How to calculate the profitability of your restaurant

It’s known across the industry that many new restaurants don’t make it past their first year, and there is a range of factors that come into play. One of these is the capability to realistically calculate your restaurant’s profitability. This involves having a good business plan and knowing how to be smart with your finances. We’ve got some tips on how to calculate your restaurant profitability, as well as how to reduce restaurant expenses and even boost your restaurant profitability. 

So, how do you calculate when you’ll break even? Where do your losses come from? What tools can help you save money on a daily basis? 

Let's find out together.

Simple ways to calculate restaurant profit margins

When it comes to the profitability of your entire restaurant or the profitability of individual dishes, the methods of calculation differ.

Choose a global or centralized view

• Profitability per dish = (dish price – dish cost) / dish price 

• Overall profitability = (total sales – total costs) / total sales

Starting point: when can you break even?

Start by calculating your break-even point. This is the minimum turnover you need to achieve in order to break even—the first step towards profitability. Once you have passed the break-even point (see diagram below), you’ll start to generate profits.

It is therefore very important to be able to predict when this threshold will be reached and to define in advance the costs that should not be exceeded (using a simple calculation).

Calculating the break-even point in a restaurant

Break-even point = Fixed costs / Variable cost margin

The information you need to calculate the profitability of the restaurant:

• The margin on variable costs: Turnover – variable costs

• Turnover: Turnover = Sales price x quantities sold

• Variable expenses: These are expenses that will vary during the year. (Example: Valentine's Day is coming up and you’re going to order more raw materials than normal). They are opposed to fixed expenses, all expenses that remain unchanged regardless of your level of activity. (Example: rent for your premises). 

Before opening, think about all your expenditure and income points to see how long it will take before you become profitable. Be aware of all the costs (fixed, variable, etc.) and where savings can be made.

Even with the best of forecasts, you may face new problems once your business has started.

Thus, calculating your post-opening profitability will allow you to answer the following question: Am I able to cover my expenses with my current costs and prices of dishes?

If the answer is no, you will need to make some changes, making savings where possible, by following our advice in the rest of this article.

5 tips for reducing restaurant expenses

1. Identify the origin of losses

Before making savings, you must first understand the origin of your losses. Losses are inevitable in the restaurant business: theft, breakage, expiry of products, etc. 

We therefore advise you not to wait until the end of the month to qualify a loss. If possible, keep track (on paper or online) of which products are stolen or broken on the same day. It is at the monthly stocktaking that you become aware of what has been lost, but monitoring your stock regularly will help you to identify anomalies. 

If you start the month of September with 100 drinks, sell 10, and there are only 80 left in the stock on 8 September, there is a good chance that some of them have been stolen.

But beyond breakage and theft, some products are sometimes offered, or consumed by one of the team members. You can anticipate this by setting a daily limit on the number of coffees they can consume, and by having the reflex to indicate the products offered in your follow-up.

2. Reduce your accounting expenses

In the restaurant business, using a chartered accountant to manage your accounts is a strategic choice to save time and to be sure of a good result. 

However, these are quite large expenses, which you can reduce by digitising part of the process. With SumUp POS software, for example, your accounting reports are created automatically, and can be exported in CSV or PDF format to be sent to the accountant in one click. 

It will take less time to manage your accounts, so you can renegotiate the amount you give them each month.

3. Negotiate with suppliers

When it comes to raw materials, quality is paramount. You should not try to save as much as possible by going to the supplier with the lowest price. This will have an impact on the quality of your dishes, and you risk losing customers or issuing refunds.

However, you can negotiate with your current supplier—your loyalty should be rewarded. If you’ve been working with the same person for a long time, ask for a small percentage discount—you’ve got nothing to lose!

4. Avoid food waste as much as possible

Food waste is a major loss in the catering industry. In addition to the tons of food wasted every year, it is a loss of money for you.

Analyse the best-selling dishes to anticipate the raw materials you will need in the coming weeks. Avoid over-ordering on products with short use-by dates. Although it’s reassuring to stay stocked up, ordering too much can result in more waste.  

5. Pay attention to quantities

Accurately weigh all the ingredients in your dishes. By avoiding over-usage of ingredients, you ensure that every customer gets the same amount and that you have enough raw materials.

If you notice that your customers rarely finish their dishes, you can review your portion sizes and simply reduce the amount you serve.

How to improve the profitability of your restaurant

Optimising the profitability of your restaurant before opening: 

Choosing the right concept

If you have not yet opened your own establishment, think about which concept will be the most profitable for you. Other factors also come into play, such as the location of your restaurant: for example, a salad bar will be more successful near a business hub than at the exit of a college.  

Determining the right prices 

Pricing on your menu should be determined by several criteria (competition, cost of raw materials, labour, and more). You need to find a good balance between what you get from the sale, and the expenses needed to produce the dish.

The right price is therefore the one that allows you to make a margin, which you can calculate as follows:

• Gross margin : (Sales excluding VAT – raw material costs) / sales excluding VAT

• Margin on labour costs : (Turnover excluding VAT – labour costs) – turnover excluding VAT

• Margin on production costs : (Turnover before tax – (raw material costs + labour costs) / turnover before tax

Improving the profitability of your restaurant after opening: 

Improve the management of your staff

To boost the productivity of your employees (and thus generate better results), you can set up challenges between team members:

• Who can make upsell the most in one day

• Best server of the month

• Best customer service

With prizes at stake, your team will be motivated to break all records. However, it should be seen as a healthy initiative, so be careful not to make your workplace too stressful and competitive.

Use menu engineering

Menu engineering is the study of two factors:

• The profitability of menu items: the price you put on a dish versus the cost of producing it for your restaurant.

• The popularity of menu items: the volume of orders for a dish in your restaurant over a specific time period.

In addition to everything we have mentioned, calculating yout break-even point will allow you to make changes such as: increasing your number of employees, buying new tools that will save you time, expanding your terrace to accommodate more customers. Keep in mind that one of the best ways not to lose control of your business is to innovate.