Restaurant profit margin calculator: Know your restaurant’s wealth
The goal of your restaurant, just like any other business, is to make a profit. Yet restaurants are different from other businesses – so standard benchmarks only go so far if you want to calculate how much profit your restaurant could be making based on the many different costs associated with running your stores. We’ll look at all of the factors that affect your profit margins, and then you can use our restaurant revenue calculator to see where you have opportunities to improve.
Key factors to look for when determining profit
Let’s go back to Econ 101 for a moment. Profit is revenue minus expenses. To increase your profit, you can increase your revenue or reduce your expenses (or both). When looking to increase your profit margins, there are some factors you can control and some you can’t.
Let’s start with things you can control. To increase revenue, your primary focus is going to be on improving sales. You have more options when it comes to reducing costs: you can find ways to reduce the cost of goods sold, cut labor costs, or reduce controllable expenses.
Things can get sticky when it comes to the factors you can’t control. Rent, taxes, and insurance are all non-optional, non-flexible costs (also known as fixed costs) that you can’t really reduce – at least quickly. The same goes for banking and credit card fees. It’s not like you can keep all of your money under a mattress; you have to use a bank. You may have some influence over marketing costs, but because marketing has a direct correlation with revenue, you want to be very careful if you’re considering cutting back there.
All of these factors come together in the formula of revenue minus expenses equals profit.
Try it out on our restaurant profit margin calculator below. Type in your expenses and your combined revenue to get your answer. And keep reading to find benchmarks you should be aiming to hit for each of these variables.
What are good benchmark values for these factors?
Percentages, year-over-year increases, and other changes in costs can vary based on a number of factors, but you can use these generalizations as a starting point.
- Sales: More is always better. Many brands aim for a 4% year-over-year increase in sales.
- Cost of goods sold: The combined cost of your food, beverages, napkins, cups, etc., shouldn’t be more than 30% of your sales.
- Labor: Labor costs should be less than 30% of your total sales. To go a step further, best-in-class restaurants aim for a combined cost of labor plus cost of goods sold of 55% or less.
- Controllable expenses: Usually the combination of sales, COGS and labor, these expenses include utilities, supplies, cash over/short, miscellaneous expenses, uniforms, etc. These expenses should be no more than 5% to 8% of sales.
- Fixed Costs: All of your fees, taxes, insurance, rent, contract services, and marketing, etc., should ideally add up to no more than 30% of your sales. However, depending on your location, these expenses could realistically go beyond 30% – especially due to rent.
Marketing: More marketing is usually better, but you have to know your market. Returns on marketing costs start to dwindle when marketing is allocated over 20% of the budget. For example, the normal range for marketing costs is 4% to 12% in the restaurant industry, with 5% to 8% usually being the sweet spot.
The most important benchmark: profit margin
We’ve looked at many of the contributing factors that go into determining your profit margin, and now it’s time for the main event: looking at the margins themselves.
As we mentioned before, the formula for calculating profit is revenue minus expenses, and it really is that simple.
Restaurant-level profit = (combined revenue) – (cost of goods sold + labor costs + controllable expenses + non-controllable expenses)
You might call it something different, like operating profit, net profit, or EBIDTA (earnings before depreciation, interest, taxes, and amortization), but the bottom line is the same: add all of your revenue together, then subtract all of your costs and expenses, and you have your profit margins.
So what’s a good benchmark for profit margins? If food and labor costs take up about 60% of your revenue, controllable costs take about 5%, fixed costs take 10%, and fixed costs take up about 20%, that leaves about 5% profits for you in the end. If you’re doing better than that, great – 5% to 15% is a good place to be. If you’re making less than 5% profits, you need to start looking for changes to make.
Another way to look at profits is by removing fixed expenses, and looking at “controllable profit.” Controllable profit – profit levels the restaurant team can influence directly (like food costs, labor costs, etc.) either by improving sales or reducing costs –should be somewhere in the 35% to 40% of total revenue range, which should be enough to cover your fixed expenses, like rent, taxes, and insurance. For franchisees, set a high standard for controllable profit on a store by store basis or in volume buckets – keep the store level teams focused on controlling what they can control.
Where do you fall in this range? Whether you’re at, above, or below the average, you should be able to identify places where you could either increase revenue or reduce costs to improve your margin. Check back in with our restaurant revenue calculator to see how you’re improving.