# Unlock The Secret of Restaurant Gross Profit Margin Analysis

`First Published: 8 November 2023`

## Understand Your Gross Profit Margin

In the challenging world of restaurants, running an efficient restaurant isn’t just important – it’s a must if you want to succeed. One of the big things every restaurant owner needs to figure out is how many customers they can serve each day and how to make the most money from it. This article will help you understand one of the most critical metrics to make or break your restaurant’s success, the gross profit margin.

### Understanding How Much You Can Sell To Achieve Your Gross Profits

Figuring out how much money your restaurant can make is a bit like doing a math problem. We use a formula to do it:

Sales Forecast = Number of Tables x Seats at Each Table x How Much Each Customer Spends x How Many Times You Can Use Each Table in a Day.

Let’s look at each part of the formula to see how it works:

Number of Tables: This is how many tables you have in your restaurant. It depends on how much space you have. In a moderate-sized restaurant in the UK, you can typically expect to find anywhere from 15 to 35 tables.

So, If you have 30 tables, that’s the number you will use to forecast your budget.

Seats at Each Table: How many people can sit at one table comfortably? If it’s four people per table, that’s your number.

How Much Each Customer Spends: How much the average customer spends at your restaurant? If it’s £20 per person, that’s your number.

How Many Times You Can Use Each Table in a Day: How many times can you clear and set up each table in one day? If you can do it twice, that’s your number.

Now, let’s use the formula to figure out how much money you can make:

Calculate the Sales Forecast using the formula:

Sales Forecast = 30 (Tables) x 4 (Guests per Table) x £20 (Average Spending per Guest) x 2 (Table Turns per Night),

The result is:

Sales Forecast = 30 Tables x 4 Guests per Table x £20 per Guest x 2 Turns per Day.

Sales Forecast = 30 x 4 x 20 x 2.

Sales Forecast = £4,800.

This means that, based on these calculations, you can anticipate generating £4,800 in sales on an average day.

## Cracking the Gross Profit Margin Analysis

As a restaurant owner, once you allocate your sales figure, you also need to pay attention to your Gross profit. Gross Profit is the money you have left after you pay for food and staff. To understand your Gross profit, you need to divide your expenses into two categories: the cost of food and drinks and the cost of paying your staff.

Here’s how you can do it:

Cost of Food and Drinks: Ideally, you should spend about 25-30% of your earnings on buying food and drinks. Going over 35% is usually not a good idea.

If you stick to these percentages, you can aim for a profit of about 35% to 40%, which is a good goal for a restaurant. But remember, before you get your final profit, you’ll also have to pay for other things like rent, rate, marketing, and additional fixed and variable costs.

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### Gross Profit Margin: Setting the Right Prices

The cost of the food you serve is an integral part of your pricing strategy. It’s like deciding how much to charge for a meal. Typically, the cost of the food should be 25% to 35% of what you charge your customers. For example, if it costs you £5.00 to make a dish, you should charge at least £14.25 for it to make sense.

But this cost isn’t just about the ingredients. It also includes preparing the food, serving it, and cleaning it up afterward. And it would help if you made enough profit to cover other costs like rent.

Here’s a simple way to check if your prices are right:

Calculate the total cost of making a dish, including ingredients and staff costs. For example, let’s say a dish costs £5.00 to make, and with labour costs, it’s £8.55.

Subtract this cost from your menu price. If you set the menu price at £14.25, it looks like this:

£14.25 – £8.55 = £5

Finally, divide this result by the menu price:

£8.55 / £14.25 = 60%

This calculation tells you that your £14.25 menu price is reasonable, maybe even a bit high. If you lower it a bit, you can attract more customers while still making a good profit of 40%.

Remember, if you change the dish, like adding special ingredients, it can raise your costs. In that case, you might need to increase the price to keep a healthy profit.

### Gross Profit Margin: Controlling Portions

Keeping the right portion sizes is a smart move for many successful restaurants. It helps make sure every dish is the same and keeps costs under control. For things like chicken or beef, you should weigh them to be sure. For smaller items like shredded cheese, use portion-control cups.

You can also think about buying pre-portioned items like steaks or burger patties to save you money and reduce waste.

## Different Pricing Strategies

In the restaurant business, making money can be a bit tricky. So, there are different strategies to choose from. Let’s look at a few:

Cost-Plus Pricing: This is like counting all the costs for a dish, including staff wages and rent. Then you add a bit more for profit.

Including Everything in Profit: To stay in business long, consider the owner’s profit, money for emergencies, and expansion plans. It would be best to look at what other restaurants charge and how much profit they make.

Adjust for Changes in the Market: Sometimes, the cost of food goes up or down because of different reasons. To keep things steady, you can raise your prices to cover the changes. This way, your restaurant can stay profitable even when things get tough.

Know Your Customers: It’s important to know who your customers are and what they like. Please list what your ideal customer is like, including what they want to eat and how old they are. It can help you make the right menu and prices for them.

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### Offering Different Choices

Another good idea is to offer different choices to your customers. You can have a basic option that’s not too expensive, a middle-priced option, and a fancy one that’s more expensive. This way, you can attract more customers and make more money.

Making It Simple

So, running a restaurant is about more than just making delicious food. It’s also about making sure you charge the correct prices, control your costs, and offer choices that make customers happy. If you do all these things right, your restaurant can succeed. Remember, every little detail matters in the restaurant business, and getting your prices exactly can make a big difference.

Related articles:

Restaurant Profit And Loss Statements

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Restaurant Inventory Management System

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## Conclusion

Managing your restaurant’s daily operations and pricing strategies can be like solving a puzzle. But with a good understanding of your costs, customers, and competition, you can set your restaurant up for success. Remember, even the most minor details matter in the restaurant world, and getting your prices right can be the key to standing out in a competitive industry.

Starting on the path to culinary success and financial prosperity begins with a solid grasp of these essential principles of gross profit margin analysis. With the right strategies, you can navigate the complex world of running a restaurant and create a recipe for long-lasting success.

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## FAQ’s

What do you mean by gross profit margin?

The gross profit margin in a restaurant is a financial measure that indicates the percentage of revenue surpassing the cost of goods sold (COGS). It indicates how efficiently a company is producing and selling its products by comparing the revenue generated from sales to the direct costs associated with manufacturing or purchasing the goods. A higher restaurant gross profit margin suggests that the restaurant is more efficient at turning sales into profit before accounting for operating expenses, taxes, and other costs.

How do you calculate GP (Gross Profit)?

The restaurant’s gross profit is calculated by subtracting the cost of goods sold for a given period from the total revenue (sales). The formula is:

Gross Profit = Revenue − Cost of Goods Sold (COGS)

For example, if a restaurant has £500,000 in revenue and £300,000 in COGS, the gross profit would be £200,000.

What does a 70% gross profit margin mean?

A 70% gross profit margin means that 70% of the revenue generated from sales is retained as gross profit after covering the cost of goods sold. This high percentage indicates that the company can produce or purchase its goods at a relatively low cost compared to the price at which it sells them. For every Pound of sales, 70 pence is profit before deducting other operating expenses, taxes, and interest.

What does a 25% gross profit margin mean?

A 25% gross profit margin means that 25% of the revenue remains as gross profit after covering the cost of goods sold. This indicates that for every Pound of sales, 25 pence are retained as profit before accounting for other expenses. A lower gross profit margin than higher percentages could suggest higher costs of goods sold relative to sales revenue. In a restaurant environment, a 25% gross margin will lead to a negative net profit.

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