A profitable restaurant is one that takes in more money than it pays out. Simple, right? Not if you’ve ever run a restaurant or watched “The Bear,” the Hulu series that offers a gritty portrayal of life in a professional kitchen.
While not every restaurant will be dealing with the complicated issues and interactions depicted in the show, it does provide insight into why running a profitable restaurant is so challenging. Variable food costs, inventory management and staffing issues, menu decisions, competition, changing customer tastes, and other factors can make it difficult for restaurants to operate at a profit—much less a comfortable one.
What Is A Profitable Restaurant?
A profitable restaurant generates more revenue than it spends over a given period of time, which results in a net profit. Profitable restaurants share two characteristics: They know how to manage their costs and maximize their revenues to achieve a healthy profit margin. The efforts that go into managing costs—for example, using historical data and demand forecasts to schedule staff, or simplifying the menu to limit the amount of ingredients that must be purchased—can pay off in the form of profit. But restaurants can also boost their profits through revenue strategies, such as by training staff to upsell food and beverage items or by adding catering, home-delivery, or other new services.
Key Takeaways
- Many variables affect a restaurant’s ability to turn a profit, including fluctuating food costs, labor shortages, adverse weather conditions, and the state of the economy.
- Beyond selling prepared food and beverages, restaurants can increase revenue by hosting events and selling branded merchandise, groceries, and cookbooks.
- The use of an integrated technology platform allows restaurants to monitor profit-related metrics across the business.
- Consistently tracking profitability metrics can guide decisions about menu items, the customer experience, staffing, and management of inventory and overhead.
Increasing Restaurant Profitability Explained
Restaurants are constantly looking for ways to increase profitability beyond just selling and charging more. Indeed, while both of those strategies can be effective, they can actually decrease profits over the long term by reducing food and service quality and pricing out (or putting off) customers. More sustainable ways of increasing profitability include improving the customer’s overall experience, analyzing point-of-sale (POS) data to determine the most profitable menu items, devising special offers that will appeal to customers, being more strategic about reducing food and labor costs, and creating a vibrant social media presence to engage customers. Constantly adjusting these strategies based on performance is essential.
How Restaurants Generate Revenue
Prepared food and beverages generate the most revenue at a restaurant. But to maximize those revenues (beyond offering top-quality fare and a first-rate guest experience) restaurants should pay special attention to their location, capacity, and menu.
- Location: Where a restaurant is located plays a big role in how much revenue it can generate. Is the restaurant in a well-traveled area and/or near other businesses? Is it easy to get to? How’s the parking? Restaurant locations with high foot traffic and accessibility naturally increase the customer base, boosting sales. A restaurant that aligns with the local population’s spending power and preferences for food choices and service level is also more likely to thrive. The competitive landscape is another factor that affects revenue. If similar dining options are in the area, the restaurant may end up with a smaller market share and smaller profits.
- Capacity: Revenue per square foot of space is an important calculation for restaurants, but increasing revenue involves more than just cramming in as many tables and seats as possible. Rather, effective capacity management balances the number of customers with the restaurant’s dining experience and the staff’s ability to provide efficient service. Restaurants must consider both the comfort of customers and the ease with which staff can move and turn over tables. Many restaurants use software that lets them model different seating arrangements, manage reservations and waitlists, analyze guest behavior (such as days of the week and times of day that the restaurant is busiest), and schedule staff to meet projected demand.
- Menu: Restaurants can increase their revenue with a menu design that is attractive, aligned with the brand, and easy to navigate. The menu should be laid out in a way to highlight high-profit items and suggest complementary or upsell items, such as wine pairings or specialty cocktails. Clearly listing which menu items include common allergens helps customers identify what they can safely consume—and may generate loyalty. Online menus, optimized for web and mobile platforms, can further generate revenue by enabling direct ordering and/or the ability to make reservations.
Types of Profitable Restaurants
There are many common factors that determine whether a restaurant is profitable, such as effective inventory management and staff training. But different types of restaurants also must consider factors specific to their menu offerings, clientele expectations, and staff. Bars, fast food joints, food trucks, diners, and pizza places tend to be particularly profitable.
- Bars: A bar’s profitability is driven, in large part, by its ability to manage pour cost, meaning the cost of the ingredients used in drinks. Bars can maximize profitability by effectively managing inventory, standardizing drink recipes, and offering easy-to-prepare food options (keeping in mind that the profit margin on food is less than on alcoholic beverages). It’s also important to provide ongoing education to staff on inventory management and customer service and safety.
- Fast food: A few factors unique to fast-food restaurants typically lead to a higher profit margin than earned by other types of restaurants. Because fast-food restaurants focus on speed of service over the quality of menu items, their food costs may be lower and customer turnover higher. It also costs less to hire and train fast-food restaurant staff because the interaction between staff and customers is limited, and because food preparation and restaurant processes are highly standardized across the chain or franchise.
- Food trucks: Food trucks have become increasingly popular. A report published in late-2023 noted that industry revenue had grown at a compound annual growth rate of 13.3% in five years. While food trucks must deal with permits, licenses, fuel costs, and weather restrictions that brick-and-mortar restaurants don’t, these mobile restaurants have unique opportunities for increasing profit. Notably, the combination of a flexible location and a focus on boosting foot traffic could drive revenue. For example, a food truck could increase revenue by parking (with proper permission) on the street in front of a large office building during weekday lunch hours and at festivals or concerts on the weekend.
- Diners: Diners are typically informal, inexpensive, and fast-paced. The most profitable diner items tend to be food and beverages that have simple ingredients, can be prepared quickly, and are in high demand (such as breakfast items). The ability to quickly turn over tables is key to a diner’s profitability. The historical and often unique nature of diners can also be promoted within the restaurant itself, on social media, and through other outlets to increase foot traffic.
- Pizzerias: Pizza is popular, but with more than 70,000 pizza restaurants in the United States in 2023, competition is tough. Restaurants focused on serving pizza can increase profit by increasing options that differentiate themselves from competitors. For example, pizzerias can offer online ordering, delivery services, specialty offerings, allergen-friendly items, and loyalty programs that reward repeat customers with special discounts. Pizzeria menus tend to be relatively limited, so inventory management and staff training may be less challenging than for other types of restaurants, contributing to profitability.
Calculating Restaurant Profit
Tracking profitability enables restaurant owners and managers to make informed decisions about menu items, staffing, inventory, overhead, and other matters. The following basic formula can be used to calculate restaurant profit:
Restaurant profit = Total revenue – Total expenses
Revenue, of course. is how much money the restaurant takes in. Expenses will differ depending on the type of restaurant, but general costs include the cost of goods sold (COGS), such as food and beverages; rent/mortgage; labor, including payroll taxes and benefits; equipment and maintenance; insurance and permits; and POS systems along with other ongoing technology costs.
While profit is measured in a dollar amount, profit margin is measured as a ratio or percentage. Tracking profit margin over time is necessary to gauge and maintain a restaurant’s financial health. Restaurants typically have a relatively low profit margin compared with other businesses due to factors such as fluctuating food costs, high employee turnover, and wavering demand. By regularly monitoring profit margin—a process that’s ideally automated through the use of technology—restaurants can respond promptly to changes in any of these variables.
There are a couple of different types of profit margin to consider: net profit margin and gross profit margin. Net profit margin is derived after all costs and expenses are deducted. The formula to calculate it is:
Net profit margin = [(Revenue – Expenses) / Revenue] x 100
Gross profit margin deducts only COGS. This is why net profit margin is always lower than gross profit margin. The formula to calculate gross profit margin is:
Gross profit margin = [(Revenue – COGS) / Revenue] x 100
7 Strategies for Running a Profitable Restaurant
A number of factors, many of which are out of anyone’s control, conspire against a restaurant’s financial success. These include cut-throat competition, rising prices, labor shortages, and even bad weather. Here are some strategies restaurant owners can put into action to make sure they’re managing revenue and costs in a way that puts them on the road to profitability.
-
Monitoring Metrics
A restaurant cannot assess its profitability without accurately monitoring industry key performance indicators (KPIs) across the organization. In addition to profit margin, here are some of the KPIs that restaurants should track on a regular basis.
-
Profit and loss: Let’s run through the basics. A restaurant makes a profit when its revenues exceed its expenses. It posts a loss when expenses exceed revenue. These metrics are reported on the business’s income statement, also referred to as a profit and loss statement (P&L), which is one of three core financial statements used to demonstrate a company’s financial health for a specific period. (The other two are the balance sheet and cash flow statement.)
The formula to calculate profit is:
Profit = Total revenue – Total expenses
Total revenue includes sales of prepared food and beverage, as well as sales from any other goods and services the restaurant offers. Those can include gift cards, on- and offsite event hosting and catering, groceries, and merchandise, such as restaurant-branded T-shirts.
Total costs include COGS (detailed next); labor costs and overhead costs, such as rent/mortgage, insurance, permits and licenses, and maintenance and repairs; operating expenses, such as advertising and marketing; POS and other technology; and supplies, such as paper goods and linens.
-
Cost of goods sold (COGS): COGS for a restaurant include the direct costs of serving a meal, including the main ingredients (such as beef or fish) and cooking supplies (such as spices, oil, and flour). Restaurants that provide takeout service include the costs for items such as disposable dishware and containers when figuring COGS. Using COGS as a benchmark helps a restaurant manage inventory and make modifications in menus or even labor. For example, if the cost of beef is relatively low, the restaurant could feature and promote beef-based specials for the week.
The formula to calculate COGS is:
COGS = (Beginning inventory + Purchased inventory) – Ending inventory
For example, if a restaurant started a week with $1,000 in inventory (beginning inventory), bought $1,000 more in inventory (purchased inventory) and ended the week with $500 in inventory (ending inventory), its COGS would be $1,500 ([$1,000 + $1,000] – $500).
In general, the lower your COGS, the greater your profit margin.
-
Prime cost: A restaurant’s prime cost is the sum of two of the biggest costs to the business: COGS and labor. Labor costs include payroll and payroll taxes, benefits, uniforms, and bonuses. Prime costs inform restaurant decisions about menu choices and pricing, staffing, and inventory. The formula is:
Prime cost = COGS + Labor costs
Many restaurants also figure prime cost as a percentage of total sales, using the formula:
Prime cost percentage = (Prime cost / Total sales revenue) x 100
Restaurant performance can vary widely from day to day, month to month, and season to season. For this reason, restaurants should calculate their prime cost frequently.
-
Food cost percentage: Food cost percentage is the ratio of the cost of ingredients used to prepare menu items to the revenue generated from selling those items. Most successful restaurants have a food cost percentage between 28% and 35%, but specifics can vary according to restaurant type and pricing strategy. Food cost calculations help restaurants determine whether their menu items are priced for profitability and what should be added or deleted from the menu moving forward; where food waste may be occurring and how to mitigate it; and how to plan for future food purchases. Managing food costs is essential to restaurant profitability.
To determine food cost percentage, restaurants must first calculate COGS (formula above) and the cost of food sales (add them all up) for a specific period. Then they can determine the food cost percentage. The formula is:
Food cost percentage = (COGS / Total food sales) x 100
-
-
Inventory Management
Restaurant inventory includes all the physical items needed to provide service to customers, including foods and beverages; their ingredients; the machines, tools, and supplies needed to prepare them; and tables, chairs, linens, silverware, staff uniforms, and other dining room items. It’s important that restaurants know exactly how much of each of these and other items they have—and when they will need more—so they can make informed purchases. Overordering perishable inventory, for example, increases the risk of spoilage, which means money down the drain. Not ordering enough can mean running out of key ingredients, disappointing customers, and losing sales.
As those examples demonstrate, inventory management has a direct effect on a restaurant’s profitability. Because COGS is a key factor in determining net profits, lowering total COGS through smart inventory management practices can ultimately increase profits. Some companies still take a paper-and-pencil approach to inventory management, but an increasing number of restaurants are leveraging technology to automate refine, and improve this critical process.
-
Managing Overhead Costs
Overhead costs aren’t directly associated with the production of goods or provisioning of services, but they are necessary for running a business. For a restaurant, overhead costs include rent or mortgage, taxes, insurance, permits and licensing, equipment maintenance, utilities such as heat and electricity, and marketing and advertising.
Overhead costs will differ from one restaurant to another. For example, a food truck would need to figure in the cost of fuel but not rent. Expenses should then be categorized to group similar costs. For example, utilities, rent, and maintenance could be categorized as facilities costs.
The formula to calculate overhead rate percentage is:
Overhead rate = (Total overhead costs / Total sales) x 100
Some, but not all, businesses allocate overhead to specific products, services, or departments. This is referred to as an “allocation base.”
The formula to determine the overhead rate of a particular allocation base is:
Overhead rate of allocation base = (Total overhead costs / Allocation base) x 100
Regardless of whether a restaurant allocates overhead, tracking overhead expenses over time can help it identify trends in rising expenses and take steps to reduce costs and improve profitability.
-
Staff Engagement and Upselling
People are key to a restaurant’s profitability. Paying close attention to the needs of both staff and customers can go a long way toward increasing a restaurant’s profit margins. Here are a couple of key considerations:
- Training and development: As with most businesses, a restaurant is only as good as its people. Employees are likely to stick around if they feel supported and are given the tools they need to grow in the organization and serve customers better. This is why restaurants should provide ongoing training focused on staffers’ specific roles and requirements, including front-of-house (hosts and wait staff) and back-of-house (chefs and kitchen staff), as well as on standard operating procedures and technology platforms used in the establishment. Restaurants should also support staff by providing training based on interest and talent. For example, a restaurant could nurture an employee’s interest in creating desserts by offering training in pastry making. This training will go a long way toward engaging—and retaining—good staff people and ultimately delighting customers.
- Customer retention: In any business, it’s more expensive to acquire a new customer than to retain an existing one. Strategies for retaining customers include engaging with them regularly on social media, especially by posting about upcoming specials, events, and offers. Restaurants can also reduce friction in the dining purchase process by enabling customers to make online reservations, put themselves on waitlists via the restaurant’s website or app, and order and pay for takeout online. Well-designed menus that clearly indicate allergen information help customers quickly identify suitable dishes, fostering trust. Loyalty programs are another way to keep customers coming back.
-
Expanding Ordering Channels
The easier it is for customers to order and buy menu items, the more likely they are to order and visit frequently. Expanding ordering channels is an effective way to reduce barriers to ordering and increase average order value. Consider offering:
- Direct online ordering: Customers appreciate the ability to order directly from a restaurant’s website or app. A popular sandwich and salad chain, for example, offers an app that lets customers place, customize, and pay for orders, while also providing real-time updates on order preparation status.
- Self-order kiosks: Inside of a restaurant, customers can use self-order kiosks to place and pay for their own orders. These kiosks- typically touchscreen devices that display a menu and walk customers through the ordering process—are much more common in fast-food restaurants than in other dining establishments. Though likely not ideal for more formal dining establishments, self-order kiosks have been shown to improve accuracy, reduce wait times, and increase check sizes. They can also decrease the number of cashiers required, providing an opportunity for staff trained in that area to apply their expertise in other roles.
- Integration with delivery apps: The pandemic may have fueled the popularity of delivery apps, but customers’ appreciation for an app’s speed and convenience has never waned. In fact, US revenue from food-delivery apps reached $17.9 billion in 2023. Restaurants that integrate with food-delivery apps increase their exposure to new customers and appeal to those who prefer delivery options, especially if they’re a regular user of a particular service. However, restaurants must balance that exposure with the commission fees that food delivery services charge.
-
Diversifying Offerings
Food and drink are the, ahem, bread and butter of restaurants, but diversifying offerings can help increase a restaurant’s revenue stream and profitability.
- Hosting events: Bridal and baby showers, weddings, anniversaries, birthdays, retirement parties, celebrations of life—there’s no shortage of reasons for people to gather and eat. But there’s often a shortage of time to plan, host, cook for, and clean up after those gatherings, creating an opportunity for restaurants to become go-to venues for such gatherings. These events can provide predictable revenue, making them an efficient way for restaurants to increase profit margins. For success, restaurants may need to dedicate an existing staff member or hire someone to manage and promote events. It’s also important to provide a comfortable and inviting space for these events.
- Merchandise sales: Restaurants, especially those with an established brand, can increase revenue through the sales of merchandise. A brewery, for example, could sell branded sweatshirts, mugs, and packs of seasonal beer. When deciding what merchandise to sell, it’s important to remember that some merchandise is more expensive to procure than others. A sweatshirt, for example, will be more expensive for the restaurant (and, consequently, the customer) to buy than a T-shirt.
- Meal subscriptions: Restaurant subscription services are another trend that came out of the pandemic. When it was difficult (if not impossible) for customers to eat out during that time, restaurants responded with subscription-based meal delivery programs. Today, subscriptions are as popular, and they have expanded to include a variety of unique dining experiences and promotions. For example, customers could pay a set fee and get unlimited coffee, tea, and other beverages for a year, or pay a certain amount per month for access to an exclusive supper club takeout experience on the first Friday of every month. Such subscriptions can increase customer retention and loyalty, as well as encourage more frequent visits. They also provide a predictable revenue stream and can help restaurants better manage inventory and staffing.
- Catering services: As with event hosting, catering provides restaurants with a way to increase revenue in a planful way. Restaurants can develop a catering menu using ingredients that are relatively inexpensive, easy to prepare, and/or plentiful at the time. They also can buy just what they need and dedicate the right amount of staff to prepare the dishes. Just as important, restaurants know how much revenue will be generated from the event and can require payment or partial payment before the event takes place. Catering also can increase restaurants’ exposure, so they should be sure to brand their participation by, for example, setting out cards with QR codes that link to the restaurant’s website and/or using dishware and napkins bearing the restaurant’s logo.
-
Utilizing Technology
The use of effective technology platforms in the following areas can make the difference between a profitable restaurant and one that struggles to make ends meet.
- Payroll: Payroll has many moving parts, and getting any one of those parts wrong can result in disgruntled employees, hefty fines, and even lawsuits. Many restaurants, especially smaller ones, don’t have the time or skills to effectively process payroll manually. Restaurants should look for technology solutions that stay current with legal requirements in every jurisdiction and save time by performing tasks such as automated calculation of earnings and deductions, real-time payroll review and editing, payroll tax filings, and distribution of end-of-year tax forms. Considerations specific (but not limited) to restaurants include tip reporting, overtime pay, and multiple pay rates.
- POS: POS systems do more than just process customer payments. The systems automatically calculate relevant sales taxes and fees; integrate with accounting systems to make it easier for restaurants to generate the records needed to make timely, accurate tax payments; and calculate tips to ensure that restaurant staffers are fairly and accurately compensated. Some POS systems provide inventory tracking and data analysis capabilities to help organizations improve operations and make strategic decisions about the food, beverages, and services that generate the highest profits. Any restaurant that accepts credit cards must use POS software to ensure that credit card data is encrypted.
- Accounting: Accounting software helps restaurants record, manage, and report on their day-to-day financial transactions. Restaurants should look for a solution that can track assets, liabilities, revenues, and expenses, while automatically populating the general ledger with these transactions in real time. This will provide restaurant owners with immediate access to accurate financial data that will help them make better business decisions—ones that, ideally, boost profitability. Restaurants can use accounting software on its own or integrated with more comprehensive systems, such as enterprise resource planning (ERP) and human capital management (HCM) systems.
- HR software: Human capital management software can help ease the complexities of employee hiring, onboarding, and retention tasks; simplify benefits administration; improve data security practices; and provide and analyze data in a way that helps restaurant owners connect HR metrics to business and accounting goals. HCM systems can help increase profits by helping ensure that a restaurant is staffed by well-trained employees who feel supported, not just day to day but also in terms of their general well-being, potentially reducing employee turnover. Restaurants should look for solutions that also simplify regulatory compliance and related reporting, allow for employee self-service, and recognize and promote employee contributions through the use of social tools.
Maximize Margins and Accelerate Success With NetSuite
NetSuite Financial Management helps restaurants expedite daily financial transactions, reduce budgeting and forecasting cycle times, ensure regulatory compliance, and automate accounting processes. The cloud-based system delivers real-time visibility into restaurants’ financial performance, from a consolidated level down to individual transactions. NetSuite Financial Management also integrates with other business applications, including those for order management, inventory management, and commerce.
The restaurant business’s many variables make achieving and maintaining profitability a significant challenge. Restaurants must be laser-focused on managing cash flow and inventories, training staff, creating a positive customer experience, and improving operational efficiency. By leveraging technology to track key metrics and analyze that data to make informed decisions, restaurants can increase their profitability.
#1 Cloud
Accounting Software
How To Make A Restaurant Profitable FAQs
How can I increase my restaurant profit?
Restaurants can increase profit in a variety of ways, such as by:
- improving inventory management.
- using data from POS and other systems to make decisions about menu items and upselling.
- expanding ordering channels.
- engaging with customers and potential customers on social media platforms.
- controlling overhead costs.
- implementing loyalty and rewards programs to attract and retain customers.
Which type of restaurant is most profitable?
So many factors determine a restaurant’s profitability that it’s impossible to say which type is most profitable. However, fast-food restaurants, pizzerias, and diners have relatively low food costs and high table turnover, which can translate to relatively high profit margins.
What is the formula for profitable restaurants?
There is no one formula for making restaurants profitable. But they can get a strong sense of where their profitability stands and how to improve it by tracking financial metrics such as total revenue, total costs, costs of goods sold, prime costs, overhead costs, and food and labor cost percentages.