How to calculate restaurant profit margins?

Taking your restaurant from an idea to a brick-and-mortar business involves plenty of entrepreneurial passion. Once it’s up and running, though, you’re going to need more than drive to keep your business alive. In particular, a good grasp of finances and a keen knowledge of your restaurant's profit margins are crucial to keeping your company afloat. 

What are profit margins? Is there a simple way to measure the profitability of your restaurant? How can you reduce expenses to boost your overall revenue?

As small business supporters and tiny team cheerleaders, SumUp are here to help with all of your financial needs. Let’s start by getting to grips with your restaurant's profit margin.

Simple formulas for restaurant profit margins

Your profit margin lets you know whether your business is growing, staying steady or bleeding money. In terms of restaurant health, it’s a great indicator and one that’s actually pretty easy to work out.

Your net profit is usually shown as a percentage. This percentage refers to how much you make on every £1 you see in revenue minus costs. In other words, it shows how much you’ll keep as a profit. So, for example, if you have a profit margin of 50%, you’ll be seeing a profit of £0.50 for every £1 put into your restaurant. 

There are plenty of simple profit margin formulas that make light work of creating a financial overview of your business. First, though, you need to understand the different terms involved:

• Gross profit margin - your total revenue excluding cost of goods sold (COGS).

• Operating profit margin - your total revenue excluding COGS and operating expenses.

• Net profit margin - your total revenue excluding every business expense (including tax).

Once you know these, you can then start working out your preferred profit margin. 

To get an overall picture of health, most restaurants prefer looking at net profit and taking every business expense into account. For net profit, we recommend using this formula:

Net profit margin = (net income/revenue) x 100

Net income refers to your profit minus all costs.  

For operating profit margins and gross profit margins, the formulas follow the same principle. Simply switch net income for either gross or operating income, as shown here:

Operating profit margin = (operating income/revenue) x 100

Gross profit margin = (gross income/revenue) x 100

Once you’ve plugged in your numbers, you’ll end up with a percentage you can use to gauge the health of your restaurant.

5 tips to reduce restaurant expenses

If you’ve worked out your profit margin and it’s not as healthy as you expected, don’t panic. A negative profit margin doesn’t mean it’s time to shut down. Instead, you need to work on getting control of your finances.

One way to do that is by reducing your expenses. A strategy with instant results, it’s the first method we recommend to quickly turn your profit margins around. 

Here are 5 easy tips to start cutting back on your costs:

1. Create & stick to a budget

Running a restaurant costs money; that’s unavoidable. But, by sitting down and taking a look at what you’re spending, you can get clever with your money and restore your restaurant’s financial health. 

A budget will help you keep track of your expenses and be more mindful about the costs of your regular purchases. It’ll also give you a better idea of your cash flow, putting you in charge of your finances.

2. Shop around for new quotes

Quickly cut back on costs by shopping for new quotes. By talking with different suppliers, you can unlock great deals and bring down the cost of your bills.

From electricity and water to food and equipment, make sure you’re getting the most for your money by regularly asking for new quotes.

3. Go green & save money

Around 30% of British people will actively spend more to eat at a sustainable restaurant. But did you know that going green could also save you money? That makes it an eco-friendly no-brainer. 

By making sustainable choices, you can cut back on energy and water use around your restaurant. Some quick tips to reduce your bills include:

• Switching to energy-efficient lightbulbs.

• Only running your dishwasher when it’s full.

• Encouraging staff to turn off taps and lights when not in use.

• Using lids on pots to conserve heat.

4. Minimise food waste

Another eco-tip that can also save you money is minimising food waste. Restaurants in the UK collectively lose around £680 million in food waste alone, making it a costly part of your business.

To cut down on food waste, offer different portions so that customers can choose their meal sizes based on how hungry they are. 

You’ll also save money by taking control of your inventory. Using a reliable point of sale (POS) system you can track your stock, keeping items that expire first at the front of your storage and preventing overordering with efficient tracking.

5. Get rid of your worst-selling items

Are there items on your menu that don’t sell well and aren’t adding to your profit? Then it’s time to get rid of them.

This is particularly important for menu items that are contributing to food waste. When a low-selling dish uses a unique ingredient that’s frequently chucked out, that dish is draining your budget. 

Use your POS system to keep an eye on your best and worst-selling items. Remember that these can change seasonally, too, and a rotating menu could save you a lot in terms of food waste.

How to improve the profitability of your restaurant

Alongside cutting restaurant expenses, you can improve your profit margins by increasing revenue. The trick here is to look at low-cost strategies that won’t bump up your expenses. 

Here are some tried and tested profitability tips to get started:

Optimise your pricing

When your profit margins are very low, it could be because you’re undervaluing menu items. Work out the cost of each dish, including a cost-per-serving breakdown, and make sure you’re adding a healthy profit to the menu price. 

You can also get a better idea of pricing with market research. What are your competitors charging for similar dishes? If you notice they have more expensive menus, it’s a clear sign you need to increase your prices. 

Improve sales training

Your team should be working on your side to boost sales. Make sure they’re well-trained in tactics like upselling, a method in which staff suggest an alternative item that earns your restaurant a higher profit.

For example, if a customer orders a side of green beans, your staff might point them towards the starter dish of green beans in a garlic sauce. It’s a tastier dish but also one that’ll make your restaurant a healthier profit.

Change your menu layout

If you haven’t already, this is a good time to read up on menu psychology (also known as menu engineering). By simply changing the layout of your menu, you can put more emphasis on popular, profitable items. Customers are then more inclined to choose these items over your cheaper options, leading to higher order values.

Consider table turnover

The more customers you manage to serve in a day, the more revenue you’re likely to make. When looking to increase profitability, be sure to focus on table turnover. 

Some restaurants implement time limits on tables, for example, ensuring customers don’t stay for hours on end. Quick service and efficient cooking are other important factors, so make sure your team is organised for maximum profit margins.

Encourage impulse buys

Impulse buying quickly pushes up total order value, earning you more money per table. We already mentioned upselling, which is a good move if you’re trying to encourage last-minute purchases, but there are plenty of other methods to push impulse spending including:

• Adding deals and promotions to impulse items (e.g. drinks and sides).

• Using cross-selling to highlight complimentary items.

• Using visual merchandising to display impulse items. 

Even the payment methods you offer can influence impulse spending. Card readers, for example, are known to encourage last-minute purchases with customers more likely to splurge. Transactions are speedy, too, helping increase table turnover to get your next customer orders in quicker.