How to Improve Restaurant Profitability Ratios
Running a restaurant is like being the captain of a ship in unpredictable waters. Some days, you’re riding high on packed tables and flowing drinks; other days, you’re staring at slow sales and rising costs, wondering if you’ll ever see smooth sailing again. But if there’s one thing that can keep your restaurant afloat, it’s knowing—and mastering—your profit margin.
That’s why we’ve created this 2025 guide to restaurant profit margins—designed to be engaging, informative, and (dare we say) even a little fun! We’ll simplify all the essential information for you, allowing you to concentrate on what you excel at: crafting incredible dishes and memorable customer interactions.
What Is a Restaurant’s Profit Margin?
Your profit margin is the percentage of revenue that remains after covering expenses. In other words, how much money does your restaurant keep after paying for ingredients, rent, labour, utilities, and everything else?
The higher your profit margin, the more efficiently your restaurant is running. A restaurant making £1 million in sales but only keeping £30,000 in profit is running on razor-thin margins—just 3%! Compare that to another restaurant with the same revenue but £100,000 in profit—a 10% profit margin—which is far healthier.
How to Calculate, Improve, and Master Your Restaurant’s Bottom Line
Profit margins are measured in two key ways:
- Gross Profit Margin (Before Expenses)
This tells you how profitable your food and drink sales are before factoring in rent, labour, and other overhead costs.
Formula:
Gross Profit Margin=[Revenue−Cost of Goods Sold (COGS)]=Revenue
Gross Profit Margin=[Cost of Goods Sold (COGS)/Revenue/)]×100 = gross Profit Margin
- Step 1: Calculate Net Profit Margin
This is your actual bottom line. It accounts for every business expense, giving you the most accurate picture of how much money you’re keeping.
Formula: Net Profit Margin=(Revenue−All CostsRevenue)×100
Net Profit Margin=(RevenueRevenue−All Costs)×100
Real-World Example: Calculating Restaurant Profit Margins
Let’s say you own a cosy pizza shop in London. You’ve pulled the numbers from last year, and here’s what you found:
- Total Revenue: £1,000,000
- Cost of Goods Sold (COGS): £300,000 (this includes the cost of ingredients)
- Total Operating Costs (Rent, Labor, Utilities, etc.): £900,000
Now, let’s plug these numbers into the formulas.
Step 1: Calculate Gross Profit MarginGross Profit Margin=(1,000,000−300,0001,000,000)×100 =70%
Step 2: Calculate Net Profit Margin
Net Profit Margin=(1,000,000−900,0001,000,000)×100 =10%
Net Profit Margin=(1,000,0001,000,000−900,000)×100 =100,000
So, your gross profit margin is 70%, but after accounting for all expenses, your net profit margin is 10%. That means for every £1 your restaurant earns, you keep 10p in profit.
What’s a Good Profit Margin for a Restaurant?
Profit margins in the restaurant sector are well-known for being quite slim compared to other industries. But how does your restaurant stack up?
- Average Profit Margins by Restaurant Type:
- Full-Service Restaurants (FSRs): 3-5%
- Fast Casual Restaurants: 6-9%
- Quick-Service Restaurants (Fast Food): 6-9%
- Catering Businesses: 7-8%
- Bars & Nightclubs: 10-15% (higher margins due to alcohol sales)
If your restaurant’s profit margin is above 10%, you’re doing great! However, if it’s below 5%, you may need to make some changes.
How to Improve Restaurant Profitability Ratios
A restaurant profitability calculator is a great tool for estimating potential earnings. It can also help estimate the average price per person for your restaurant based on the cost of menu items. However, it is crucial to note that this amount is a median and does not account for the extremes of the price range. Additionally, sales can fluctuate significantly on various days of the week. For this reason, it is important to use the information from the calculator carefully.
A restaurant profitability calculator is a valuable tool that can help you calculate your net profit. It measures how much money is left after operating expenses and is based on POS data. The difference between revenue and profit is that the latter represents the amount of cash that a restaurant earns after paying its operating costs. Moreover, revenue varies depending on many variables. For instance, the number of seats, the type of food sold, the location, and the seasonality of the business can affect the revenue.
Fixed costs are simple and straightforward. One bill is for the prime cost, which is what the restaurant should make. It is possible to break these down by day. This is the overhead rate, which can give you an idea of the cost of running the restaurant. This number will help decide how much money you need to invest to make the business profitable, especially if you have no experience running a restaurant.
A restaurant profitability calculator can help determine how much money you can make from your business. A good restaurant’s gross profit is around 70%. It is calculated by subtracting the total costs of goods sold from the total revenue. In this case, Johnny’s Burger Bar made £1.25 million in July-September – an overall gross profit percentage of 68%. The money from this income is then used to pay the operating costs. The restaurant’s profitability will determine how much you can invest in marketing and advertising.
The profitability of a restaurant depends on several factors. The location of a restaurant can affect revenue significantly. For example, a busy restaurant can increase or decrease its profits. Another critical factor to consider is the cost of acquiring new customers. For example, a high-profit margin indicates a high return on investment. In addition, a low-profit margin means your business will require higher marketing costs.
The cost of labour is one of the main costs for a restaurant. It accounts for 30% of the total revenue and is the second-largest operating expense. The labour cost can be reduced by optimising employee scheduling and reducing unnecessary labour. The Boston Consulting Group estimates that by 2030, food waste will lead to a global cost of $1.5 trillion, indicating that any food that goes to waste represents a loss of potential income. Hence, a low-profit margin will affect not only a restaurant’s bottom line but also its sales.
A Restaurant Profitability Calculator
A restaurant profitability calculator is a great tool for tracking food costs. It will help you determine how much you can charge per serving. Tracking food costs is an essential part of running a restaurant, and the calculator will allow you to choose the optimal amount to sell. A pizza shop can earn about 61% of its total revenue in a typical month. A low-profit margin is a profit remaining after fixed expenses are deducted.
A restaurant profitability calculator will help you to calculate how much money you can make from the business. In the case of a pizza shop, the average revenue per shift is £1,380. Using the calculator, you can determine the average profit of a restaurant. For the same amount of time, you can use it to estimate the average profit margin of a restaurant in a week. It is also helpful to consider the average annual revenue of a restaurant in different types of business.
A restaurant profitability calculator can help you determine how much money you can make from a second location. The calculator will take into account the cost of the initial location and multiply it by 60% to find the estimated revenue of the second location. In addition, it will calculate the price of the second location. This figure will be your ideal revenue for the new location. It is important to note that a new restaurant will never operate at full capacity in the first year.
Related article:
Restaurant Menu Pricing Strategies
How To Control Food Costs In Restaurants
Restaurant Food Waste Management Challenge That Will Change Your Restaurant
Shocking Restaurant Secrets The Jaw-Dropping Truth About Operating Costs
What Is The Most Important Thing Restaurant Managers Should Consider When Choosing A Food Vendor
How to Increase Your Restaurant’s Profit Margin
If your profit margin is looking a little slim, don’t panic! There are plenty of ways to boost profitability without compromising quality. Here’s how:
- Raise Prices Strategically
Instead of a blanket price hike, increase prices on your best-selling and high-margin items.
Introduce premium options for customers willing to pay more (e.g., “add truffle oil for £3”).
- Reduce Food Waste
Keep an eye on portion sizes—are you over-serving?
Track waste and find creative ways to use leftover ingredients.
- Train Your Staff to Upsell
Encourage servers to suggest high-margin items like cocktails or desserts.
Teach the art of subtle upselling—customers love good recommendations!
- Optimise Your Menu
Feature more profitable items front and centre.
Remove low-margin, low-selling dishes that take up resources.
- Lower Operating Costs
Negotiate better deals with suppliers.
Switch to energy-efficient appliances to cut utility bills.
Reduce labour costs by optimising schedules.
Restaurant Profit Margin FAQs
- How Often Should I Calculate My Profit Margin?
At least once a month! Regular tracking helps you spot trends and take action before problems arise.
- Why Is My Net Profit Margin So Low?
High food costs, expensive labour, rent, or inefficient operations are common reasons. Review your expenses carefully to find leaks.
- What’s a Quick Way to Improve Profit Margins?
Menu engineering—focuses on selling more high-margin items while cutting costs on less profitable ones.
- Should I Use Cash or Accrual Accounting for My Restaurant?
Most restaurants use accrual accounting, as it gives a clearer picture of financial health. However, small, cash-heavy businesses may prefer cash accounting for simplicity.
Final Thoughts: Master Your Restaurant’s Profitability
Your profit margin isn’t just a number—it reflects how well your restaurant operates. The more you understand and manage it, the more successful your business will be.
So, whether you’re running a fine-dining establishment, a casual café, or a bustling burger joint, use this guide to take control of your numbers and maximise your profits.
And remember: small changes add up!
If you want to track your profit margins effortlessly, try our Free Restaurant Profit Margin Calculator—it’s fast, easy, and gives instant insights.
Here’s to higher profits and a thriving restaurant!