Understanding Your Restaurant’s Profit Margins

By Robert Whited Day-to-Day Business Operations Restaurant Financing July 23, 2018

Understanding Your Restaurant’s Profit Margins

As a restaurant owner, there are plenty of figures that you have to keep your eye on. Many of these stats serve as crucial indicators of the long-term stability and overall health of your restaurant’s finances.

Perhaps, the most important of these figures is your profit margin. This is because it provides a quick snapshot into the efficiency and performance of your business. As your profit margin is a key indicator of the overall condition of your restaurant, it could have a considerable impact on your entire strategic planning process.

Also, keep in mind that understanding your profit margin also allows you to take swift action. Moreover, you can adjust your course whenever there are signs of imminent financial difficulty.

Understanding Two Types of Profit Margins

Note that there are two key figures you have to consider when determining and evaluating your profit margin. These are your gross margin and your net margin.

The determination of these two margins is often a simple calculation.

Your gross margin is calculated by dividing your gross profit by your total income. On the other hand, you can determine your net margin by dividing your net income by your total income.

After determining these two key figures, you could use them for comparing the performance and efficiency of your business with other restaurants. In most cases, it’s helpful to compare your business with those in the same locality. Also, make sure the restaurants are of the same size.

A Good Profit Margin Depends Considerably On Your Industry

You cannot consider and analyze your profit margin in isolation.

While the alcohol industry has a net profit margin of about 19%, advertising has a net profit margin of about 6%.  Similarly, most computer services generate a net margin of about 7%, while food and beverage margins hover around 4%.

Profit margins lower than 15% indicate susceptibility to negative market changes.

Understanding Your Restaurant’s Profit Margins

Importance of Knowing Your Profit Margins

Obviously, it is good practice to have an accurate and thorough understanding of your restaurant’s financials. That said, there are some other reasons you must keep track of your profit margins:

Financing Needs

You may have a compelling business idea, expansion project, or remodel but lenders would like to know where your gross and net profit margins stand. If banks and other lenders do not know whether or not your restaurant is profitable, it is often more difficult and/or more expensive to get financing.

Business Expansion

Determining your profit margins will help you determine underperforming products, inefficiencies and excess spending. This is helpful data that you should have on hand when you are evaluating how your business will move forward as it expands and grows.

Improving Your Profit Margins

Here are the top 6 investments to increase your bottom line:

  • Implement new marketing campaigns to cultivate new customers and more repeat business
  • Adopt online technologies that multiply sales opportunities
  • Invest in your menu, suppliers and facilities to improve food quality
  • Develop programs to reduce employee turnover
  • Renovate your current location for a better dining experience
  • Open another location

Call on ARF Financial

If you need capital to grow, improve your business efficiencies and profit margins, contact ARF Financial. We offer loans with flexible repayment terms up to three years with payments you can afford. Also, our rates are some of the most competitive in the industry.  We can approve you in 24 to 48 hours and your credit will not be impacted by this application! APPLY NOW.