{"id":121578,"date":"2022-09-15T00:00:00","date_gmt":"2022-09-15T00:00:00","guid":{"rendered":"https:\/\/www-review2.sapaad.com\/restaurant-accounting-101-the-basics-of-measuring-your-restaurants-profit-margin-2\/"},"modified":"2025-11-06T06:33:28","modified_gmt":"2025-11-06T06:33:28","slug":"the-basics-of-restaurant-profit-margin","status":"publish","type":"post","link":"https:\/\/www.sapaad.com\/us\/the-basics-of-restaurant-profit-margin\/","title":{"rendered":"Restaurant Accounting 101: The Basics of Measuring Your Restaurant\u2019s Profit Margin"},"content":{"rendered":"\n

While passion for great food and amazing service can fuel a restaurant business, it\u2019s the numbers that dictate where you can take it. Can you afford to open a second outlet<\/a>, or maybe even launch a franchise<\/a>? Or do you need to cut costs<\/a>?<\/p>\n\n\n\n

Out of the restaurant metrics<\/a> you need to calculate regularly, it\u2019s your profit margin that can answer these questions. Profit margin refers to the percentage of profit you earn from sales. <\/p>\n\n\n\n

Restaurants used to have an average of 15-20%<\/a> gross profit margin, but over the past 20 years, it has shrunk to as little as 4-7%. Some restaurants even operate without profit at all, with many just barely breaking even.<\/p>\n\n\n\n

While your profit margin can help you set realistic goals, it can also point out the adjustments you need to make to increase your earnings. We\u2019ll help you understand profit margins and give you tips on how to protect them.<\/p>\n\n\n\n

Understanding Profit Margin<\/h2>\n\n\n\n
\"Person<\/figure>\n\n\n\n

Businesses deal with two kinds of profit: gross profit and net profit.<\/p>\n\n\n\n

Gross profit margin <\/strong>is the percentage of sales that goes into profit minus deductions. You can also determine the gross profit margin of every menu item. In that case, the formula is as follows:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Gross Profit Margin = (Menu Price \u2013 Raw Food Cost) \/ Menu Price * 100<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

Suppose you sell a plate of biryani for $11<\/strong>. To make this dish, you spend $6<\/strong>. Therefore, your gross profit margin for biryani is:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Gross Profit Margin = ($11 \u2013 $6) \/ $11 * 100<\/strong><\/p>\n\n\n\n

Gross Profit Margin = ($5 \/ $11) 100<\/strong><\/p>\n\n\n\n

Gross Profit Margin = 45%<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

A 45% gross profit margin is healthy for one dish. Let\u2019s see the percentage you\u2019d end up with if we calculate your gross profit margin based on your total sales.<\/p>\n\n\n\n

In this scenario, the formula you\u2019ll use is:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Gross Profit Margin = (Total Sales \u2013 Cost of Goods Sold) \/ Total Sales * 100<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

Let\u2019s say your restaurant\u2019s total sales from January 2022 to June 2022 was $1.5 million<\/strong>, and the cost of goods sold (CoGS) was $350,000<\/strong>.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Gross Profit Margin = ($1.5 million \u2013 $350,000) \/ $1.5 million * 100<\/strong><\/p>\n\n\n\n

Gross Profit Margin = ($1.15 million \/ $1.5 million) 100<\/strong><\/p>\n\n\n\n

Gross Profit Margin = 77%<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

If your gross profit margin based on total sales is 77%, it means that for every $100 a customer spends at your restaurant, you earn $77, which you\u2019ll then use to pay for operating expenses.<\/p>\n\n\n\n

Speaking of operating expenses, the profit margin you get after deducting them is your net profit margin<\/strong>. On the other hand, operating expenses include inventory costs, labor, rent, utilities, equipment leasing costs, and subscription fees.<\/p>\n\n\n\n

To calculate your net profit margin, you can use this formula:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Net Profit Margin = (Gross Sales \u2013 Operating Expense) \/ Gross Sales * 100<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

Take note, gross sales minus operating expenses equals net profit, so you can also write the formula as follows:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Net Profit Margin = Net Profit \/ Gross Sales * 100<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

If your restaurant\u2019s gross sales for the period mentioned above was $1.85 million<\/strong>, and the operating expenses were $1.6 million<\/strong>, then:<\/p>\n\n\n\n

<\/p>\n\n\n\n

Net Profit Margin = ($1.85 million \u2013 $1.6 million) \/ $1.85 million * 100<\/strong><\/p>\n\n\n\n

Net Profit Margin = ($250,000 \/ $1.85 million) 100<\/strong><\/p>\n\n\n\n

Net Profit Margin = 14%<\/strong><\/p>\n\n\n\n

<\/p>\n\n\n\n

With a 14% net profit margin, you\u2019re earning a lot more than the national average. This makes you more likely to expand your business with your resources at hand. You can also use your excess profit for investments, which can help you grow capital.<\/p>\n\n\n\n

But before diving deeper into making the most out of your profits, let\u2019s discuss the other factors that play into your net profit.<\/p>\n\n\n\n

Profit and Income<\/h2>\n\n\n\n

It\u2019s not enough to look at profit alone to determine how much you\u2019re truly earning. Profit merely represents the amount you\u2019re left with after deducting the expenses from revenues. To know the actual amount you\u2019ve earned after a period, you should calculate your income. Income is determined after deducting the rest of your restaurant\u2019s expenses from your net profit. Such expenses include taxes, interest, amortization, and depreciation.<\/p>\n\n\n\n

Restaurant profit margin also affects restaurant income, but assets are the ones that significantly boost it. Three factors affect assets, such as:<\/p>\n\n\n\n