Where Does Your Profit Go? Understanding The Magic Nickel
Revenue from a restaurant is a great thing, but more important than a dollar of revenue is a few cents of profit. For many restaurateurs, a mere nickel in profit emerges from a dollar’s revenue after expenses and costs take their toll. How can this be, you wonder? You keep track of your expenses — don’t you? You know what you spend on food, beverages, and labor. What other profit goblins could there be?
Revenue
Let’s start with revenue. In a typical restaurant, the bulk of your revenue is from food and beverage sales. You may have other small sales, such as souvenirs, or surcharges for banquet room rentals and the like. No matter the source, you bring in a dollar of revenue, and then the costs start to nibble away. So how do those costs typically breakdown?
Prime Costs
A restaurant exists to repackage and sell food and drink. To do this, you need two categories of prime costs:
- Food and beverage costs — approximately $0.33 out of that dollar
- Direct labor costs — approximately $0.30 out of your dollar in revenue
Skimping on labor costs is also not a proven path to increased profits, as increasing workload (by requiring fewer employees to perform more tasks per hour or handle larger sections) leads to increased turnover from unhappy employees.
Prime costs eat up $0.63 out of your dollar, with plenty of expenses still to take into account.
Controllable Expenses
Controllable expenses vary from restaurant to restaurant and can be wildly different based on management’s approach, location, and local laws. Their cost-per-dollar include; from least expensive to most expensive:
- Music and entertainment (live, recorded or streamed) — $0.01
- Marketing — $0.02
- Repairs and facility maintenance — $0.02
- Energy and public utilities — $0.03
- Administrative and general costs — $0.04
- Direct operating expenses — $0.05
- Employee benefits — $0.06
These controllable expenses add up to $0.23 to come out of that revenue dollar.
Operating Income
Knowing the prime costs and controllable expenses, subtract both from your original dollar’s revenue. This means the $0.63 in prime costs and the $0.23 in controllable expenses eats up $0.86, leaving operating income of only $0.14.
You may feel a sigh of relief until you realize the rent is still due.
Occupancy Costs
To rent or lease your restaurant space, assume approximately $0.07 of every revenue dollar. Insurance costs and property taxes add another $0.02 to occupancy costs, for a total of $0.09.
From that operating income of $0.14, you now have a magic nickel! That’s it — for that hard-earned dollar in revenue, you are looking at a shiny nickel’s profit.
Some sectors operate with tinier margins, such as grocery stores (third-quarter 2017 net profit margin of 1.24 percent, says industry tracker CSI Market). Yet compare restaurants’ 5 percent with other sectors, such as dentists’ offices (profit margins of 14.8 percent, says Forbes).
Getting More For Your Money
Most restaurateurs would say they work at least as hard as dentists. So getting more than a nickel out of a revenue dollar is not an unreasonable expectation.
Administrative and general costs and direct operating expenses can offer untapped profit without harming employee benefits or labor costs. Finding innovative electronic invoicing solutions can help you make more educated decisions when it comes to food orders and save man-hours on endless administrative work.
If you want more than a nickel out of every dollar your restaurant earns in revenue, Getsourcery.com can help. Contact us today to learn how we can provide AP automation solutions, help you see real-time insights into your operating costs and save you time and money. We can help you control cash flow, cut expenses, and lower prime costs.
Originally published at blog.getsourcery.com on November 16, 2017.
