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By Katherine Pendrill
Use our free restaurant profit margin calculator to easily and quickly gauge how your restaurant’s sales compare to its expenses. When you regularly monitor and manage your restaurant’s key performance indicators, like profit margin, you can make decisions that keep the business afloat.
If you’ve calculated your restaurant’s profit margin and aren’t sure what it says about your business, keep reading. We’re taking it back to the basics by covering:
A restaurant’s profit margin is the percentage by which a restaurant’s sales revenue exceeds its expenses. This figure compares sales to the cost of goods sold to reveal how effectively a restaurant can turn revenue into profits. Profit margin can be measured in two ways: gross profit margin and net profit margin.
In the world of accounting, “gross” means total. Therefore, gross profit margin is calculated by subtracting the cost of goods sold from total revenue and dividing that figure by total revenue. Cost of goods sold (COGS) includes the costs directly associated with purchasing menu items, rather than all costs associated with production, such as labor and utilities. Gross profit margin, therefore, indicates profits before expenses are deducted.
“Net” refers to the total after deductions have been made. Instead of just considering COGS – like you would to calculate your restaurant’s gross profit margin – you have to factor in every business expense (like payroll, rent, utilities, technology, etc.) to calculate net profit margin. The result is a more conservative and holistic representation of your restaurant’s profitability.
Use the profit margin formula or our restaurant profit margin calculator above to calculate your margin.
The formula for gross profit margin is:
Gross Profit Margin = [(Revenue – Cost of Goods Sold)/Revenue]*100
The formula for net profit margin is:
Net Profit Margin = [(Revenue – All Costs)/Revenue]*100
Revenue refers to your sales in dollars, or your local currency. Cost of goods sold means the price that you paid for the raw ingredients for the menu items sold. All costs refers to your restaurant’s total operating expenses, including food costs, labor, rent, utilities, technology, and more.
Now we’ll put those formulas into action with a sample calculation. Let’s say you run a pizza parlor and want to find out both your net profit margin and gross profit margin for last year.
First you’ll need to find all of the inputs for the formula, starting with annual revenue. By looking at your POS reports, you see that your revenue in 2021 was $1 million.
To figure out the cost of goods sold, you look up your entire food and beverage inventory costs in your inventory management software, and find that you spent $300,000 on ingredients in 2021. Finally, you look up all of your operating costs for 2021 in your accounting spreadsheets and find that they totalled $900,000.
Now you’re ready to plug these figures into their respective formulas.
[($1,000,000 – $300,000)/$1,000,000]*100=[$700,000/$1,000,000]*100=70%
[($1,000,000 – $900,000)/$1,000,000]*100=[$100,000/$1,000,000]*100=10%
Therefore, your gross profit margin for the year was 70%, while your net profit margin was 10%.
Need a bit more information? We’re answering some of the most common questions about restaurant profit margins below.
The average restaurant profit margin varies by service style. Full-service restaurants (FSRs), for example, have an average profit margin between 3 and 5%, while a fast food restaurant typically has a higher profit margin in the 3 to 9% range.
According to TouchBistro’s 2022 State of Full Service Restaurants Report, most FSRs in the United States have a profit margin of around 10%, which well exceeds the average.
If, after calculating your restaurant’s profit margin, you’re not happy with the results, there are a number of things you can do to increase margins, such as:
Calculating your restaurant’s profit margin regularly can help you better understand your business’ performance and inform decisions. Use our restaurant profit margin calculator to keep an eye on this critical restaurant metric.
Need help managing other aspects of your business? Check out our downloadable restaurant spreadsheets.
Katherine is the Content Marketing Manager at TouchBistro, where she writes about trending topics in food and restaurants. The opposite of a picky eater, she’ll try (almost) anything at least once. Whether it’s chowing down on camel burgers in Morocco or snacking on octopus dumplings in Japan, she’s always up for new food experiences.
By Debra Weinryb
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