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Restaurant Profit Margin - 4 Areas To Focus On

Posted by Mirus Team on 7/8/13 4:47 PM

Restaurant Profitability

Whether you own 1 restaurant or 100, there’s no eluding the fact that you have a slim restaurant profit margin. Like… razor thin. Each and every week you or someone on your staff breaks down the numbers to try and find ways to control costs, cut back labor hours, manipulate ingredient specs, etc. with the ultimate goal to pad the bottom-line and increase profitability. It’s perpetual and it’s always something different that changes the outcome and affects your restaurant profit margin. Whether it’s the price of wheat or employee turnover, your numbers will be modified to a slight, but noticeable degree.

In regards to restaurant profit margin, there are more than 4 areas to focus on to improve operations but we have highlighted these 4 specifically because we think you’ll find lots of value in this set of information.

1. Understand The Restaurant Profit Margin Formula

This will look different for every company but there are a couple fixed and variable costs that will be constant for all restaurant concepts:

Net Profit Margin = Net Income/Gross Sales

Net Income = Gross Revenue - Operating Expenses

Operating Expenses:
Ingredients (Food)
Rent
Labor
Equipment (and depreciation)
Repairs and Maintenance
Utilities

If we look at one location as an example and we calculate that gross sales for the previous week was $20,000, we would subtract the operating expenses from the previous week to give us the net income. Hypothetically let’s say it costs $15,000 in operating expenses. You're left with $5,000 in net income. Divide $5,000 by $20,000 and the outcome is a net profit margin of 25%.

2. Increase Gross Sales To Increase Restaurant Profits

But be careful not to be mislead by restaurant numbers. In theory, if you were to have an increase in sales, you therefore had an increase to one of your many variable costs.

Take the example above. Let’s say the next week there was a 10% increase in sales. In order to achieve said increase, more food had to be prepared. So not only did you have to use more ingredients, you also had to increase staffing to support the increased volume of orders. You also increased utility usage, as well, because it took more gas to heat the ovens to cook the increased amount of food.

The only way the restaurant profit margin percentage increases is if the operating expenses do not simultaneously increase by 10%. There are multiple factors that could contribute to this. Upselling is one of them. You could have had the exact same labor as the week before but your employees’ upsold a more expensive menu item to increase the guest check average, thus, increasing weekly gross sales. If this is the case, give your manager a pat on the back for a job well done.

3. Decrease Operating Expenses To Increase Restaurant Profit

This is where you find out how good your manager is at staffing his/her location and how productive those employees were while they were on the clock. Good forecasting comes in hand, as well. The data from previous weeks does not lie; if you were busy from 5-8 the previous three Mondays, chances are you will be busy 5-8 on the fourth Monday, too!

Another thorn in the side of above store leaders is the overuse of ingredients and an increase of food waste. Cost of sales will inevitably increase if you are using more ingredients while preparing the food. Make sure your restaurant managers know the importance of accurate specs for each menu item. Good, productive labor and controlled food usage will more times than not increase the restaurant profit margin.

4. Upsell Profitable Menu Items

I mentioned this earlier but it deserves to be reiterated. Again, this is where using your operations data is going to be your biggest asset.

If the cost of goods for one menu item are higher than another, the margins are going to be much thinner. The best case scenario is having a menu item that is low in regards to cost of goods, but is high in price for the consumer.

For instance, if you are in the pizza business and for some reason pepperoni costs are down, have your employees’ upsell large pepperoni pizzas. Restaurants who utilizes online ordering can research their data and they may notice that the guest check average is higher through online orders. If that's the case, encourage your customers who call or dine-in to order online for their next meal with you.

Conclusion

None of this works without great employees working for you and outstanding
customer service. Period. The people running your restaurants are one of your greatest assets and they are in the driver’s seat of controlling restaurant profit margins.

Another very important asset is knowledge. Knowing and understanding the data coming from the POS, BOH, and FOH systems can help you make the best decisions for your restaurants. Having a great reporting and analysis tool on your team could be your supplemental best-friend!


Thoughts?

What else would you suggest to improve restaurant profit margins?

Do you monitor restaurant data? Use spreadsheets? Software?

About Mirus:

Mirus is a multi-unit restaurant reporting software used by operations, finance, IT, and marketing.

For more information, please visit www.mirus.com

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Topics: Restaurant Profit, Restaurant Operations

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