7 Ways to Improve the Profit Margin of Your Franchise Restaurant
If you’re a business owner, you’ll want to generate as much profit as possible. Profit margins are hugely important when you’re managing a business – but what exactly does the term mean, and how can you improve profit margins?
Most entrepreneurs are keen to know what profit margins they can expect to achieve once their business is up and running. Working out financial projections can be tricky, but there are ways to find out how much money you are likely to make and how you can improve profit margins. Let’s learn more…
In simple terms, a profit margin refers to the amount of profit an organisation makes. In other words, this is the amount of revenue that is left over once the organisation has paid off all its expenses. Profit margins are always expressed as a percentage of a business’ entire income.
A profit margin can be split into two key terms:
- Gross profit margin: This is the business’ income that is left after the cost of the products or services sold are taken away. In calculating this for a restaurant, you might consider the cost of food, as well as labour that is directly linked to preparing and serving the food.
- Net profit margin: This takes all the business’ expenses into account. As well as food and labour, your calculation will include rent, utilities, tax, equipment repairs, laundry and administrative costs. Working out the net profit margin will give you a fuller picture of a restaurant’s financial performance, compared to the gross profit margin.
Working out your profit margin
Depending on whether you’re calculating the gross or net profit margin, all you need to do is take either the cost of the products or services, or combined cost of all the business’ expenses away from its total revenue. Then, divide the outcome by the total revenue. What you’re left with is a percentage and it’ll tell you your profit margin.
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Average profit margin of a restaurant
There are huge variations in profit margins from restaurant to restaurant. Typically, they make between 0 and 15 percent profit, but it is most common to see a profit margin of around five percent.
Profit margins are particularly low in the restaurant industry, which means it is often difficult for restaurant owners to stay out of the red. In fact, it is a generally acknowledged fact that over half of new restaurants don’t make it beyond their third year. But why are profit margins so low?
Well, the main reason is that restaurants have a lot of different expenses. They need to cover the costs of buying, preparing, cooking and presenting food, as well as storing ingredients at safe temperatures. In addition to this, the kitchens, toilets and dining areas must be hygienic, the premises must be warm and dry, and the décor should be fresh and attractive. What’s more, restaurants may also have to pay to get kitchen equipment repaired, train staff and get rubbish collected regularly.
When you look at the main expenses that restaurant owners shell out for, they can be categorised into three main groups: the cost of goods sold (COGS), labour and additional overheads. Generally, one third of the business’ total income should go towards the COGS, another third should go towards paying staff and any other overheads should be paid for using the remaining income.
On top of these expenses, there is rising competition in the restaurant sector, which pushes up overheads even more:
Increasing competition has always meant more expenditure devoted to decor and state-of-the-art cooking equipment. This means it's harder to turn a profit, let alone amortise the set-up costs. – Damien Pignolet, Regatta Restaurant Rose Bay
How to improve profit margins
What can you do to boost your profit margin? The truth is that there are only two real ways to improve it. The first is to increase the amount of money you bring into the business compared to the money you spend on expenses. The second is to reduce the amount of money you put towards expenses compared to the income your business receives.
Some restaurant owners mistakenly believe that increasing the price of their food or reducing staff pay will earn them a bigger profit margin. However, raising prices will probably deter customers and decreasing salaries could cause employee morale to fall. This, in turn, is likely to negatively impact the customer experience and staff retention levels.
So, here are our best tips for improving your profit margin.
1. Choose a specific type of restaurant business
Like in any industry, the restaurant sector experiences trends that come and go. In general, fast food and quick service restaurants have higher profit margins than full-service restaurants. This is because profit margins are boosted by spending less money on the customer experience. For example, food outlets that wash and lay tablecloths, hire staff to bring customers’ food to the table and maintain higher cleanliness standards are likely to notice a dent in their profit margin.
For this reason, if you’re desperate to maintain high profit margins, consider starting a fast food or quick service outlet.
2. Make sure you have developed a robust business plan
Your plan should detail all potential expenses – including unexpected ones – and put plans in place for them. If you’re prepared, you’ll be better equipped to cope with surprise outgoings and more likely to survive financial complications.
3. Make small changes for big improvements
Take a comprehensive look at your outgoings and, if you find you’re overspending in some areas, find cheaper alternatives. Even the smallest changes – like switching to energy saving lightbulbs, for example – could have a significant impact on your profit margin in the long run.
4. Find ways to spend less on ingredients
To do this, you could try to find cheaper suppliers and minimise the amount of food waste you produce. Why not develop extra menu options that use up food that is regularly thrown in the bin? This will benefit the planet as well as your pocket, so it’s a great option for forward-thinking entrepreneurs.
5. Work out when your busiest periods are and make sure your staff rota reflects this
Cutting back on staff salaries doesn’t mean firing employees for good. Are there specific times when you don’t need quite so many workers waiting on tables? Save costs by reducing the number of staff members working during certain hours, days or seasons.
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6. Introduce promotional offers and incentives
Instead of streamlining your staff work schedule, you could try to boost sales during slower periods with customer deals. You could, for example, offer new customers a discount on their bill. Alternatively, create a points system, where returning customers collect points for every pound they spend and are given a free drink, dessert or side order every time they reach a certain amount.
7. Use cheap – or free – advertising methods
Rather than launching marketing campaigns through local newspapers or radio adverts, you could take advantage of social media to raise awareness of your business. This type of e-marketing is completely free; all you need to do is take high-quality photographs of your restaurant and food, and upload them across several internet platforms.
To find out more about the financial aspect of running a business in the restaurant sector, read more of our articles on the subject:
- How to Get Funding for Your Restaurant
- Budget for Starting Your New Restaurant
- Five Start-Up Costs to Think About When Opening a Restaurant
Alice Tuffery, Point Franchise ©
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