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A healthy profit margin is all about finding the right formula for increasing revenues and reducing costs. It sounds simple, but it’s a tricky balance to find when you’re dealing with fixed costs and a fluctuating economy.
At Trail, our sole focus is to support businesses in the hospitality industry to run efficiently and thrive for years to come. So, if your restaurant profit margins are a little too lean and you’re looking for some ways to refresh your knowledge and give your profit margins a boost, then we’re here to guide you.
In this article, we’ll clarify the difference between gross profit and net profit, and how the two work together to generate the final figure for your restaurant’s bottom line. We’ll also show you how some seasonal creativity with your menu could be a key player in reducing your restaurant’s costs.
If you’re ready to take the first steps to increase your profit margins and help your restaurant thrive, let’s dive straight in.
Gross profit margin or net profit margin? And which do you use and when? Both metrics serve slightly different purposes but generally speaking, the profit margin of a restaurant refers to the amount by which revenue from sales exceeds total costs.
How it’s calculated:
First, work out your gross profit which is revenue minus the cost of sales. Divide this figure by the revenue and multiply it by 100 and you will see what percentage of your revenue is gross profit.
How it’s calculated:
Deduct all expenses from total revenue. Divide this figure by your revenue figure and multiply by 100. This figure will give you a percentage for the portion of total income that is profit.
What are the average profit margins in restaurant businesses?
In the UK, the average restaurant profit margin lies somewhere between three and five per cent, but these figures can range between 0 and 15%. It’s quite a difference, but you should bear in mind that these figures aren’t comparing like with like.
Restaurants are not the same across the board and some may generate revenue by letting rooms and selling merchandise in addition to food and beverage sales. This shows that while there is scope for bigger profits, keeping a restaurant profitable can be a challenging task, especially during times of economic uncertainty when customers are looking for ways to reduce their outgoings.
Fixed costs such as rent and business rates, as well as rising energy costs can squeeze your profit margins further. So, what can restaurants do to keep profits up?
Simple changes done with consistency can lead to improvements in your restaurant’s profit margins. Monitor your expenses as even small savings, when grouped together, can have an impact .To keep track of your restaurant’s progress and profit margins, it’s a good idea to set a goal for each year but be realistic. Depending on your circumstances, between three and five per cent is about right.
For bigger changes, think back to the formula for boosting profit margins:
Minimise costs and increase sales and somewhere in between lies your profit. Let’s take a look at areas where you could make savings to protect your bottom line.
Eating seasonally costs less so engineer your menu to change with the seasons to benefit from lower costs. For example, in autumn months, strawberries are out of season so any you buy have been shipped from abroad creating CO2 emissions and additional mileage costs. Switching from a fresh strawberry-based dessert to a more seasonal fruit pudding such as apple crumble will lower purchasing costs, use ingredients you’re already likely to have in your kitchen and last longer in storage making it less likely to go off and create food waste.
To take this idea one step further, if you know your customer base is more likely to be environmentally conscious, you could make a point of creating a dish out of ingredients that would otherwise go to waste. This isn’t as strange as it may first sound, and restaurants have been doing this for years. Lamb shanks, bone marrow and fish heads are cuts of meat which used to go to waste, but creative cookery has elevated them to become almost menu staples in some British restaurants.
Take the idea of menu engineering a step further by looking at your menu to identify high profit / high popularity dishes and low profit/ high popularity dishes. Balance out the two by adjusting prices and portion sizes accordingly.
It’s tempting to open your restaurant every day of the week to pick up any trade- but is this really cost-effective? Opening on a day that is regularly quiet could be costing your restaurant more than it is making. Take a look through your sales to identify days when trade is slack and consider whether it’s worth the cost of opening up, paying staff and using energy.
Alternatively, you could review your opening hours, or offer a reduced menu on a quieter day to reduce waste, lower energy usage costs and help protect your restaurant’s profit margins.
Subtle hints and tricks to tempt your customers can also boost business and make customers feel they’re getting a great deal.
Think about the way you describe your lovingly created, personally made-to- order, artisan dishes designed to take customers on a culinary adventure beyond imagination. While that last sentence sounds a little over the top, it proves that while customers use their mouths to eat, brains are definitely in the driving seat when it comes to decision making.
Use this creative insight to write descriptions for higher profit dishes and you could see sales increase. Don’t forget to keep prices ending with a 9 rather than rounding up. It will appear more attractive and better value.
Restaurants no longer rely on word of mouth or a positive newspaper review to maintain sales or generate new business. Social media and a strong online presence are vital in making sure your restaurant is visible and at the front of people’s minds when choosing where to eat. Once up and running, it takes little time to update information on your website or social media pages and it’s a low cost way of reaching some of the 65% of British adults who use online platforms to make reservations and discover venues they’d like to try next.
Using technology to help manage the day to day running of restaurants has increased over the years. If you’re using Trail technology to oversee the monitoring of appliances to ensure they’re keeping food at the right temperature and in good working order, your restaurant is likely to be already making savings. But, what else can we do to help protect restaurant business profit margins?
Inventory management tracks ingredients from delivery to dish, and staff who are trained to use technology to prevent waste through proper storage and stock management will ultimately help to protect your restaurant’s margins. What’s more, you can oversee all this, and more, remotely from the palm of your hand with paperless support from Trail.
Staffing accounts for up to one third of your costs, so it makes sense to keep your team on task with smart scheduling. Over scheduling means staff are potentially standing idle or wasting time repeating minor tasks already completed by others just to feel busy. Alternatively, under-scheduling can place pressure on the running of your restaurant, leading to mistakes with orders, issues with food quality and service, and upset for customers who may or may not return, depending on how you manage their complaints.
Making sure staff are scheduled to be in place on busy days when orders are being delivered or extra cleaning checks happen, means your staff stay focussed rather than pressured to multi-task because of poor planning.
Throughout this article we have looked at ways restaurants can boost their bottom line by reducing costs and increasing sales. The solutions are as individual as your business, but changes need to be made with patience in mind. We’ve discussed how engineering your menu to be seasonal could yield savings and help improve profit margins, but it’s an idea which needs to be repeated to have the desired impact.
Similarly, investing in technology will help your restaurant to run more efficiently, enabling you to save money or redirect it to other areas of your business, but only if you use it to the full. If you’re ready to explore the possibilities of technology and the positive impact it could have on your restaurant’s profit margins, we’re ready to help.
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