The ultimate financial guide about restaurant profit margins

5
January 2023

Having a profitable restaurant is challenging, and its success requires constant measuring, updating, and reinventing. If you are here, one of your primary objectives for this year is for your restaurant business to prosper. If you're a restaurant operator, in this guide, we will help you track your success by looking at performance metrics like profit margin, gross and net profit, or cost of goods sold.

In the following few sections, we will explore profit margins and how to calculate them, the difference between gross profit and net profit, how much you need to earn to run a profitable business, and ways to improve your restaurant's profit margin. Share your craft with the world, and make sure you can turn your success into a full-time reality. Let's dive deep into it!

Profit margin averages for restaurants

A restaurant's profit margin is the amount stated as a percentage of annual sales, where profit is a quantity expressed in dollars and cents. Different variations can determine a restaurant's profit margin and impact how much you make as an owner (we'll discuss more in the following sections).

The typical restaurant's net profit margin, when looking at the industry per se, is about 3-5%. Still, it can vary significantly, and on the higher end, some restaurants can pull in a 15% margin. In reality, your company's "normal" restaurant profit margin is not predetermined, as is the case for many other aspects of the restaurant business. Everyone can agree that the restaurant industry's profit margins are incredibly thin compared to different sorts of enterprises, even though the figures that most experts come up with vary considerably. For more perspective on this, below are the average profit margins by the industry as of 2022:

Industry

Gross Profit Margin

Net Profit Margin

Advertising

26.20%

3.10%

Computer Services

27.4%

3.42%

Engineering/Construction

13.45%

1.81%

Financial Svcs. (Non-bank & Insurance)

85.08%

32.33%

Healthcare Products

59.04%

12.92%

Household Products

50.13%

12.45%

Office Equipment & Services

33.40%

2.55%

Restaurant/Dining

31.52%

12.63%

Software (Entertainment)

64.45%

29.04%

How much do restaurant owners make?

We need to remember that all restaurants are unique. Still, we can analyze the following statistics:

  • According to PayScale, the average base pay for a restaurant owner in the United States is $73,257. In the US, restaurant owners can expect to earn between $33,000 and $145,000.

  • Also, restaurant owners earn more if they receive a bonus or profit sharing. Profit sharing can range from $1,000 to $247,000, while bonuses can increase earnings from $1,000 to $50,000 yearly.

  • Total average wages now range from $26,000 to $166,000 per year.

To dive deeper into specific numbers per state, check out ZipRecruiter's average salaries for restaurant owners.

How much money does a restaurant make?

Two elements primarily determine a restaurant's profitability, which directly affects the restaurant owner's earnings. These elements are the expenses and the amount you are selling. A restaurant's size, location, and idea significantly impact revenue. So, how much money do restaurants make per day?

A typical restaurant in the United States earns around $1350 per day, derived from approximately 47 transactions, with each customer spending approximately $27 per day. The estimate is that restaurants earn about $40,500 per month or $486,000 per year.

How much you need to pay to do business will, of course, impact your earnings. For example, you can impact your bottom line (your company's net income) if your rent is high or your product is expensive.

On the contrary, if your property is your own and your ingredient expenses aren't too high, you might even out-earn a restaurant owner who owns a four-star establishment. Cost-cutting ultimately involves striking a balance between price and quality.

Gross profit vs. net profits of restaurants

As we mentioned before restaurant's profit margins are classified into two types. To understand a restaurant's profit, you must understand the difference between gross and net profits. Many other sources often need help to distinguish between the two or make clear which one they are referring to. This may be the reason for the confusion and conflicts regarding what you end up earning as an average profit margin for the restaurant business. Ultimately, both metrics are used for different purposes. Below we will distinguish the two.

How to calculate a restaurant's gross profit

The gross profit margin is one method for examining your restaurant's profitability. Your gross profit margin shows your restaurant's profit after accounting for its Cost of Goods Sold (CoGS). The cost of goods sold in restaurants is the total cost of all ingredients used to make menu items, including garnishes and condiments.

To calculate your restaurant's gross profit, you will need two figures:

Total revenue - CoGS = Gross Profit

If your restaurant's total monthly sales for November are $12,500 (Net sales), and its cost of goods sold is $4,395 (CoGS), you can calculate your restaurant's monthly gross profit by doing the following equation:

$12,500 – $4,395 =$8,105

In this case, your restaurant's gross profit for December would be $8,105. To understand net profit in context, you can calculate it as a percentage of sales, which you can use to determine how much of every dollar you earn goes to profit:

$8,105 ÷ $12,500 x 100 = 64%

Your restaurant's gross profit as a percentage is 64%, meaning that for every $100 a guest spends in your establishment, $64 is the gross profit you can use to pay for operating expenses.

Other critical operating expenses, such as labor costs, and other components of your overhead, such as rent and insurance, are not included in gross profit. Consider focusing on your net profit to get the whole picture.

How to calculate a restaurant's net profit

Your net profit provides a different perspective on your restaurant's performance and profitability. It is based on your profit, operating expenses, such as food, and additional costs, such as payroll, rent, and other operating expenses. A restaurant operating expenses covers office supplies, wages, utilities, rent or mortgage, upkeep, taxes, and insurance. Use the following equation to calculate your restaurant's net profit:

Total Sales – Total Expenses = Net Profit

To put net profit into context, calculate it as a percentage of sales:

(Net Profit ÷ Total Sales) x 100 = Net Profit Margin

In this case, going back to the restaurant example, if your total sales or revenue is $1,100,000 and your total expenses are $1,000,000, this is how you would calculate your net profit margin:

1,100,000 - 1,000,000 = 100,000 Net Profit

(100,000/1,100,000) x 100

0.09 x 100 = 9%

In this case, your Net Profit Margin would be 9%, meaning that for every dollar a customer spends, you're keeping 9 cents as profit. 

Which are the most profitable types of restaurants?

Restaurants of different kinds have varying levels of profitability. Below are the top 5 restaurant business models and what makes them successful.

Delivery-only restaurants

Due to the coronavirus pandemic, delivery services in the United States experienced their highest growth in five years in 2020. Nearly everyone orders food delivery; according to Gloria Food's research, 86% of Americans order food delivery at least once a month. And the food delivery industry is expected to grow to $320 billion by 2029. So, this is a fantastic opportunity for restaurants that want to save on the location while still being in a big city. This strategy is being used by more restaurants than before, especially in large cities where real estate is expensive and because people are huge fans of takeaways.

Pizzerias

Every town and city in the US has unique pizza spots that everyone swears by, and there's a reason for that. Pizza has always been famous in the United States, and it's easy to make and inexpensive to buy the ingredients. This way, you focus on making the best pizza recipes while making a profit.

Bars

Believe it or not, bars have the highest margins of any other type of business in the restaurant sector, and this is because alcoholic beverages have a significantly more significant markup than food (you can get up to 60-70% profit margins for drinks). If you are considering opening a bar, make the proper budget considering the extra costs of owning a bar.

Food Trucks

Similarly to delivery-only, food trucks save lots of money on staff and rent. But also, you can have a small menu since it is a fast-food restaurant, so your production costs can be significantly lower and get higher revenue.

Diners

Last but certainly not least, you got diners. Breakfast restaurants usually show constant growth since people are often on the go early in the morning. Additionally, breakfast food has meager ingredient costs, allowing for higher profit margins.

How to improve your restaurant profit margin

There are many ways to improve your profit margin. But it also boils down to controlling the costs of your restaurant. For this reason, sales growth and cost-cutting are the two main strategies for increasing profit margins. How can you achieve this? There are many creative ways to improve your profit, but below are a few easy tips:

  • Invest in your social media presence and reviews. Did you know that 90% of customers research a restaurant before visiting? Make sure your social media is up-to-date, post photos of your location, have a digital menu, and fill your Google My Business with all the relevant information.

  • Start a loyalty program. Everyone loves to feel appreciated. A loyalty program creates a relationship with your customers beyond the first visit. This program can include exclusive discounts, free drinks, a free meal, and so much more.

  • Reduce food waste. Not only is food waste terrible for the environment, but it's also bad for business and profit. Since food is a massive part of your budget, you should plan it properly to avoid over-ordering. Additionally, ensure your menu is creative enough to do more with less.

  • Shrink your menu options. In hand with the last tip, having a small but efficient menu is a great way to save on costs. Having an extensive menu may seem like you are putting your customers first. Still, in reality, you are spreading yourself thin and giving a lower-quality experience to your visitors. ​​Look at what sells the most and cut what is not working. This way, you'll sell more, specialize your kitchen and save money on produce.

  • Decrease staff turnover. Charming, experienced, quality servers can uplift a customer's experience, which is why keeping your staff and valuing them is essential. But did you know staff turnover ultimately costs money? One hourly restaurant employee turnover typically costs $5,864. With a 73% yearly employee turnover rate, your restaurant might lose as much as $428,072 a year due to poor employee retention. You may raise morale and improve your bottom line by offering on-the-job skill training, creating a safe working culture, and promoting constructive criticism.

Need a more in-depth guide? Please read our complete guide on how to increase your restaurant sales!

Invest in your service with One Park Financial!

As with any business, you need to spend money to make money. But if you are short on working capital to invest in your restaurant, don't sweat it! One Park Financial is here to help you become the number 1 restaurant in town.

Your wishes could come to a fantastic reality with our assistance. One Park Financial's financing alternatives suit motivated business owners with less-than-perfect credit who run profitable enterprises. You can find out if you pre-qualify for one of our fast-working capital programs if your business has been in operation for at least three months and generates at least $7,500 per month.

Want to check all the options out there? Check out our blog on types of loans and financing options for restaurants.

Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.