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Have you ever wondered what the average profit margins are in restaurants? It’s hard to find that information, so I’m going to break it down for you in today’s video. Watch now!
To learn more please either watch the video above, read the transcript or listen to the podcast below.
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Have you ever wondered what the average profit margins are in restaurants? Where or how much you’re supposed to spend in certain categories? It’s hard to find that information, so I’m going to break it down for you in today’s post.
What is the average profit margin?
The average profit margin in a restaurant is a lot lower than people think. What I see from the people that I work with is that it ranges anywhere from about 15% to, obviously, nothing. On average, I’d say most restaurants are profiting at about 5-6% of total sales which is pretty bad. However, it’s really hard to tell because some people pay themselves a salary while some people don’t so that’s going to throw off profits.
Let’s look at where the makeup of your restaurant profit should be. First, all these numbers are based on top-line sales or total sales. So let’s assume you’re doing a million dollars a year, your prime cost should be less than 60%. I’m recommending 55%, but it should be less than 60%. Remember that Prime Cost is the total cost of goods sold plus labor (CoGS + Labor). So all of your cost of goods sold, purchases, and labor together should represent 60% or less.
Then there’s Direct Operating Expenses (DOE), this is all the other things that you buy but you don’t sell back to customers, therefore it’s not considered a cost of goods sold. Things like toilet paper, napkins, gloves, foil, to-go containers, and chemicals are examples of DOE. Technically, what doesn’t go on the recipe is not a cost of goods sold but rather a direct operating expense and those are usually about 6-8% of your profit margin. If you take prime cost and DOE together, that’s something that I call Restaurant Controllable Costs (RCC). My goal is to always keep Restaurant Controllable Costs at about 65% total. In this example, let’s just say we have 66% (60% Prime cost + 6% DOE) that goes to your controllables.
Then there’s rent and marketing. Why am I including rent and marketing together? It’s pretty simple, the better piece of property or the better location, the less money you’re going to spend on marketing. If you’re in a really poor location, you don’t have a lot of foot traffic, and there’s not a lot of customers – you’re probably going to need to spend more money on marketing. So I want you to set aside 10% for rent and marketing, whether you split it into 6% rent/ 4% marketing, 8% rent/ 2% marketing, 9% rent/ 1% marketing, whatever you want. Then 20% for other expenses: attorneys, accountants, banks, utilities, linens, maintenance, electricity, telephones, credit card processing, etc.
So now if you add all this stuff up we’re looking at what an average restaurant profit margin is: 60% (Prime Cost) + 6% (DOE) + 10% (Rent & Marketing) + 20% (Other Expenses). That’s 96%, which only leaves 4% for profit! And that’s assuming you’re doing all that well.
Let me tell you it’s hard to get to a 60% prime cost. When I look at the average number of all the users that are using our software, BACON, most people that get started with BACON are averaging about 72% prime cost or over 80% restaurant controllable costs – there’s no room for profit there. You’ve got to get your prime costs below 60%, it’s hard to do and I have other videos that will give you tips on how to lower food costs, how to lower labor costs, etc. But the point is that doesn’t leave a lot of money for profit so you have to be on top of your finances.
If you’re just struggling on profit ask me a question and I’d be happy to answer. I hope you enjoy the video, have a wonderful day!
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