Achieving Ideal Food Profit Margins Is a Journey, Not a Destination
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Your restaurant’s food profit margin tells you how much of each dollar earned that you get to keep. The higher the margin, the better!
Yet average restaurant margins are seemingly capped around 3-5% — we say “seemingly” because it’s entirely possible to drive up your margins if you’re strategic and intentional about your profitability.
Read on to learn why it’s crucial to consistently track food profit margin. Discover how unavoidable product price fluctuations impact margins and what you can do about it. Understand why this quest for your ideal food profit margins never actually ends.
And see how xtraCHEF by Toast and our restaurant invoice processing automation our can help you along the entire way.
Why do you need to consistently track your food profit margin?
The reason for tracking your profit margins is quite simple:
Seeing you have a gradually decreasing margin over several months is a red alert that needs addressing. Identifying a positive trend means you’re doing something right that you can identify and work to sustain.
It’s especially important to realize that profit margin is your frontline defense against attacks on your profitability.
Think of it as a perimeter alarm. Once it’s tripped, you know there’s an issue to be dealt with, but you still need deeper insights and greater details to figure out what’s needed.
For example, seeing your margin shrink month-over-month for a few months should trigger alarm bells. Then it’s up to you to dig deeper into your numbers to spot what the culprit(s) are.
What variables affect profit margin?
Tracking your food profit margins requires some modest financial savvy—identifying what’s actually hampering your margin is some next-level work.
Your profit margin is the percent of sales you get to keep after subtracting all your costs.
When you look at what impacts your food profit margin, it’s either your selling price or your costs. Your selling price should be largely driven by your costs, so let’s focus on them.
Costs in this sense are your Cost of Goods Sold (COGS) and labor. These combine to make up your Prime Costs, which typically run about 50-60% of your sales. Prime costs are also known as controllable costs because…you can control them—as opposed to harder costs like rent, utilities, etc.
Here’s a quick primer on the two and how they affect your profit margin:
Cost of Goods Sold
Your COGS is the combination of costs of ingredients and products required to sell your dishes. It’s critical you control these costs.
If the price of chicken increases 10% and you don’t do anything about it, that’s going to eat away at your profit margin—in general and especially for anything featuring chicken.
Now we know you’re not the one setting prices. So when we talk about controlling your COGS, we’re really talking more about your spend.
You’ve got to know how much you’re spending, what you’re spending it on, and which vendors you’re spending it with. Without that, how can you set proper prices and ensure your menu is helping profit margins rather than eating them way.
Labor costs are the wages/salaries you pay yourself and your staff. These costs may seem more static, but in today’s labor market, they can fluctuate just as wildly as your COGS.
Labor costs are designated as a controllable cost because you’re the one setting the wages and scheduling the hours each week.
Many operators get trapped in rinse-and-repeat scheduling where no adjustments are made from one week to the week. But you’re in control of staggering your shifts, spotting consistent busy times week-over-week, and also giving your staff the tools and automations they need to stay on task and work more efficiently.
If you have four bartenders when only two are needed, that’s hurting your margin. If you have cooks spending three hours on prep that should take an hour, that’s hurting your margin.
You obviously want to do well and right by your employees. You have to balance that sentiment with your margin and profitability goals. The goal is a Wine-Win-Win for you/the business, your staff, and your customers.
Offload profit margin and other KPI calculations to automated systems
Many operators set margin targets when they open/take over and that’s it. Maybe they get refreshed during a menu redesign—maybe. Some operators don’t bother setting them at all.
We don’t blame you if you fall into this camp. If you don’t have the right systems in place, this stuff requires a ton of time and manual data gathering and calculations.
xtraCHEF by Toast goes beyond the calculations and actually automates the data gathering and mapping with which you make the calculation. This takes place via our invoice processing automation tools built specifically for restaurants.
You lay the initial groundwork building and mapping xtraCHEF product categories to the general ledger codes from your Chart of Accounts. And then you’ll have to map any new products to the appropriate category.
After that, it’s off to the races.
Simply scan or snap a photo of your invoice to upload to the system. All the invoice details will be ingested within 24-hours. Once uploaded, you’ll see dashboards and reports update automatically with new pricing data. You’ll get alerts if product prices are outside your set thresholds. And any recipes you’ve built will reflect product pricing changes at the ingredient level.
There’s no way to get around it: tracking margin is crucial if you want a more profitable restaurant over the long term.
Don’t let any perceived complexity of tracking—manual input and all the time required—hold you back from constant margin tracking.
Let’s set some time to discuss how xtraCHEF can work for your operation.