Most people don’t open a restaurant to make money. In the majority of cases, people go into the restaurant business to share their love of food with as many people as possible. However, the sad reality is that, without turning a profit, this dream of spreading “food love” sends aspiring restaurateurs back to their day job. So, how much should you be making in a restaurant?
You should be making between 3% to 5% net profit for your restaurant to be considered an economically viable enterprise. This is the amount of money you have left over from sales after all other expenses have been accounted for.
If 3% to 5% doesn’t seem like a lot of money, you’re not crazy–it’s not. The restaurant business has always been competitive, with current market factors straining these low margins even more. If you want to open a restaurant but are nervous about whether you can make a profit, keep reading to find out everything you need to know about making money in a restaurant!
How Much Money Should a Restaurant Make?
Depending on the type of restaurant you run and the price of the food you sell, you will make a different amount. But how much money should a restaurant make?
A restaurant should be making between 3% to 5% net profit to remain viable as a business operation. Full-service restaurants will operate toward the lower end of this range, while limited service–or quick service–restaurants will be slightly more profitable.
How to Calculate Profit For a Restaurant
You can calculate profit for a restaurant by paying everything that is needed with your restaurant, and then the 3% to 5% figure is the net profit.
Let’s take a deeper look into this below.
Pay All Needed Expenses
Before you can earn, you must spend. But what all do you need to pay for in a restaurant?
Some things you will need to pay before you can calculate the profit for your restaurant include:
- Rent
- Utilities
- Payroll
- Insurance
- Equipment
- Taxes
- License Renewals
- Other periodic expenses
Because there are so many aspects that must be considered before arriving at net profit, it can often be difficult to estimate. Therefore, many restaurants aim for a 70% gross profit to estimate whether or not their operation is financially viable.
Gross profit is a much easier figure to arrive at. It is simply the amount of sales minus the cost of goods sold, or in accounting-speak.
Calculate Revenue Minus Cost of Goods Sold
So as a restaurateur, you simply add up the cost of all of the food you bought for the month and subtract this figure from your sales receipts.
This figure needs to be around 70% for you to meet your net profit goals for the month. For example, if you had $150,000 in total receipts for a month, you would want your cost of goods sold to be no more than $45,000 to ensure that your gross profit is at 70%, or $105,000.
In addition to being a quicker way to assess profitability, gross margin is a direct measure to see if you are good at doing what the restaurant business is all about: making and selling food!
Why Is Running a Restaurant So Expensive?
Although owning a restaurant has never been among the highest margin enterprises, profits have become tighter and tighter in recent years. Why is that?
The price of each of these has gone through the roof in recent years:
- cost of goods sold – Food prices continue to climb due to inflation, with another 4.5% to 5.5% increase expected by the end of 2022
- Labor – Rising minimum wage and government-mandated employee wellness benefits continue to put pressure on restaurants
- Overhead – The rising cost of commercial rent is untenable for many restaurants, with some even looking into ways to share a kitchen with other businesses to lower overhead costs
Arguably, the most significant pressure to restaurant profits in 2022 is the proliferation of third-party food delivery services.
In order to keep costs low for the consumer, restaurants are paying third-party delivery services such as UberEats, DoorDash, and GrubHub up to 30% of total order costs.
So while these services introduce restaurants to a wider reach of customers, they are actually unprofitable customers, forcing restaurants into the unenviable decision of taking away the convenience post-pandemic customers expect and protecting profit margins that allow them to keep their doors open.
How Can You Make More Money In a Restaurant?
The restaurant business has always been cutthroat and continues to get even more competitive with evolving market pressures. But that does not mean that you cannot be profitable as a restaurant owner.
There are two direct ways to improve profits: selling more stuff and decreasing expenses. Ideally, you can accomplish a little of both at the same time to expedite the process.
Let’s take a look at a couple of effective ways to make more money in your restaurant.
Invest In Top Notch Employee Training
Any business is only as good as its people. This is magnified in the restaurant industry, where interaction with employees is a defining component of the total dining experience. And while it may be tempting to cut as many corners as possible in the face of rising labor costs, it will help you in the long run to attract, train, and retain the best employees possible.
Teach your employees the art of interpersonal communication and how to interact with customers professionally. Give them the confidence that they are a projection of your restaurant’s brand and are critical to business success.
The more comfortable customers are with employees, the easier it will be to cross-sell them on high-margin items such as fountain drinks, fries, and cookies.
Have a Menu Item That Is the Best In Town
The most profitable restaurants start with a remarkably simple concept. Subway is really good at selling sandwiches. Dominos is really good at selling baked dough. Starbuck is really good at selling coffee. Once a restaurant becomes synonymous with a specific menu item, the rest of the business takes care of itself.
While your restaurant may not or may never be on the same level as these national brands, you can definitely adopt the same approach to dominate your local market. Have a burger that people in town are willing to wait in line for. Make a drink that people schedule their Friday night around.
Once customers are in the door for your can’t-miss item, the impulse purchases will follow.
Conclusion
Restaurants should be making between 3 to 5% in net profit each month. For a more straightforward estimate, a 70% gross margin (revenue minus cost of goods sold), is a good indication that you are making enough money on your food sales to keep the doors open.
Whether you are thinking about opening a restaurant of your own or are looking into ways of making your current efforts in the kitchen more profitable, use the information in this article to start making more money in the restaurant business today!
