What is a good profit margin for a restaurant? Have you been searching for a magic number? Do you want to know where you stack up against the competition? Are you worried that you're leaving a lot of money on the table, or are you just looking to make money for the first time? If you’re looking for the answer, allow me to explain two truths about restaurant profits and your restaurant’s potential.
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Welcome to my KZitem Channel. I am David Scott Peters, a restaurant coach and speaker who teaches restaurant operators how to cut costs and increase profits with my trademark Restaurant Prosperity Formula. Known as THE expert in the restaurant industry, I apply my no-BS style to teach and motivate restaurant owners to take control of their businesses and finally realize their full potential. Thousands of restaurants have used my formula to transform their businesses. To learn more about me and my coaching program, visit www.davidscottp....
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First, before you can get to the true profit margin potential for your restaurant, you have to first understand there are the two profit truths in the restaurant industry.
Truth number one, you can't use industry averages to run your restaurant. What do I mean by that? When the National Restaurant Association does all their surveys and compiles all the data for restaurants, they’re combining data from all kinds of restaurants, from a pizzeria to a steakhouse. They say the average restaurant makes a nickel to 8 cents on every dollar that comes in the door. That’s a profit margin of 5 to 8 percent on average. That combines the good, the bad and the ugly.
The second profit truth is that most independents are running their food cost and labor cost at least 10 to 23 percentage points above their targets. I discovered this in coaching independent restaurant owners just like you since 2003. I’ve based my entire business on this fundamental truth.
If the National Restaurant Association says you can make a nickel to 8 cents on every dollar, and I'm telling you that you are already 10-23 points above where you should be, can you start to put those things together to see there is greater opportunity for profit if you simply learn how to manage your restaurant properly?
To figure out where your profit margin should be, first you have to know about prime cost way back when and prime cost now. Prime cost is the term for controllable expenses in the control of management: how you hire, fire, train, utilize your people, purchase product and utilize that product.
Prime cost is total cost of goods sold plus total labor costs, including taxes, benefits, insurance.
What should your prime cost be? The old standard was a 65 percent prime cost for a full-service restaurant and 60 percent for a quick serve. That number doesn't work anymore. It’s old school based on costs and operations pre-9/11.
Costs are going up all around you, and you cannot operate off a 65 percent prime cost anymore.
Instead, if you do at least $850,000 in annual gross sales today, your new prime cost target is 55 percent or lower. If you are a quick service, it's 60 percent. If you're under $850,000 a year in sales, it's 60 percent.
To figure all of this out for your own restaurant, you need to put a budget together. There is no other way to figure out the two parts of your prime cost, cost of goods sold and labor. A budget is critical. It's your plan for success.
A quick note on figuring out your prime cost: if you’re not at that $850,000 minimum I mentioned, you're going to have less opportunity to make higher profit margins because you don't have enough dollars to shave pennies off to make more. Now, if you're a $1 million, $2 million, $5 million or $10 million dollar restaurant, your profitability can go through the roof for the exact opposite reason.
Now, this all hinges on creating your plan for success, implementing systems to achieve your new prime cost targets and operating your restaurant to your budget. So let’s do it!
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