Is your restaurant struggling to turn a profit?How To Start A Restaurant Business? It’s not unusual for restaurants to report extremely slim margins or even just break even during the first few years of their operation. Luckily, there are plenty of ways to increase your restaurant’s profit margins and help you start turning regular profits sooner rather than later!
How to calculate your restaurant’s profit margin
To calculate your restaurant’s profit margin, first you must estimate how much it costs to run your business. A good starting point is to estimate your monthly fixed costs, which are expenses that will be incurred every month no matter what and include things like rent or mortgage payments. Next, add in variable costs for items that change from month to month based on sales volume, such as food costs. Then subtract total variable costs from total sales (minus taxes) and you’ll have an idea of what percentage of each dollar spent at your restaurant goes toward covering overhead and helping pay off any loans you may have taken out to open your restaurant.
What’s the average restaurant profit margin?
According to an American Express Restaurant Business study, profits at full-service restaurants average just over 4 percent of sales. At fast-food restaurants, that number is closer to 3 percent. That might not sound like much of a profit margin but consider how high your expenses are—and how low they can be! By optimizing your margins and strategically managing your costs, you can maximize profits in no time. It all comes down to maximizing revenue while minimizing costs; here are five ways to do just that: 1. Identify your best customers: Understanding who makes up your restaurant’s biggest spending demographic is essential for building a profitable business plan—and growing a profitable customer base.
Read on to find out how to increase your restaurant’s profit margins in some simple steps:
The average restaurant profit margins by type of restaurant
For example, fast food restaurants make an average of 4.9% profit margins, while other restaurants (not including full-service) average 7.1%. The average restaurant profit margin varies by region as well: Southern states had an average of 6.7%, while New England states had a lower-than-average 6.2%. Restaurants in urban areas tend to have higher profit margins than rural ones — at 7.4% compared to 6.8%. The highest profits are reaped in highly urbanized areas like Chicago and New York City, which have averaged 8% for many years.
Use software for track account and inventory
Using an restaurant management software to track your restarant’s finances and inventory is a great idea. These programs will give you accurate information in real time, so you’ll know exactly what’s going on with your business at all times. You can even use them to create detailed reports for yourself or for other staff members who may need access to specific data about your restaurant. The best part is that most of these systems are cloud-based, meaning they’re accessible from any computer with internet access. They also offer easy-to-use interfaces that make it simple to enter new data quickly. This means that you won’t have to spend hours poring over spreadsheets and looking up invoices when you could be out doing something more fun! All of these systems offer free trials, so check out our reviews below to see which one might be right for your business.
Set realistic goals
Before you get started, it’s important to set realistic profit goals. In other words, don’t try to take on too much risk. If you don’t have a grasp on basic business concepts like your break-even point and gross margin, it might be a good idea to pick up an introductory business book before you continue. Even if they’re dry and boring (we’ve read them all), they’ll help ensure that your efforts are focused on what’s most likely to turn a profit. Furthermore, keep in mind that no matter how simple or delicious your restaurant concept is—or how expensive or underwhelming your competition is—you still need customers with cash who are willing to pay for your food.
Cut food costs
Chefs and restaurateurs have been known to say, Cooking is easy. Managing costs is hard. That’s because paying attention to your food costs can have a huge impact on your bottom line. If you can reduce food costs by just 5%, that’s worth $20,000 per year if you’re earning $100,000 in revenue annually. And while it sounds daunting, there are plenty of cost-cutting strategies—from buying food in bulk to working with local producers to finding ways to use less ingredients per dish—that will keep money in your pocket. You should also pay attention to what customers are ordering at each meal; adjusting entree selections based on popularity can help boost sales of higher-margin dishes and increase overall revenue for your restaurant.
Use your staff wisely
The more hours servers and bartenders work, the more money you’ll bring in. But don’t be tempted to overwork them. In most states, employees are entitled to an overtime rate if they work more than 40 hours per week. You can easily get around that by paying them a salary or by cutting their hourly wages (that is, offering $10/hour for a 40-hour week instead of $10/hour for an 80-hour week). While cutting wages may reduce your costs—by avoiding paying overtime and increasing employee productivity—it also means that you have less cash on hand.
Have menu promotions
Studies show that consumers are very responsive to menu promotions. But, what’s also true is that consumers are often so turned off by promotions—especially frequent ones—that they eat out less and go elsewhere more often when they see prices discounted too heavily. The trick is to create a menu promotion schedule with at least one day of rest in between each promotional item. This way you can offer new items on a regular basis without scaring away your customers or hurting your revenue too much; just make sure you have ample supply of each item for when you need it most. (See more here)
Restructure incentives
Restaurants rely on incentives to get new customers to try their establishments and return regulars back. Some of these incentives come in a monetary form while others take place in non-monetary ways, such as offering discounts on future purchases. How can you help incentivize people to spend more money at your restaurant? What rewards can you give that encourage both current and new patrons to spend more? The first step is always figuring out what is currently working and changing it. If you focus only on how to bring in new clients without looking at your current ones, you will end up pushing away those who are already patrons of your establishment by making them work harder for those discounts rather than just automatically giving them or having it be a one-time bonus for first time shoppers.
Offer a complete experience
Customers are often happy to pay a premium price for a complete experience. For example, they’ll gladly cough up more money if they know that in addition to getting their steak cooked exactly how they like it, there will be ample staff on hand to serve them and a room available for them to socialize afterwards. Of course, all of these extras are going to drive up your costs as well… but you get what you pay for. If customers don’t feel as though they’re getting a good value, they won’t come back; however, offering additional perks is one way to increase profits without raising prices.
Communicate with customers
Customers want to feel like they’re part of a community. So why not share your story? Whether it’s about how you got your start or how you came up with your restaurant concept, sharing your story can help customers relate to you—and help them understand what drives you. When potential customers do business with someone they can identify with, they’re more likely to stick around for future meals and brand ambassadors. Communicating with customers helps build loyalty and builds brand awareness by making customers feel invested in your success.
Remain aware to stay in business
It might sound like common sense, but you have to keep a close eye on your profit margins. To get an accurate idea of what your margins are—and whether or not they are likely to be sustainable—make sure you are tracking food and labor costs accurately. You should also check to make sure that items from a particular department (such as beverages) aren’t eating into sales in another area (such as appetizers). Understanding how all departments work together is key if you want your restaurant to thrive.
Conclusion
For restaurant owners, margins are important. There is a difference between profit and margin. Profit is what remains after costs and expenses are subtracted from revenue or sales. A margin is a ratio or percentage of sales used to measure profitability. So increasing your margins at your restaurant can lead to profits (and lower risk) for you down the road. Here are five ways to increase your restaurant’s profit margins: 1. Increase Your Volume: The more customers you have coming through your doors, the more money you will make. In order to get more customers in, it might be time to promote some specials on social media or in local newspapers. You could also offer free food with a purchase, especially if it is something that people like and would buy anyway—like fries with an entree order.
