If you are planning to open a restaurant, you may want to know how much profits you can make with this business. In other words, you must know how much revenue you must generate to reach break-even and make profits.
According to the State of the Restaurant Industry report by the National Restaurant Association, the foodservice industry is expected to reach a whopping $898 billion in sales in 2022..!
Despite being one of the biggest in the US, the restaurant industry is also notorious for its high operating costs.
So if you’re wondering how much profits you can make with a restaurant, you’d have to consider first all the costs you must pay for to run such a business. Let’s dive in!
What is the average turnover for a restaurant?
According to Eat Pallet, the average turnover for a restaurant is dependent on the type of restaurant. For example:
- All-You-Can-Eat or Buffet Restaurants make $1,175 to $3,525 daily
- Fast Food Restaurants make $10,000 to $12,000 daily
- Full-Service Restaurants can make $1,410 a day just by selling steak (not accounting for other dishes and appetizers)
Another report by Toast Lab states that restaurants that are operational for less than 12 months usually make $111,860 a month.
ZipRecruiter reports that the average national yearly restaurant owner salary in the US is $75,091. Payscale reports that the average salary of a restaurant owner in the country is $68,146 a year instead, not to far off either.
What is the average profit margin for a restaurant?
Synergy Suite reports that the average profit margin for a full-service restaurant is between 3% and 5%. For fast casual restaurants, the profit margin is between 6% and 9%.
How much does it cost to run a restaurant?
Irrespective of the type of restaurant you have, there will be certain recurring costs and they include:
- COGS: It is the cost of the raw materials you must acquire to run your restaurant
- Staff: You will have employees and you must pay salaries to them
- Rent: Unless you own the restaurant property, it is likely that you will rent a commercial space for which you must pay a monthly rent
- Insurance: You will need business insurance and workers’ compensation insurance
- Utility bills: You must pay utility bills including water & electricity
- Marketing: You must advertise your restaurant to attract new customers
- Software: You will need restaurant management software, bookkeeping software, etc. to run your business efficiently
On average, it costs $79,000 – $96,000 per month to run a casual restaurant with 120 seats.
We’ve included below the revenue to net profit breakdown of a casual restaurant grossing $230,000 in sales per year (~5% net profit).
For more information on how much it costs to run a restaurant, read our article here.
How to forecast profits for a restaurant?
In order to calculate profits for a restaurant, you must first forecast revenues and expenses.
Profits = Revenue – Expenses
Forecasting revenue for a restaurant
Revenue can easily be obtained by multiplying the number of covers by the average revenue per table.
Revenue = Covers x Average Revenue per Table
For example, if you have 120 covers in a day with an average $100 revenue per table each, monthly revenue is about $300,000 (assuming you’re open 6 days a week).
Forecasting expenses for a restaurant
There are 2 types of expenses for a restaurant:
- Variable expenses: these are the COGS as explained earlier. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
- Fixed expenses: most salaries, rent, marketing and all the other operating costs listed above
Calculating profits for a restaurant
When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.
In order to get to EBITDA, we use the following formula:
EBITDA = Revenue – COGS – Operating Expenses
To make it clearer, we’ve included below the profit-and-loss of a restaurant (from our financial model template for restaurants).
Whilst gross margin (after variable costs) is rather high (~70%) as explained earlier, EBITDA margin can go up to 10-20% depending on the restaurant, and net profit margin up to 5-10% for the most profitable restaurants.
What is the break-even point for a restaurant?
Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.
Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs.
Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs. As we just saw, restaurants typically have rather high gross margins (~70%). Indeed, most expenses are fixed costs (salaries, rent, etc.).
The break-even point can easily be obtained by using the following formula:
Break-even point = Fixed costs / Gross margin
Using the same example earlier, let’s assume your restaurant makes $90,000 in turnover per month and has the following cost structure:
|Operating cost||Fixed vs. variable||Amount|
|Staff costs||Fixed cost||$30,000|
|Other (maintenance, tableware, etc.)||Fixed cost||$5,000|
The break-even point would then be:
Break-even point = Fixed costs / Gross margin %
= $46,500 / 75% = $62,000
In other words, you need to make at least $62,000 in sales per month to turn a profit.
Assuming the average revenue per table is $100 on average, your break-even is 620 tables per month. In other words, you make profits once your restaurant serves 24 tables per day (assuming you’re open 6 days a week).
How to increase profits for a restaurant?
You can apply certain strategies to increase the profits for your restaurant and they include:
- Menu Optimization: Include items that bring in and increase profits and remove the ones that are slow-moving or with very low margin
- Customer Preference: Redo your menu by accounting for fresh ideas from your customers
- Partner with Food Delivery: Use third-party delivery platforms to increase your sales and profits
- Use Restaurant Software: This can help you to improve management, reduce costs, and optimize expenses
- Customer Loyalty Programs: Introduce loyalty programs to increase lifetime customer value
- Sell Merchandise: Start selling branded merchandise
- Use Social Media: Use social media to engage with your customers directly
- User-Generated Content: Ask loyal customers to share pics on social media platforms to get free advertisement
- Use Geo-Targeted Ads: Use PPC ads to target relevant audience
- Focus on Staff: Retain the best talents, train them well, and pay them well
- Food Wholesalers: Purchase raw materials from wholesalers to reduce costs
- Minimize Food Waste: Avoid wastage with proper inventory management, refrigeration, etc.
- Optimize Employee Scheduling: Prevent overstaffing or understaffing with proper management
- Lower Utility Bills: Switch to LED lights, use energy-efficient appliances, etc.
To learn more about these strategies, read our post here.
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