How to Calculate Profit Margins for Restaurants?

The restaurant industry is becoming competitive, and calculating restaurant profit margins makes it easier to understand their position in the industry. Calculating profit margins for restaurants is easier; however, many factors need to be considered. 

Profit margins are important to measure restaurant business growth and analyze areas for improvement. It is essential to monitor the key performance indicators (KPIs) and introduce new technologies to improve the KPIs and assist in monitoring them to keep your restaurant business ahead of the curve. 

In this article, we present the significance of the various types of profit margins and how to evaluate them. We also elaborate on factors affecting restaurant profit margins and the key strategies to enhance profitability.

Understanding Gross Profit

The gross profit for restaurants is the difference between the selling price of the dish and the total costs of ingredients and materials used to make the dish. Ideally, the gross profit should be closer to 70%, meaning that for every $100 spent by the customer, the restaurant should earn $70 as profit. 

The formula to calculate the gross profit is simple, as all you need to do is subtract the cost of goods sold from total sales. For instance, if a food establishment made $1.5 million and the cost of goods sold was $500,000, the gross profit would $1,000,000. 

When you have the gross profit with you, you can easily calculate gross profit margin. 

How to Calculate Gross Profit Margin for Restaurants?

Gross profit margin represents the percentage of profit a restaurant saves after subtracting the cost of goods sold from the revenue earned. It is an effective way to set your menu prices that maximize profitability.

Let’s understand the formula to calculate Gross Profit Margin.

Gross Profit Margin = ((Total Revenue – Cost of Goods Sold) / Total Revenue) * 100

For instance, if a bar’s total sales from July to September was $1.25 million and the costs of goods sold was $400,000, then gross profit margin world be: 

Gross Profit Margin = (($1,250,000 – $400,000)/ $1,250,000)*100

The gross profit margin would be 68% in this case. Gross profit margin indicates that if a customer spends $100 at your restaurant, than $68 can be used to pay for operating expenses. 

How to Calculate the Operating Profit Margin (OPM)?

Operating profit margin is a profitability or performance ratio that indicates the profit percentage that a company produces from its operations before subtracting the taxes and interest charges. This is also called as Earnings Before Interest and Tax Margin.

Let’s understand the formula for Operating Profit Margin.

Operating Profit Margin = (Operating Profit / Total Revenue) * 100

For instance: a bar has an operating profit of $1 million and the total revenue was $5 million, then the operating profit margin would be 20% as calculated per the formula ($1,000,000/$5,000,000)*100. 

The average operating profit margins for a business range between 10% to 20%. While evaluating OPM for businesses, interest payments, EMIs, or debts shall also be considered for determining high profit margins.

How to Calculate Net Profit Margin?

All types of profit margins are important, but the net profit margin for a restaurant business gives a clearer picture than others. It comprises the overall amount businesses save on revenue after deducting all their expenses. These expenses may include operational costs, cost of goods sold, labor, food, and other costs.

The formula for Net Profit Margin is as follows. 

Net Profit Margin = (Net Profit/Total Revenue)*100

Net Profit = (Total Revenue + Gains) – Operating Expenses 

For instance: the bar made $1.25 million in total revenue, it gain around $50,000, and approximately $1.2 million went into expenses from the period from July to September. The, the net profit would be ($1,250,000+$50,000)-$1,200,000, which would come out to be $100,000. 

Hence, if we would the value of net income in the net profit margin formula, ($100,000/$1,250,000)*100,000, the value would be 8%. The net profit margin is 8%, meaning that for every dollar the customer spends, the bar earn around 8% of it. 

Wrapping up,

Considering the importance of profit margins in running a restaurant business, we suggest you opt for Restaurant Management Software that provides clear insights into your business.

These parameters are beneficial in driving sales, improving services, and generating healthy profit margins for your business. 

Taqtics provides comprehensive software solutions for the restaurant industry and upscale businesses, providing tools for workforce attendance management, virtual merchandising, assigning tasks, centralized learning platforms, and others. Schedule a demo today to see how Taqtics can streamline the operations. 

Soumyajit