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If you own a Restaurant Business, what do you think your net profit could be? And what exactly is the difference between Net and Gross profit?
You know, when people see a busy restaurant the first thought they have is almost the same: This is a gold-mine! The owner of this place must be wealthy!
If you end up with more than 10$ in your pocket after all expenses for each 100$ in net sales, you are an excellent entrepreneur! That is 10% of the net income! The reality is that most restaurant businesses make even less and have net profits (money in their pockets after all expenses) that round the 7% or 5% of the net sales figure.
Now, for sure, there are rich people out there around the globe that own restaurant businesses and that have made a fortune from scratch.But the majority of restaurant owners have a hard life and to ensure a respectable income to maintain the lifestyle they work many, many hours. What is for many hours?
Doning the Hours
Well, if you think that fish and vegetable markets open at 4 am and many owners do the buying by themselves, you can easily do the math. Service for lunchtime starts at noon and then again dinner at 7 pm.A 16 hour day is not an exception for a restaurant owner! Do you think I am joking? I’m not!Of course, this is not the case for all, but for many!But why am I talking about the working hours of the owner? What does it have to do with profit?When you run a restaurant, you serve individual dishes depending on the type of business you have, but all have a common denominator:”The price a customer will pay for that dish.”The market with his supply-demand law determines the price for which you can offer a specific dish. And all the rest of the expenses will follow in percentages as a consequence.As a consequence? Why?Well, you will say that you have seen a Pizzeria in Dubai or wherever selling pizza Margherita for 30$. And the same pizza in your town costs 12$.Ok! But the rent in your town will be much cheaper than in Dubai, as well as the other related costs. Do you get the point?So, with this in mind, let’s go back to our restaurant owner.
Given that he can sell his steak or pizza only for so much (depending on the business location), the only way to earn more money for each steak or pizza sold is to get the raw materials for as little money as possible. And without losing quality!And who is the most interested in getting the best quality for the best price? The owner! – Got it?Every penny he can save at the market at 4 am goes directly in his pocket!And the fresh products he is buying will guarantee the quality for his customers at the Restaurant at lunch and dinner time. But what if he wants to sleep instead? Well, he must pay someone to do it! Which automatically will reflect as less profit at the end of the month/year.Now, let’s do the day with our owner.After he has risen early to get all the products that were on the list, he goes back to the Restaurant. His kitchen staff are there and start preparing the different menus for lunch. All fresh materials must now be prepared and transformed into best-prepared dishes. At this stage, all types of waste must be reduced to a minimum!
Waste is lost profit
Vegetarian Life
Each product in a kitchen must have an obvious destination. And a Chef must have a big picture because if, for example, you are selling fish-filets, what happens to the rest of the fish? Well, they could prepare the fish soup. And the same for the vegetables and meat. Every piece of raw material that don’t get used is lost profit!And it happens with every product and material we find on the premises. This includes supplies such as gas, water, electricity, and very important to the cleaning materials. These last ones are often underestimated but are very expensive. Exceeding in the dosage of cleaning material, especially when they are mixed with water, can cost a fortune.As you see, every single ingredient has an impact on profit.But the most significant impact is the salaries of the people working at the Restaurant.Staff costs or wages can sum up to 30-35 % of the revenue!And this is why our owner, after coming back from the market, must:– organize the kitchen- check the rest of the goods- review the dining room- deal with an infinite list of other requests- do a briefing with the service staff
And after all this, he is supposed to be back for lunchtime to attend personally to his V.I.P. guests, and many times he is the Chef himself and must be present from the beginning to the end.After lunch, if he is lucky and encounters no bad surprises, he can finally have a rest. But, hey, dinner time is coming soon, and so he will be back!Do you think I was exaggerating when I said 16 hours? Do the math!Owning a restaurant is hard work. Ever Never underestimate it! It can be the best thing in the world, but you must be passionate about it! If you have no passion, it will kill you!
We get closer to the truth
As you notice, it is complicated to talk about profit at a restaurant business without going into the operating part.All are directly or indirectly connected and will be translated to a number in your profit & loss account.As a wise friend of mine used to say: “numbers can tell a story”.We have seen how raw materials impact profit.We have seen that the staff cost are another big part of the cake.Operation costs such as rent, gas, electricity, rubbish, stationary, and expenses for accountants and so on, this is the third big piece of the cake.When we add all these factors, we end up with a big, big number, which is about 75-80% of the net-revenue or all the net sales. (net sales= gross sales minus vat/iva)And this is before interest and tax! (E.B.I.T.)For beginners: Vat or Iva has nothing to do with tax!
When a client pays the bill, he is paying a certain amount, including V.A.T. or I.V.A. (government tax, which depends on the single country).This percentage, which can be 10 to 20 or more, is deducted from the client’s bill and goes (almost) directly to the government’s account!Very important: Never count on this money. (Of course, you can be in VAT /IVA credit or debit and take some advantages from it, but this is a conversation you should have with your accountant!)Now, once we have deducted our IVA/VAT, we end up with a real Net-Sales figure!To keep it simple, let’s assume it is a net sales figure of 100$From this 100$ now, we have to deduct our cost of sale (the net-cost of raw materials from the market and the other providers)This number is about 30% (but can go from 25% up to 35% depending on the type of establishment you have. If you sell only drinks it will be low, but for a restaurant, it will never be lower than 30%)So we end up basically with 70$ if we are excellent negotiators and have no waste! Now we have to deduct wages, and so another 30% minimum is going away, which leaves us with about 40$ on the table!If we sum up all our operation cost, we will see that we have to deduct another 20% and so we end up with 20$.Now you will think you can go and spend the 20$ in your new car!
Nothing farther from the truth!
Probably you have a loan from your bank to finance the startup phase of your Restaurant, and so you have to pay back this money plus a certain percentage of interests the bank will charge for the loan (that’s how Banks make money) Let’s assume you have to pay back 5$ out of your 100$ of net sales and so you’ll end up with 15$And now? Well now comes the government which says: “hey, you ́ve gotta pay me something out of your profits”. 🙂 LOLPlease note, that all I write about is based on waht I have experienced in over three decades in the industry. However, I am not an accountant, and the tax situation is very different from country to country, and so I cannot predict how much you will pay in taxes.
ConclusionBut I can assure you: wherever you own a restaurant business if you end up with more than 10$ in YOUR pocket after all expenses for each 100$ in net sales, you are an excellent entrepreneur!But why are so many people interested in starting a restaurant if the profits for such hard work are so low?I don’t ́t know the answer. The only thing I know is that I am one of them.I think passion is the most significant part of it!I have personally found a way to reduce the hours to a minimum. But it is a result of many years of experience and the combination of a very accurate market strategy combined with a primary location!If you do a proper investigation to make informed and intelligent choices, you can create your own Lifestyle Restaurant Business too!But remember: you must be passionate about it!
If you want to know what the most profitable busines is, read this article.
Marco Palatini
