When looking for ways to increase your restaurant profits, sales come in as the most important company activity. Having good sales lets restaurants add additional staff, upgrade equipment, and expand their product lineup. Slumping sales means no future for the restaurant or any business for that matter.
Many factors contribute to slow sales, including a poor economy. A sluggish economy can hit small restaurants and businesses particularly hard. However, having revenue strategies in place can help through a tough economy or anytime you need a sales boost.
Implementing Profit Strategies
When it comes to implementing your profit strategies, several factors should come into play first.
- You understand what’s affecting your business, whether the economy or another factor.
- Strategies are compatible with the products you offer.
- You can effectively implement any strategies you plan to use.
- You have a complete understanding of your buyers’ purchasing motivations.
- Will competitors copy you and weaken the effect of your strategies?
- Any expectations for the future and the effects on your restaurant.
When it comes to implementing profit strategies, there are many important factors to consider. Sales is a top consideration, but for restaurants, knowing your profit margin is key. Many factors go into gauging overall success, but the net profit margin provides the clearest financial health picture.
Restaurant Profit Margins
Calculating your average profit margins depends on the format used. However, a profit margin of twenty percent or more is good.
The easiest net profit margin calculation is per accounting period and dividing your net income by gross sales.
Gross revenue numbers come from food, drink, and merchandise sales plus gains like transactions not coming from normal business operations. A gains example is sales of kitchen supplies and equipment or furniture which don’t get added to the gross revenue.
Operating expenses cover the costs of running the business. These expenses might include food ingredient costs, equipment depreciation, utilities, taxes, wages, rent, and building or equipment maintenance.
An increase in food cost, rent, or utilities can affect margins considerably. Because financial changes affect a restaurant’s profit margin, many owners prefer calculating margins quarterly or bi-monthly instead of yearly.
By regularly tracking the running expense totals of your restaurant, you can adjust sales or reduce expenses as needed. Always knowing your margins means quickly implementing planned profit increasing strategies.
Focusing on the Main Profit Margin Areas
Once you know your restaurant operational expenses, it’s time for reducing costs while increasing the profit margin. There are four main areas of profit margin improvement. By focusing on these areas first, you improve your overall operations while helping with your profit numbers.
The four main focus areas are:
- Food Cost Reduction
- Increasing Sales
- Decreasing Overhead
- Using Technology
1. Food Cost Reduction
Many restaurant owners don’t equate reducing food costs with increasing sales. The common line of thought is if you increase sales your food costs go up. However, while it sounds strange, you can increase your restaurant sales and reduce your food cost at the same time.
- Look at your menu: The first place to start with reducing food cost is by looking at your menu. Menu design and pricing have several factors affecting costs. Look at direct, indirect, and volatile costs, service costs, and competition for each item. Next, you can price according to portion cost, raw food item cost, item demand, or competition.
- Supply Price Negotiation: Track regular supplies and supplies ordered in bulk then request discounts. In some areas, restaurants can contract with producers or farmers for direct buying resulting in deep discounts. In addition, buying locally means fewer freight chargers which lower your food costs even more.
- Reduce Theft and Waste: Theft and waste cut directly into restaurant profits and if not controlled, they have a detrimental effect on business. Start by looking at what you throw away and work at decreasing your waste amount. Less waste starts with portion control and chefs using pre-measured food items. Train your employees to always use the correct measuring tools. Regularly question the reasons for throwing away items and keep wastage foremost in your employees’ minds. Practice regular inventory procedures for both waste and theft. Items like specialty foods and alcohol get stolen most often and these thefts significantly increase food costs.
2. Increase Your Sales
For increasing sales, you only have two choices; selling more product to existing customers and attracting new customers.
Increasing sales means you must promote your restaurant through discounts, special events, promotions, and other marketing efforts. While these sales incentives are standard techniques, you can also increase sales through less utilized ways.
- Switch up the menu: Start with the menu and add more profitable items. Items that cost less, but sell for a higher rate. Train employees on upselling techniques. Many appetizers and side items like French fries and desserts have a higher profit margin. Even specialized drinks like fruit puree teas and lemonades have a big potential for increased profits.
- Add merchandise to the restaurant products: Novelty items like logo t-shirts, glasses, and mugs, and other small items are big sellers in many areas. Consider making specialty beverages in souvenir glasses. This adds five dollars or more to the drink cost with printed glassware that costs pennies when bought in bulk. Customers love glassware they can take home.
- Add temptation to the menu: Lots of restaurants keep a good stock of children’s items like toys, coloring books, and candies near the cash register. While these goodies may have a small price, kids love these things and the sales quickly add up. Other restaurants offer pastries, cookies, and homemade dips to take home. Another hot item is bread items like the restaurant uses on their menu. People love taking home that fresh baked goods for their next family dinner.
3. Decreasing Overhead
Most fixed costs like rent are difficult if not impossible to reduce. However, other costs like utilities, salaries, and supply costs are easier to control.
- Qualified and well-trained staff: Cutting salaries is all-around, bad for business. However, hiring qualified employees and providing top-notch training invests in your company’s future with efficient and productive staff. Add incentives and contests to your employment practices and you get happy staff.
When your staff is happy, you get high performing employees with ongoing loyalty. This means less hiring for less training costs adding more to your bottom line. When you have well-trained and happy employees, your restaurant runs on limited staff.
- Multi-tasking: Giving your staff adequate operational training goes a long way to help with your profit margins. However, having multi-tasking employees goes a step farther. Move away from departmentalization and train your servers and bartenders on closing cleanup. This cross-training saves the expense of after-hours cleaners. In addition, training your bartenders to take orders and serve meals helps when business is busy.
- Lowering energy costs: While energy efficient equipment is a great way to lower costs, there other ways of saving energy costs. Adjust the thermostat to not run as often during non-business hours. Even an adjustment of 2-3 degrees can make huge money saving differences. Seal air leakage areas like around windows and doors and use low flow when possible. Train your staff to only run full loads of dishes and reduce idle times on cooking equipment.
- Controlling waste: Kitchen waste is like money down the drain and can completely ruin your profit margin. Unless you have an extremely small restaurant with a small product offering, a Point-of-Sale system is a good investment. The best POS comes with recipe and inventory management, menu management, comprehensive reporting, and a staff management module. These features ensure correct food preparation with lessened redo orders and allow for accurate stock monitoring.
4. Using Technology
As we mentioned earlier, using a good Point-of-Service system helps control waste, reduces cost, and improves your profit margin. However, there are other ways a POS system helps restaurant operations and profits.
- Accurate inventory tracking avoids theft
- Set reorder schedules according to low stock levels
- Reduces spoilage waste
- Tracks sales for product retention
- Staff modules help with schedules, payroll, performance monitoring, and hiring
- Increases staff efficiency
- Reduces order mistakes
- Increase table turnover rates
- Helps identify sales trends
- Makes menu changes easier
- Helps you market your product
Small Changes for the Short Term
When it comes to growing your restaurant business, increasing profitability is the first step for expansion. When you have more of your sales dollars going to the bottom line, you have more available expansion resources.
Extra bottom line dollars give you the extra money you need for trying new and different sales and profit strategies. Most strategic changes for improvement come from simple operational adjustments. Changes made to the restaurant operations with relatively simple implementation.
Here are a few ideas for getting started with your new strategic profit plans. Use what ideas work for you, switch them around or make your own.
Analyze the Menu
Start by analyzing the menu. Look at the sales record and profitability of each item you offer. Then determine if each item has a price that’s right for what it costs to make.
If sales or profits are too low for an item, consider raising the item price. If an item doesn’t sell well and has a low-profit-margin, replace it with a better selling item.
Offer Taste Tests for New Menu Items
After determining the menu items that need to be replaced, free taste tests give you an idea of successful items. By offering the customer a taste test, you can get a feeling for the dish’s popularity before buying the new inventory.
This method is perfect for trying out less conventional dishes that you are unsure of the reception. If the new menu item is seasonal, offer the taste testing when you will have the best ingredients available.
Weekday Meal Deals and Coupons
There aren’t many restaurants that don’t suffer slow business during off-peak times like weekdays. Compared to Friday and Saturday nights, a Monday night likely sees a fourth of the traffic the weekend does.
This downtime offers the perfect opportunity to bring in some extra business. Start by offering special discounts on appetizers or combo meals.
Or offer weekday branding night. Make Tuesday Ladies Night and offer special prices on wines, specialty drinks, or beer. Or Wednesday Family Night, when kids meals are free.
While weekday deals bring in business on slow days, offering specials during the weekends also boost your sales. Bogo’s are a favorite and work perfectly for selling additional items. Offers of half-price appetizers with the purchase of an entrée help sell meal add-ons. Or, on Saturday night, buy any steak and add 6 shrimp for $3.
Distributing product coupons has been another effective marketing strategy for many years. Not only are newspaper and magazine coupon ads good advertising, but now the Internet makes coupon distribution cost effective advertising.
Electronic coupons are a fraction of the cost of print coupons. Websites like LivingSocial and Groupon look for companies to offer discounted products. In return, companies get exposure to LivingSocial’s and Groupon’s huge coupon user market.
Another good coupon distribution source is local coupon aggregators that distribute combined company coupon books. These books are either given away as promotional items or sold to local markets or through school fundraisers.
Delaying Free Appetizers
When offering pre-meal snacks, like bread or tortilla chips, have servers ask customers if they would like the appetizer. Many times, customers don’t even eat them. By asking first you avoid food waste which leads to added savings.
Evaluate All Supply Contracts
One of the first places to look at for saving money is your supply contracts. By reviewing contracts at least twice each year, you ensure you’re still getting a good deal. Start by looking at your best-selling products and listing the ingredients that go into them. Compare your supply list prices with the prices of other suppliers. If you find suppliers offering better pricing, consider changing suppliers or using the prices for negotiating with your existing suppliers.
Our Final Take
It’s important to understand that utilizing all these items together is the best way to control expenses and increase profits. A combination of implemented strategies helps you find hidden costs to better control the restaurant’s overall financial health.
Whatever strategies you use, regularly calculating restaurant key performance areas is necessary for optimized profit margins. Reviewing strategies bi-monthly or quarterly helps you quickly identify problem areas or discover buying trends for more efficiency and profitability.