How to Increase Profit in Restaurant

Do you want to Double up your profit? so check out this post on how to increase profit in restaurant by this important matrix.

Are you a restaurant owner who wants to know valuable tips to make his/her business generate double revenue? If YES, your search journey gets ended here.

Running a successful restaurant needs a constant check and balance, not only in the initial stages but throughout the lifetime of the business. Today, technology has developed to such an extent that it can even tell you how much each spoon of pepper is contributing to your business. You can keep records of your shattered data in one place.

The question here is that what should you do to take your restaurant business up to the level of the sky? So, there are some considerable metrics you are obliged to measure if you want to run your restaurant business profitably.

Also, it’s mandatory for you to do a break-even analysis of your restaurant to compare it with other restaurants. By doing this you will be able to look deeply into the performance of your restaurant, its areas of weaknesses and the improvements that are required.

List of Important Metrics for How to Increase Profit in Restaurant

  1. Expenses at Goods Sold
  2. Labor Cost Percentage
  3. Prime Cost
  4. Food Cost Percentage
  5. Gross Profit
  6. Inventory Turnover Ratio
  7. Net Profit Margin
  8. Earnings Before Interest, Taxes, Depreciation, and Amortization

 

Here are some metrics that you must calculate to get an effective and smooth going business operation system. You can easily have access to customer data, operational data, and performance data after scaling these metrics. Let’s have a look at them.

1. Expenses at Goods Sold

The expenses that are coming on sold goods are referred to as costs of goods sold (CoGS). It is the cost that is required on each and every item that is present in your menu list.

In simple words, it is the cost that you are required to spend on the inventory of your restaurant to have all the raw material that is needed to prepare food, and again it will help you to have better inventory cost control. Evaluating these metrics will help you to compare and keep a record of costs on goods sold.

How to calculate CoGS

A restaurant inventory software can help you do this. Also you can use the following formula to calculate CoGS.

COGS= (Beginning Inventory of F&B) + (Total Purchase) – (Ending Inventory)

2. Labor Cost Percentage

The Labor Cost is the total payable amount to staff members or labor. Labor Cost percentage is the second main and crucial part of the actual cost (the first part is the Cost of Goods Sold). After food cost, you should primarily calculate Labor Cost percentage in order to get increased profit.

How to calculate Labor Cost percentage? 

Use the following formula to calculate the Labor cost percentage.

Labor Cost Percentage= Labor / Sales.

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3. Prime Cost

A prime cost is the total sum of the Cost of Sold Goods and the Labor Cost percentage. This is the cost that makes 60% of the entire sales of a restaurant. You must measure this metric as it lies among the crucial ones and can help you control all the expenses of your restaurant in a better way. Also, you can manage expenditures better by getting a complete record of Prime Cost.

How to Calculate Prime Cost? 

It’s not rocket science to calculate the prime cost. Just add COGS and Labor. You will get the prime cost immediately.

Formula

Labor Cost + COGS = Prime Cost.

4. Food Cost Percentage

Food cost percentage indicates the difference between the cost coming at producing all the menu items and the price on which these items are being sold. The importance of calculating this metric is much more than anyone can think.

When you will price your menu, it will help you know how much each dish is taking part in building revenue. In this way, you can have a better estimate of all the items and dishes. Also, you will be able to increase your income by selling high revenue-generating dishes more than the other dishes.

How to calculate food cost percentage? 

You can calculate the food cost percentage of your restaurant by using the following formula

Food Cost Percentage = Item Cost / Selling Price

Also, you use a food costing software to check food cost percentage. 

5. Gross Profit

It is the profit that the restaurant generates after minimizing the cost of goods sold. The amount obtained will be the money ready to use for paying other expenses including fixed expenses and profit. With this money, you can pay electricity bills or rent your building. Indeed it is going to help you maintain the system better and generate extra money.

How to Calculate Gross Profit?

You can simply calculate it by using this formula

Gross Profit = Total Revenue – COGS

6. Inventory Turnover Ratio

The inventory turnover ratio is something very important and can prove to be really beneficial for your business calculations. This ratio tells you the number of times your restaurant is selling inventory during a specific period.

For ease, you can use restaurant inventory software to check out the exact turnover ratio. By knowing this specific number you can prevent both overstocking and understocking of raw material in your inventory. Also, it will aid you in knowing how much time it takes to drain your inventory.

How to Calculate Inventory Turnover Ratio?

Consider using the below-mentioned formula to calculate the inventory turnover ratio of your restaurant

Inventory turnover ratio = { COGS / ( beginning inventory + ending inventory ) / 2 ]

7. Net Profit Margin

The Net profit margin is the actual profit that comes out after calculating all the expenses of your restaurants and subtracting those expenses by Gross profit.

These expenses may include the rent of your building, electricity bills, labor cost percentage, inventory costs, and COGS, etc. It is thus the main profit that you are earning from your restaurant business and is at the same time important too.

How to Calculate the Net Profit Margin?

Use the below- mentioned formula to calculate the net profit margin of your restaurant.

Net Profit Margin = ( Gross Sales – Operating Expenses) / Gross Sales.

8. Earnings Before Interest, Taxes, Depreciation, and Amortization

The above-mentioned heading is abbreviated as EBITDA. These are metrics that represent earnings based on operations. By knowing the figure of EBITDA you can keep a check on the health of your restaurant.

You can use this major metric to compare the performance of your restaurant with that of the others. Also, you will be able to inspect the operational performance of the restaurant. This metric allows you to decide whether to invest more in the restaurant or to sell it. Hence it is as necessary as inventory cost control. 

How to calculate EBITDA?

Try using these formulas to generate a figure for EBITDA.

Based on Operating Profit

EBITDA = Operating Profit + Amortization Expense + Depreciation Expense.

Based on Net Income

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Finishing it up of how to increase profit in restaurant

If you think that running a restaurant is a cinch or a child’s play then you are wrong. It involves a number of tricky tasks and calculations to run it smoothly and generate a handsome income out of it.

You can’t sit by putting your hands on your hands, watching what’s going on around and inside the restaurant. You have to take care and check and balance all the ongoing affairs especially the financial part of your business

For this, you have to calculate some important metrics that will help you much in taking every piece of information in your knowledge. You can use food costing software to check the food cost ratio.

We have shared all the metrics in the article, with all the necessary information needed to know about the metrics Don’t forget to calculate these metrics along with having a break-even analysis, to keep the best records of finances and to use them rightly to grow your business.

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