You know your restaurant must carefully manage expenses because of thin profit margins. All restaurants have this in common. However, some full-service restaurants can experience tremendous success while others falter or are unable to increase profits year after year of making various attempts. Equipment goes down and requires unscheduled maintenance or a replacement. Floors flood and food costs increase. Rent goes up. There are many uncontrollable factors that can put an immediate strain on a restaurant to remain profitable and out of debt.
There are also several ways to measure restaurant profitably. Some measurements are specific to fast food restaurants, while others are used only in full-service restaurants. However, there are some general accounting results that all restaurant profit margins have in common, and with some careful planning and smart decision making, your restaurant can be on track toward greater profits, even if unforeseen circumstances arise.
Measuring profitability and restaurant profit margins
From a high-level perspective, you should know what the gross profit of your restaurant is every month. Gross profit is the revenue remaining after costs of goods sold are deducted (COGS). From gross profit, you can derive the net profit margin (NPM). NPM subtracts the administrative costs, such as:
It’s the final measurement of operating results and is oftentimes the hardest to change. With it, you can determine the success and profitability of your restaurant. If $.95 of every dollar you earn goes towards expenses, your NPM is 5%. What is considered a healthy NPM can vary greatly by restaurant type. Full service, fast food, food trucks, and catering services all have different pictures of success.
Innovation and internet sales
Restaurants have had loyalty programs for years, but as technology evolves, it’s important that these programs do too. Embracing new trends in technology rather than fighting them will help your restaurant be flexible to changing tastes and trends. Many managers are now using technology to come up with creative ways to drive new business. Mobile apps have a lot to offer these days in terms of bringing new visibility to your restaurant. Yelp is a great tool that people use to rate and post pictures of restaurants they visit. Other mobile delivery apps such as DoorDash, GrubHub, and Uber Eats give diners more options to get the food that they love without ever leaving the house. Some restaurants have even integrated ordering online directly from their websites—a good thing, since 90% of people admit to researching a restaurant online before visiting. The competition is doing it. Are you?
Use real-time accounting to improve profit margins
Accounting in the food service industry is full of unique challenges, and outsourcing your accounting work to an expert who understands how to manage restaurant profit margins can help. One of the first topics they will look at with you is menu design. But you must first have in place software to collect POS data which allows you to reorganize your menu based on what sells well and what doesn’t, helping you to identify and remove items that cause you to lose money.
A wireless POS network or restaurant data service can also give you the reports you need to make money-saving decisions on the fly. Wholesale prices change more often than they used to. Price increases chip away at profit margins without the additional expense being offset elsewhere. Making a habit of regularly comparing vendor prices, in advance of your purchases, is an important habit to develop. Since input costs are the greatest expense of a restaurant’s profit margin, this will be time well spent. A qualified restaurant consultant can help you to update your sales and accounting system, enabling your business to more quickly adapt to changing conditions. Modernized restaurants give added flexibility to daily management decisions and make you more competitive in the industry.
Outsourced Accounting Management
While investing in an outsourced accounting service may be a temporarily added expense, the benefits are long term. SD Mayer has accounting professionals who are restaurant owners or investors with experience at improving profitability—even taking on Controller or CFO roles when needed. You don’t need to feel like razor-thin profit margins are a tightrope you are always teetering on. Careful planning and consultation with an experienced expert can help you expand your profit margin so that you always feel like you’re on solid ground.
The financial advisors at SD Mayer are experienced in looking at your restaurant holistically. We can help with everything from menu assessments to implementing retirement plans. If you are ready to start widening your profit margins, contact us today and we’ll help you get started.