in order to hike profit margins. Below are two important things that you need to concentrate on.
1. Labor Cost
Consider reducing labor costs in such a way that it does not affect your business operation. You can optimize scheduling employees to tackle peak hours rush. While you decide to lower the labor cost, you need to make sure neither you have excessive staff during off hours nor a lack of employees during peak season. Implement performance-based incentives to old employees who are ready to work instead of hiring excessive staff.
2. Utility Bills
Restaurants and cafes consume five times more power than any residential or commercial buildings, resulting in higher energy bills. Similarly, if you are running a quick-service restaurant, then energy bills might be so high that it may leave little to no room for profit margin. To avoid this, you can invest in eco-friendly appliances and bring in energy-saving equipment at your store that helps lower your utility bills.
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Conclusion
So, now you know what is the average profit margin for a restaurant. The profit margin for restaurants, in a nutshell, is all about maintaining the financial health of your business. By lowering overhead expenses and regularly monitoring your KPIs, you can improve your profit margin.
Constant checks on profit margins can help you reduce spending on unnecessary items and maximize your profits. To achieve the ideal profit margin for your restaurant, you need robust software like Moon POS. It can play a vital role in your transformative journey by managing inventories, satisfying customers, and increasing sales. Try a 7-day free trial now.
FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
