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Thursday, May 31, 2018

Key Restaurant Profitability Numbers

In my experience, profitable restaurants have a gross profit of 40% of sales or higher and an occupancy cost of 10% of sales or lower.  It's important to track gross profit and occupancy costs consistently.

Many operators spend great time and expense analyzing a number of items with a relatively minor impact on gross profit including:

Employee meals;
Allocation of lemons, cooking wine and olives between the kitchen and bar;
Complimentary food items;
Credit card fees;
Returns due to customer complaints.

Your gross profit calculation involves net sales, cost of sales and direct labor costs. 

Whether you prefer to allocate employee meals to direct labor or cost of sales, these expenses will impact gross profit.  The lemons, cooking wine and olives will show up in cost of sales regardless of the department bearing the charge.  Complimentary food served to patrons without a charge on their bill will be included in cost of sales.

It may be helpful to begin subtracting credit card fees from gross sales before calculating your cost of sales percentage.  The goal is a better bottom line profit.  If you net the credit card fees in the sales number used in calculations, you will build in a safety cushion.  This simple change will force you to operate more efficiently. 

Food returned to the kitchen due to customer complaints is a serious issue.  Any restaurant with enough returns to have a big impact on cost of sales is in dangerous territory.  You are in the business of providing your customers a superior meal.  These returns demonstrate the dissatisfaction of your audience.

When you find yourself in financial difficulty despite a 40% gross profit (using the conservative approach of netting credit card fees from sales), you will often see your occupancy cost above 10%. 

Since your occupancy cost is often fixed, a high number puts tremendous stress on management.  I have seen operators with restaurants packed nightly in constant danger of not breaking even.  Usually, they are sloppy with low gross margins or they just don't have enough sales to justify their occupancy cost. 

Frequently, we see famous restaurants closing due to a pending lease renewal.  These operators understand the risk of trying to operate with an unacceptable occupancy cost.

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