The Profit Margin In A Restaurant Business Is Not As High As You Might Imagine
To do what no one has ever done before. To achieve a goal. To make money. To improve our work-life balance. These are just a few reasons why we set ourselves on the path of owning a small business.
For these reasons and to ensure the safety and growth of your new business, especially if you have a restaurant you want to always know what the average restaurant profit margin is, especially when you are just starting out. Ok so that takes care of your first few months of operation, but what if you are a real newbie in the business? What kind of restaurant profit margins can you expect? Is this type of entrepreneurship going to be worth all the hard work?
Here we discuss the truth about what you can expect in the restaurant industry and what kind of profit you can expect to see.
Not For The Faint of Heart
The restaurant business is not for everyone. Passion is the driving force behind a restaurateur’s desire to bring good food to his community but the profit margin is going to determine whether you stay in business over the long run or not.
It is a sad fact. Profit margins are becoming smaller in this industry. In the old days, a restaurant owner could expect a profit margin of about 20%, but today profit margins could be as low as 7%.
Of course, there is no one answer for every restaurant, but on average the restaurant profit margin is from 2% to 7% with full-size restaurants at the lower end and fast service restaurants at the higher ends.
Why Are Restaurant Profit Margins so Small?
There are a number of expenses in the restaurant business, but primarily the reason for this low-profit margin are the costs of running the business. The biggest three expenses are the cost of the goods, labor costs, and overhead.
Approximately one-third of the revenue goes to the cost of goods and another one-third goes to labor and the remaining needs to cover rent and utility bills. What is left is about 6% of a net profit.
There are two basic ways of improving profit. First by increasing sales volume or secondly, by decreasing the overhead.
How to Increase Sales
There are a few things you can do to increase your sales volume. You can:
Optimize your menu items and pricing.
Increase advertising to bring in more traffic.
Improve customer service for servers.
Add seating options.
Decrease Overhead Expenses
Another way to improve your restaurant’s profit margins is to reduce continual expenses like employees and utilities. You can also improve scheduling options, reduce food waste, and lower utility bills.
The best way to improve scheduling and reduce labor costs is to leverage your sales and employee data. Compare the data and use it to schedule employee work schedules. This gives you the information you need to minimize your employee needs during slow business hours and maximize your staff when you have more customers.
To do this you need a point of sale analytics to help predict the number of employees you need for each hour. This type of analytics also predicts the servers that generate the most revenue and when your restaurant is the busiest.
Another money drain on restaurants is the utility bill. Restaurants consume seven times more energy than other commercial businesses. By investing in sustainable kitchen appliances and using energy-efficient lighting you can cut down on a lot of those energy costs and thereby improve your profit margin.
The restaurant business is tough and it is an industry that is difficult to succeed in. But if you use these cost-saving tips you can increase your sales and decrease your expenses.