Restaurant Profit Margin

A restaurant’s profit margin is its profits as a percentage of gross sales. Healthy profit margins are critical to the success of any food service business and can be influenced by several factors. In this article, we’ll explain what profit margins are, what margins are common in the restaurant industry, factors that impact your bottom line, and how you can improve them.

What Is Restaurant Profit Margin?

Restaurant profit margin is a measure of a restaurant’s profitability. In essence, it’s the percentage of sales revenue that the restaurant retains as profit after accounting for all operating costs, including the cost of goods sold (ingredients), employee wages, rent, utilities, and marketing expenses. The equation for restaurant profit margin is below, with the resulting figure usually expressed as a percentage.

(Total Sales – Total Costs) / Total Sales

A higher profit margin indicates a restaurant pays less in expenses relative to its sales, as compared to its competitors. It’s important to note, however, that average profit margins can vary widely depending on the type of restaurant and location. For instance, a high-end restaurant in a prime urban location may have different profit margins than a fast-food outlet in a suburban area.

What Is Gross Profit?

Gross profit is the total sales revenue a restaurant generates minus its cost of goods sold (COGS). The COGS for a restaurant typically encompasses the direct costs associated with food and beverage production, including ingredients and labor involved in preparing dishes. This figure can be divided by a restaurant’s total sales and expressed as a percentage to show the gross profit margin.

However, gross profit and gross profit margin don’t account for other operational expenses like rent, utilities, marketing, or administrative costs. Although they’re less comprehensive than a restaurant’s total profit margin, gross profit margin provides good initial insight into operational efficiency before other expenses are considered.

How To Calculate Gross Profit

To calculate the gross profit of a restaurant, you first need to calculate your total sales revenue. Next, subtract the total costs of goods sold (i.e., ingredients and direct labor). The resulting figure is your gross profit.

For example, suppose a restaurant generates $10,000 in total sales in a month. Suppose the COGS for that month, which includes the cost of ingredients and direct labor, is $4,000. In that case, the restaurant’s gross profit can be calculated as follows:

Gross Profit = Total Sales – COGS

Gross Profit = $10,000 – $4,000

Gross Profit = $6,000

The gross profit for the restaurant in this example would be $6,000 for that month. This signifies the amount of money the restaurant has after accounting for the cost of producing the food and beverages sold before considering other operational expenses like rent, utilities, and marketing.

Taking the calculation further, we can calculate the restaurant’s gross profit margin by dividing its gross profit by its total sales ($6,000 / $10,000). In this example, the restaurant would have a gross profit margin of 60% for the month.

What Is Net Profit?

Net profit (also called the “bottom line”) is the final measure of a restaurant’s profitability after all expenses, both direct and indirect, are accounted for. This includes the cost of goods sold, along with operational expenses like rent, utilities, marketing, management salaries, and administrative costs.

How To Calculate Net Profit

Calculating net profit is relatively straightforward – simply subtract all of a restaurant’s expenses for a given period from its total sales revenue for the same period. The resulting figure represents the restaurant’s overall earnings for a specific time, after it covers all its costs. If the figure is positive, the restaurant made money for that period; if it’s negative, it spent more money than it made.

For example, let’s consider our restaurant from the above example. Let’s say that, in addition to its $4,000 in COGS for the month, it also incurred $2,000 in operational expenses, including rent, utilities, marketing, and salaries. The net profit can be calculated as follows:

Net Profit = Gross Profit – Total Expenses

Net Profit = $6,000 – $2,000

Net Profit = $4,000

In this scenario, the restaurant’s net profit for the month is $4,000. This is the amount of money the restaurant retains as income after all costs and expenses are covered. 

How To Calculate Net Profit Margin

To calculate net profit margin, divide net profit (total sales – total expenses) by total sales revenue. The resulting figure is typically expressed as a percentage (you can multiply it by 100 to get the percentage figure). It represents the percentage of sales a restaurant retained over a period rather than paying it out in the form of costs. The formula for the net profit margin is below. 

Net Profit / Total Sales

In our previous example, the restaurant’s net profit for the month was $4,000, and the total sales revenue was $10,000. The net profit margin can be calculated as follows:

Net Profit Margin = (Net Profit / Total Sales) x 100

Net Profit Margin = ($4,000 / $10,000) x 100

Net Profit Margin = 0.4 x 100, or 40%

The net profit margin for the restaurant in this example is 40%. This figure indicates that the restaurant retains 40% of its total sales as profit after accounting for all costs and expenses. The higher a restaurant’s net profit margin, the more profitable it is relative to its sales.

What Is the Average Restaurant Profit Margin?

The average profit margin for a restaurant can vary significantly depending on factors such as location, type of restaurant, and efficiency. Generally, the average profit margin for restaurants hovers between 3% to 10%. However, some highly efficient and successful restaurant models and those focusing on bar sales can achieve profit margins as high as 10% to 15%. 

Why Are Restaurant Profit Margins So Low?

Restaurant profit margins tend to be low relative to some other types of businesses due to several factors. Firstly, the food industry is characterized by high operational and overhead costs. Secondly, restaurants also face the challenge of pricing their menu items competitively while still making a profit.

This is further compounded by the fact that food and beverage costs are often subject to market fluctuations, making profit predictions difficult. Additionally, wastage of perishable goods, seasonal variations in sales, and the high level of competition in the industry also contribute to the slim profit margins. 

Finally, the restaurant industry faces much higher employee turnover than businesses in other industries. The costs associated with attracting, vetting, and training employees can be significant and reduce a restaurant’s profits if owners and managers can’t retain talented employees.

Average Profit Margins By Restaurant Type

Restaurant profit margins vary widely, largely due to the type of restaurant. Here are a few examples of typical profit margins for successful restaurants in several categories:

  • Full-service restaurant: The average profit margin of a full-service restaurant typically ranges between 3% to 10%. However, this can vary based on location, menu, quality of staff, and the overall dining experience.
  • Cafe: The average profit margin for a café typically falls between 3% and 8%.
  • Fast food restaurant: Fast-food restaurants average around 6% profit, but this can vary depending on whether the industry is a franchise and the type of food offered.
  • Food truck: Profit margins for food trucks can range from 10% to 20%, but this also depends on the type of cuisine offered, location, and overall operational costs.
  • Catering: Catering businesses can have higher profit margins, typically between 10% and 20%, due to their focus on events and parties rather than daily operations. They also often have reduced overhead, as they don’t need to maintain a restaurant facility capable of seating regular guests.

How To Improve Restaurant Profit Margins

In a competitive and dynamic industry such as food services, improving restaurant profit margins is a critical, ongoing task. Understanding where and how to increase revenue and cut costs can make the difference between a thriving establishment and a failing one. Here are some effective strategies to enhance your restaurant’s profit margins:

  • Manage your inventory. An optimal inventory management system minimizes waste and reduces unnecessary expenses. Regular inventory counts also help to identify any theft or other issues impacting stock levels.
  • Price menu items carefully. Make sure you understand the cost of each menu item and price it appropriately to achieve your desired profit margin for that item. 
  • Train employees on upselling and cross-selling. Staff training should include strategies for upselling and cross-selling, which can increase average transaction value. This could be as simple as suggesting additional items or promoting higher-priced dishes to customers.
  • Regularly review profit and loss statements. Regularly reviewing income statements helps restauranteurs identify trends, monitor the effectiveness of cost control strategies, and spot potential areas of improvement.
  • Reduce operational costs. Review your operations regularly to identify areas where you can reduce costs without compromising service quality. This could involve renegotiating supplier contracts, investing in energy-efficient equipment, or improving scheduling to match staff levels with demand.
  • Work on customer retention. It’s almost always cheaper to retain existing customers than to acquire new ones. Loyalty programs, exceptional customer service, and regular engagement with customers through social media and email marketing are all effective ways to increase customer retention and profits.
  • Handle payments electronically. Handling payments electronically is an effective strategy for improving restaurant profit margins for several reasons. Electronic payments streamline operations, reducing the time and labor associated with manual cash handling, and are more accurate, reducing errors in cash transactions that can lead to losses.

While many payments can be handled electronically through restaurant point of sale (POS) systems and banking apps, one notable exception is distributing employee tips. Kickfin can be instrumental in facilitating electronic payments from restaurants to their tipped employees. 

Kickfin provides instant, electronic tip payments, eliminating the need for cash on hand. This reduces the risk of theft or loss, saving restaurants from unnecessary financial drain. Schedule a demo with one of our experts to learn more about how Kickfin can help increase your operational efficiency and boost your profits.

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We know how important same-day payments are for veterans of the service industry who are accustomed to quick cash — and we’re now seeing that same demand expand into other industries as well. 

Kickfin co-founder Justin Roberts joined MasterCard’s InConversation Webinar series to discuss why immediate payment disbursal is key for the restaurant industry and the gig economy as a whole.

Watch the webinar here or read our recap for the highlights: 

People live paycheck-to-paycheck

Not just some people are living paycheck to paycheck. Most people are. 

That’s right: around 64% of U.S. consumers are just getting by. Even more shocking, 51% of consumers who earn over six figures are still living paycheck to paycheck, despite their higher tax bracket. 

It’s a major reason why employees need access to their earnings sooner rather than later. The pressure of watching your bank account slowly drain in the two weeks between payday is putting a lot of pressure on people, leading to a much greater demand for instant payments than ever before. 

Instant payouts are now table stakes

A PYMNTS study found that people of all ages prefer to be paid out immediately, as well as some other interesting statistics:

  • When given the choice, 68% of respondents said they would opt for an instant pay out
  • 40% of gig workers surveyed were willing to pay a fee for an instant disbursement
  • 81% of respondents were willing to switch jobs to an employer that offers instant access to earned wages and tips

It’s safe to say instant payouts are becoming the expectation for today’s modern workforce. But not all instant payouts are created equal.

Consumers are much more likely to engage with an instant payout system if they aren’t required to share their bank account and routing numbers and can access funds with just their debit card credentials. Why? It’s faster, more convenient, and feels more secure. 

Instant payouts and tip management: a perfect use case.

Instant payout innovation has come at the perfect time for the restaurant industry, which is struggling more than ever with the hassles and cost of cash.

If you’re in the restaurant biz, then you know: Most consumers pay with credit cards these days, not cash. That means there’s rarely enough cash on hand to pay out tips at the end of a shift. But employees still want and need instant access to their tip earnings.

Enter: instant payouts. Offering employees the option to receive their tip earnings directly to their bank of choice, the second their shift ends, can go a long way in improving employee satisfaction and ensuring their financial security.

But instant payouts are more than a work perk for employees. The operational benefits for employers range from reduced administrative burden and significant time savings to stronger compliance and streamlined reporting.

Modernizing your tip management strategy: 5 best practices 

There are three key components to your tip management strategy: 

  • Tip pool policy: How are you divvying up tips among your staff? 
  • The payout method: How are you distributing those payments?
  • The systems and tech: What are you using to facilitate those payments?

Under the current circumstances, restaurant operators are under immense pressure to bring their tip management into the future. 

5 best practices for tip management 

Based on our experience working with restaurant operators across the country, we’ve found that these five practices are the perfect recipe for building a successful tip management system.  

  1. Determine the right model and method for your restaurant, based on your location and tech stack
  2. Get a written tip policy (and get it legally approved
  3. Solicit employee feedback in a structured way
  4. Leverage technology for efficiency, accuracy, and compliance
  5. Don’t over-complicate (but do over-communicate!)

Tip management solution must-haves

When seeking a new tip management solution, make sure you carefully vet each system to see if it really meets your needs, or if it’ll be just as frustrating as cash. Here are a few suggestions for what should be on your checklist: 

  • Instant payouts
  • Direct to bank of choice
  • Availability of employee funds
  • Payroll option 
  • Integrations 
  • Simple implementation + onboarding process 
  • Around-the-clock customer service 

Big emphasis on strong customer support teams. Restaurants and bars don’t have “typical” business hours, so neither should your tech support.

Bar Louie automates payouts with Kickfin 

In a recent case study, we took a deep dive into our partnership with Bar Louie, a chain with over 60 locations that took advantage of our new integration with Toast. They made the switch from cash payouts to Kickfin’s instant, direct-to-bank payouts and haven’t looked back.  

Two-minute tip-outs

Before Kickfin, managers spent an average of 45 minutes per shift working through Bar Louie’s complex tip out policy and counting cash. The tip pooling rules were important to them — it’s what makes the entire staff feel like they’re getting their fair share. 

Using the Kickfin0Toast integration, Bar Louie was able to automate the tip pool calculation process and send tips straight to employees in under two minutes – a potential annual savings of 15,000 labor hours across all locations.

>> See more customer success stories 

Do you want to see these kinds of cost-saving results at your business? Let’s talk. Get a demo of Kickfin and see why restaurant owners and employees alike trust us to manage their tips.

Kickfin’s best-in-class tip calculation tool has some exciting new bells and whistles.

If you’re already using Kickfin’s tip pool calculator, then you know how much time and hassle you’re saving by automating everything. (And if you’re not? Head over to our tip pooling software page to see how it works!)

As we partner with more restaurants to bring their tip management into the future, we’re continuing to innovate our product so we can address their biggest pain points.

In this case, that means enhancing our tip pooling features so you can auto-calculate tip amounts even for the most complex or unique tip pool or share policies.

Check out a few of our latest features that will make tip calculations easier than ever.

New Release: Splitting Large Party Tips 

If your restaurant often hosts large parties, you know that the tip share can get confusing. Say one server is taking care of a party of 40 with a bartender assigned to only make drinks for that party. Meanwhile, the server has a few other two-top tables that are getting drinks from the main service bar. At the end of the night, how do you ensure that the large-party bartender gets their fair share of the tip out (without spending an hour on your phone calculator)? 

Kickfin can now automate that process for you, alleviating questions from your event bartender and saving time and effort on the part of your managers. 

Seamless Integrations 

Kickfin is partnering with your POS system to integrate seamlessly with your existing restaurant tech. Already, we’re serving Toast customers through our integration — and your POS just might be up next. 

Kickfin integration users get access to new product features first, like our new tip-out transparency tool. Your employees can log into their Kickfin accounts and see exactly how their tips have been split between team members, offering them full transparency into your tip policy in action.

Manager Tips 

We’re always listening to feedback to improve the Kickfin experience, and this one goes out to all of our restaurant partners who asked us to streamline the manager tip reallocation process.

>>Learn more about managers & tipping laws

In most cases, managers are not allowed to earn tips since they are salaried employees. But we all know that managers often step in and take care of tables to help servers get out of the weeds. Well-meaning guests will most likely leave a tip, not knowing that the manager technically can’t accept them — so where does that money go?

Kickfin now features a default pool, where tips “paid” to a manager are automatically redistributed to tipped staff based on your restaurant’s tip policy. 

Improved Labor Data Accuracy

We all know how easy it is for an employee to forget to clock out after a long shift. And sure, they aren’t going to get paid for a 16-hour overnight shift, but when payday comes around, those extra hours create a nightmare for your payroll team. 

With Kickfin, all employees are required to be clocked out in order to finalize payments — so you’ll catch the labor data mistake long before your payroll team has to sort it out. 

Even Better Security 

We’re committed to protecting you and your employees’ hard-earned money, so we’re adding an extra layer of security for certain transactions. You can now enable double approval of payments that meet certain conditions:

  • First payment for new employees
  • Employees getting their first payout in X number of days
  • Employees receiving more than X payouts in a 24-hour period. 

With these extra guardrails in place, you can always be sure that the right money is going to the right person. Reach out to our support team to configure your custom security measures.

Using Kickfin is a win-win for operators, managers, and employees alike. Restaurateurs save on cash delivery and labor costs, managers shave hours off their workload, and servers have the same instant payment that they’re used to — without the hassle and uncertainty of cash. 

Want to learn more about Kickfin? Let us show you the ropes with a demo

You heard it here first: 2024 is the year of integrations. 

In an effort to make Kickfin even more user-friendly and adaptable for our partners, we’re working with restaurant tech leaders to integrate our tip management solution with their existing systems. 

First up — Toast! A trailblazer for cloud-based restaurant management technology, Toast is a favorite POS system for restaurants, food trucks, and bars. You probably know them best for being the first to create handheld POS devices, drastically changing the entire restaurant ecosystem. To make life easier for their customers, Toast partnered with Kickfin to create an integration that makes tip pooling, tip distribution, and calculation smoother. 

As restaurant tech innovators ourselves, this partnership is the perfect fit for Kickfin. 

Our goal at Kickfin is always to save time for managers, prevent loss for operators, and create more financial freedom for hospitality employees through pioneering technology that digitizes many of the analog processes that the restaurant industry is built on. 

As a member of the Toast Partner Ecosystem, we’ll be able to deliver our product to Toast customers and modernize their tip management systems with ease. Using technology that they’re already familiar with, Toast customers can reap the benefits of Kickfin with minimal ramp-up upon implementation.

“No two restaurants split tips the same way, but invariably, it takes too long and involves too much risk,”  said Justin Roberts, the co-CEO of Kickfin. “This integration allows for the utmost customization with a near-zero learning curve — truly the best of both worlds for restaurants that want to save time, reduce labor costs and make life easier for their team.”

And one of their partners is already enjoying the ROI with Kickfin. Bar Louie takes great pride in making tip distribution equitable for all of their employees, so they rely on a complex tip pooling system to ensure fair pay. Prior to using Kickfin, managers at each of their 60 locations spent 45 minutes at the end of every shift to make calculations and divvy out funds to all of their servers. Now, they’ve streamlined their tip-out process with Kickfin — and managers are doing the same work in less than a minute! That’s an annual average of 15,000 hours saved across their entire chain. 

>> Hear more Kickfin success stories

After implementing Kickfin, managers can spend their time on what matters most: delivering excellent customer service. That means more table touches, more support for your staff, and more time to focus on server training. 

With managers spending more time on the floor (instead of counting cash in the back), you’ll see better customer reviews, better service, and increased sales — all from digitizing your tip-outs with Kickfin.

We’re excited about our new partnership with Toast and the opportunity to make digital tipping a reality for their customers. For restaurants who aren’t using Toast, don’t worry! We look forward to providing similar integrations across the restaurant tech industry.  

Want to see these results for yourself? Find out how to become a Kickfin integration partner or check out a demo of our platform.

No growing pains here! 

We’re thrilled to announce that Inc. listed Kickfin in their list of the top 10 fastest growing companies in the Southwest. (In fact, we earned the #1 spot in the software category and were listed as #9 overall!) We’re honored to be included alongside innovative companies that are making a big difference in our region. 

Inc. measured Kickfin’s growth from 2020 to 2022 — which wasn’t an easy time for the restaurant industry, to say the least. In spite of the challenges posed by the pandemic, restaurant concepts across the country embraced Kickfin’s technology. 

As a group, the 2024 Inc. honorees averaged 136% growth and created 17,606 new jobs over a two-year period. Individually, Kickfin grew by a whopping 1,304% (yes, really!).

We want to recognize and thank both our amazing customers and the Kickfin team for being part of our success story and allowing us to be a part of theirs. 

Our Customers

For years, restaurants manually calculated and paid out cash tips — despite the increasing hassle and liability those old-school methods entail. It’s not because operators are tech-averse; there simply wasn’t a good way to automate the process that didn’t create new friction or require new workarounds. 

That’s precisely why we developed Kickfin. Of course, we’re proud of what we built and the team behind it (more on that below). But we owe a great deal of our success to the customers who trusted us enough to give Kickfin a shot — especially those early adopters who are now some of our longest-standing customers.

There’s a leap of faith involved when you partner with a vendor and layer in new technology, particularly when it impacts something as important and sensitive as how you pay your people.  We don’t take that lightly, and we are incredibly grateful for the opportunity to serve each and every customer who’s been on this journey with us.

>> Hear from our customers about their experiences with Kickfin

Our Team 

Every person on our team wholeheartedly believes in our mission and vision for the future. In short: we’re here to make the tip management process insanely easy for everyone so that paying out your people is (almost!) as great as getting paid. 

As backstory: Our co-founders, Brian and Justin, came up with the idea for Kickfin while dining out together and noticing that an armored car was dropping off cash. They asked why a restaurant would need a cash delivery when most patrons pay by card; the manager explained the cash was needed to pay out tips at the end of the shift. The inefficiency (and expense, and risk…) of that process was a lightbulb moment for Brian and Justin.

They set out to build a team who not only understood the problem, but could think critically and creatively about a solution — and bring it to life. 

From sales and marketing to product and support, every Kickfin employee has had a hand in the growth and success of our company, thanks to their passion for our purpose and their commitment to being best in class.

We’re proud of what we’ve achieved thus far, and we’re excited to continue collaborating with our customers, innovating on their behalf, and taking Kickfin to the next level together. Onward and upward!

See Kickfin in action!