Having a wide profit margin is the eternal hope for all restaurant owners. However, the way to achieve a high restaurant profit margin is a science that not all restaurant owners are able to master. You can, however, achieve a high restaurant profit margin if you do it right. Don’t worry, we are here to help you understand how you can garner a high restaurant profit margin, by increasing your restaurant’s overall sales and reducing your restaurant costs.
How To Calculate Your Restaurant Profit Margin
A restaurant profit margin is essentially the money that is left after subtracting operating expenses from gross revenue. How to generate revenue may include more than just food and beverage sales.
You can very effectively calculate your net-profit margin by dividing net income by sales. You can get each of these variables on the income statement for a restaurant, or chain of restaurants. This ratio shows how much sales remain once all expenses of the restaurant are paid. To calculate your net profit margin, you need to have your net income in place. You can calculate it by following this formula,
Net Income = Gross Revenue – Operating Expense
Gross revenue is sales revenue from selling food, drinks, and merchandise plus gains which means income from a transaction that does not fall in your normal business operation. On the other hand, operating expenses are the costs you incur to run your restaurants such as the costs of ingredients, rent, wages, equipment and depreciation, utilities, interest and taxes, repairs and maintenance.
Once you have your gross revenue and operating cost, then you can easily calculate your net income. With this net income in hand, you can a calculate your net profit margin following the below-mentioned formula,
Net Profit Margin = Net Income / Gross Sales X 100
How To Increase Your Restaurant Profit Margin
With the innate interest to increase your restaurant profit margin, you might brainstorm to find the various ways by which you can augment your profit margin. The two ways by which you can increase your restaurant profit margin are:
1. Increasing Sales Volume
There are various ways by which you can increase the sales volume of your restaurant which in turn will help you to garner a higher restaurant profit margin. Some of the most important ways by which you can increase the sales volume are:
- By increasing the number of customers: Bring in regular innovations in your restaurant menu, host events, run exciting loyalty programs, provide interesting discounts and offers. Remember one thing, regular changes and innovative ideas tend to attract customers on a large scale. Simply deciding and making arrangements for such occasions will not do you good, unless you market your efforts. Do a proper market research and try and analysis what your competitors are doing that is helping them to garner more customers. Once you have mastered the trick to attract customers, then you can be assured that your profits will increase.
- By increasing customers return rates: Once you have managed to attract customers, your next big thing will be to find ways to retain them. Providing excellent customer service can be a great way to retain customers. Run an extensive loyalty program, that will help you to keep your customers in tune with your restaurant. Send them SMS and emails to inform them about a new event at your restaurant, about some new offers and discounts that you will be providing. Such an initiative will make your customers feel needed and there will be greater chance to see them again at your restaurant soon.
- By increasing your sales average: You can increase your sales per customer, either by increasing the cost of the items that are sold regularly or by finding ways to increase the number of the items sold. You can do the latter by mastering the technique of upselling. Train your servers to suggest items to the customers in a way that will compel the customers to order more, or order larger dishes. However, make sure that your servers should not be very pushy since such an action might irritate your customers. You must have seen, that in KFC or in McDonald, the servers always recommend you to order large size fries or beverage, this is exactly how they upsell. This technique can go a long way to increase your profit.
2. Decreasing Restaurant Costs
Try and decrease the additional expenses, that might increase your overall cost. These might include, hiring unreasonable number of staff, unable to retain your staff, generation of a large amount of kitchen waste, incurring cost due to sudden equipment failure, unable to market well and gather the crowd on an event hosted at your restaurant, these all lead to the incurring of cost which unnecessarily increases the expense of your restaurant. Hence, find all the possible ways to cut down on these additional costs. Install a POS system that will help you in recipe management, cutting down on labor cost, help you to avoid the instances of theft and pilferage. You can train your staff so well, that will help you to run your restaurant with limited staff. Doing appropriate things will help you to avoid the possibilities of unnecessary costs that might reduce your restaurant profit margin.
Ways to increase your restaurant profit margin is a relative concept. What might work for one restaurant might not work for the other. So, it is highly recommended that you don’t follow the various myths to increase your profit margin, on the contrary, you should strategically decide depending on the format of your restaurant and by taking into consideration other tangents of your business.
We hope that you have taken away the much need knowledge about what is a restaurant profit margin and how you can increase it that will ensure that your restaurant never runs into a loss.