Managing the finances and margins of your restaurant

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Managing restaurant finances: which KPI should you be monitoring?

In the restaurant sector, a number of financial ratios and KPI are used by owners to keep an eye on their restaurant’s finances and margins.

For good financial management, you should be aware of the following key metrics:

Average ticket
Gross profit margin
Operating cost ratio
Food cost percentage
Payroll percentage

Average ticket

The average ticket is the relation between a restaurant’s revenues and the number of covers. In other words, it is the average amount paid by a customer when dining in a restaurant.

It is calculated as follows:

Average ticket = Sales after tax / Number of covers

Calculating the average ticket on a monthly basis will give you a clear idea of your activity from one month to the next.

Gross profit margin

Different types of restaurant margin exist: direct cost margin, indirect cost margin, variable cost margin, sales margin, operating margin, safety margin, etc.

The gross profit margin shows how profitable your restaurant is.

Your restaurant’s gross profit margin for both food and beverages can be calculated as follows:

[Sales before tax – Cost of goods sold] / Sales before tax

The same calculation should be applied to drinks. The sum of the gross margin for both food and beverages gives the total margin on goods consumed.

For a restaurant business to be profitable, it is estimated that the gross food margin be around 70 to 75%, and the gross beverage margin around 85%, on average.

Operating cost ratio

The operating cost ratio is the relation between revenues earned and the expenses required to run a restaurant (water, gas, electricity, maintenance, rent, professional insurance, etc.).

Expenses should amount to 20 to 25% of the price of a meal, on average.

Food cost percentage

The food cost percentage is the relation between the cost of the ingredients used in a dish and its selling price.

It can be calculated as follows:

Food cost percentage = (Food cost/Sales) x 100

On average, this ratio should be between 25 and 35%.

Payroll percentage

This ratio is used to calculate the difference between labour costs (wages and contributions) and sales before tax.

Payroll percentage = (Labour costs / Sales) x 100

Using this formula, you can calculate the share of labour costs in the selling price of a dish. Ideally, this ratio should be around 30 to 45%.

Controlling finances and margins to ensure profitability

Below are some examples of best practice for maximising your restaurant’s profits and optimising margins:

Price your dishes correctly
Manage your inventory properly
Update your menu
Keep your accounts up to date with the help of an accountant.

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1. Price your dishes correctly

To set prices on your menu, you should consider the following:

Cost of the ingredients needed to prepare the dish
Prices charged by competitors
Market positioning of the restaurant
Restaurant overheads (operating costs, taxes, payroll, etc.)
Type of cuisine offered (gourmet, traditional, fast food, etc.)
Type of customer and average budget.

Several methods can be used to set the price of a menu dish or drink. These include:

The four Omnes principles, or the four main rules that should be applied to ensure that menu prices are consistent (to find out more about this, see our article: "8 tips for designing and managing your menu".
Setting the price according to a target margin
You can also set your prices according to a target gross profit margin. The margin should be high enough to cover the cost of your raw materials and overheads.
Applying a coefficient
Another way of determining the selling price of a dish is to apply a coefficient to the cost of the raw materials required to prepare a single portion of a dish. This production cost is calculated using the recipe card, which details the ingredients and the weights and measurements needed to prepare the dish.

For food, a coefficient of 4 to 5% is generally applied to the cost price. For beverages, the coefficient can vary between 3 and 10% depending on the drink.

2. Manage your inventory properly

Good stock management is crucial for managing your finances and minimising losses caused by food wastage. You should:

Create recipe cards for each dish, with the weights and measurements of each ingredient, the material cost and the cost price
Be meticulous about stocktaking
Maintain an annual inventory tracking table
Make teams accountable, and train them in good stock management
Do not place orders too often
Choose your suppliers well and negotiate prices.

To find out more about restaurant inventory management, read our article on the subject.

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3. Update your restaurant menu

Properly managing your restaurant margins entails regularly reassessing your menu, and adjusting prices if need be. Use menu engineering, a technique that groups dishes into four categories:

High Profitability and High Popularity dishes → These are your Stars – continue to highlight them.
Low Profitability and High Popularity dishes → Increase profitability by adapting the recipe, decreasing portion size, adjusting the price, etc.
High Profitability and Low Popularity dishes → Change their position on the menu or highlight them in some way.
Low Profitability and Low Popularity dishes → It is usually best to remove these items from your menu.

4. Keep your accounts up to date with the help of an accountant

Hiring an accountant is a necessity for meeting the various accounting obligations, remaining in good standing with the tax authorities and properly managing your finances.

An accountant will carry out the following tasks for a restaurant business:

Cash management (cash receipts - sales - and cash disbursements - expenses)
Day-to-day accounting and financial management (entering invoices, monitoring restaurant sales from the cash register, tracking expenses related to the purchase of goods and overheads)
Preparation of the annual financial statements
Payroll management (pay slips, assistance in drawing up employment contracts, etc.)
Analysis and monitoring of margins in accordance with industry ratios
Tax management (VAT declarations, revenue breakdown, etc.).

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