Whether you’re opening a new restaurant or have an existing restaurant and want to increase your profit margin, this article is for you. Understanding the details of your profit and loss statement is vital to your success. It can help you become more profitable if you are not and become more profitable if you already are.
Adjusting Your P&L Sheet
Keep adjusting your profit and loss sheet by tracking how many customers come in and how much you spend on the ingredients of each of your menu items. Each menu item needs to exceed at least 70% of its gross profit margin. If your menu items don’t meet this number, you need to get creative. If you don’t want to increase prices, I suggest changing serving sizes slightly. Food styling and plating can help you modify portions without most customers noticing. For example, if you serve fries with your burger, instead of two cups, serve one and a half. Obviously, your loyal customers will notice, so it’s best to serve the dish on a smaller plate. You could change the food styling by having a burger on a plate and fries in a cool paper cone.
Analyzing Your Income
Factors you need to consider in order to estimate and adjust your income include your competitors’ prices, seeing if your restaurant concept is oversaturated in your area, average check size per table per meal period, hours of operation, and your seating capacity.
- Competitive Pricing: A great place to start is to find a successful restaurant in your area and set your prices similar to theirs. For example, if you are opening a Greek restaurant and there is a successful Italian restaurant nearby, it’s wise to have your entree prices be within the same price range depending on your portion sizes and ingredients. Just because your competitors have a set limit doesn’t mean you can’t have higher prices. For example, if all of your competitors use canned or frozen foods, you might be able to attract a high number of the surrounding area’s customers by incorporating fresh, organic ingredients. First, it’s important to do some market research on the median household income to see if people would be able to afford paying more for the higher quality menu items.
- Restaurant Concept Is Over Saturated: Like you, many other restaurant owners see an opportunity for their first, or even fifth, location in an area that doesn’t have many similar restaurants. But over time as more restaurants open in these successful areas, your restaurant concept can become more saturated. Not only do you have to compete with other restaurants in food quality but also pricing. For example, let’s say you were the first to open an Italian restaurant in your area, but over time the area now has seven more Italian restaurants and people who like Italian food have a lot more options. Sure, you can compete and go above and beyond, or you can create your own lane. I would suggest adding another concept to make your restaurant unique, such as having an Italian restaurant that is American or Asian infused. You might need to adjust your brand, but the upside can be very positive.
- Average Check Size Per Table Per Meal Period: By looking in your POS system, you can know on average how much each table makes per meal period. You’ll see how much people are spending and can use this information to increase profitability. For example, let’s say on Friday evening, each check averages about $200 with an average of an hour and a half turnover. With this knowledge, you can think of strategies to increase it from $200 to $250 per check. A good way of doing this is to have your servers become salesmen. The best strategy is for them to take down the customers’ dessert orders when they are taking their initial order and not after their entrees are finished when the customers are full. If the customers can’t finish it, they could always take it to go. Additionally, you could also track your servers’ performance and reward the servers who sell more.
- Hours Of Operation: It may seem wise to be open for as many hours as possible, but this can hurt your business if you are losing money during certain times of the day. I often see restaurants who do eighty percent of their business at dinner time still open for lunch as well. This can kill their profits. The best strategy for them is to open a couple of hours before dinner time to prepare all of the ingredients before the dinner rush. Sometimes changing hours of operation can make or break a restaurant’s profits. Find out which mealtime is most profitable for you and focus on that more. You can also modify the menu to fit that specific mealtime the best.
- Seating Capacity: It’s hard to increase the number of seats because I’m sure you’ve already maximized your restaurant’s seating capacity. Analyze each table’s profitability and if you notice that a few tables are always empty you have options. I suggest creating a small private room with a large long or round table to accommodate larger groups. Private events are a great way to increase profitability. Also, start marketing more or offer incentives. A great incentive would be to offer half off appetizers during a slower meal period to increase customer volume. Lastly if you are packed during a meal period, try having outdoor seating if possible. After Covid, customers are more likely to want to sit outdoors as long as there is a beautiful ambiance.
To gauge which mealtimes are profitable, analyze how much you’re making during each meal period you are open. For example, track meal periods daily and if you are losing money during meals on Mondays, consider being closed on Mondays. It’s also important to track this every month because some seasons are more profitable than others, depending on your location.
To understand what your break-even point is, you need to evaluate not only your fixed and variable costs, but also how your profits, sales volume, and costs all come together.
- Fixed Costs: Fixed costs are costs that never change. These include licenses, rent, insurance, loan payments, and other fixed fees. Other fixed costs are more short term and include manager salaries, trash removal, utilities, and telephone lines. The reason these are short term is because over time they will increase. Therefore it’s important to keep these numbers in consideration when adjusting your menu prices.
- Variable Costs: When business sales increase so will the variable costs, and vice versa. Variable costs include labor, food, and beverages. For example, if you sell a pizza, the ingredients used to make that pizza are part of your variable costs. You can modify your variable costs by increasing or decreasing ingredient amounts. You can change the ingredients altogether or even modify the quality of the ingredients. I would only suggest increasing the quality of ingredients if you want to maintain a good reputation with your customers. The amount of staff members will also vary depending on how much business you have. Lastly, adjust costs by hiring less qualified people but having an excellent system in place to maintain consistency. Many fast food chains are successful because they have a nearly failsafe system where even unskilled people can be hired. Your variable costs usually make up about 60-65% of your overall expenses. Don’t be intimidated because you can always adjust the different variable costs to increase profitability. Just keep working on having a great system in place. An example of this is to have a few kiosks outside the counter so customers can place their own orders. This will save you money and increase profits because you will need less cashiers and pay less salaries a year.
In conclusion, without tracking and analyzing your profit and loss margins monthly or even weekly, you will be lost not only in the restaurant business but in any business. It’s very important to know how much it costs to make each dish and what your overall expenses are so you know how to price your menu items accordingly.
By Mina Ibrahim