Grow your Restaurant's PROFIT Margins with these Practical Tips
Updated: Jun 21, 2020
If you are a restaurateur and thinking of ways to boost your profits, read on and learn some practical ideas that you can apply for your company immediately and get better results within a few weeks!
Making Dough Show had a wonderful time to be in touch with one of the country's top leaders in the restaurant and hospitality industry, Geordy Murphy, Founder, and President of FobeSoft.com.
He's taking tips and tricks from his extensive experience in the industry and create a map for success that he calls the Daily Sales Report, where they generate P & L's (Profit and Loss) daily for restaurants, helping them identify ways that can increase profit margin.
FobeSoft is a web-based restaurant management system that is designed to show exactly how to increase a restaurant's profitability.
With more than 30 years of his remarkable experience in the industry, it is no doubt that Murphy has been able to share insightful and comprehensive concepts on how to grow a restaurant's profit margin.
When we talked about the standard profit margins for different types of restaurants (full service, fast-casual and fast-food), Murphy thinks that probably all of them are ranging from zero to twentyish percent on the high end.
He cited an example like they have a client that has two identical restaurants, a pizza type concept, in different markets, one does 2.1 million dollars while the other does 1.6 million dollars.
One of them, the 2.1 million dollars, make like 22%-23% and the other one is making like 11%-12%. And that's a big piece to leave on the table, the 10% differential.
And if you look at the full-service restaurants where you can have a steakhouse with a super high volume dollar-wise, they are going to run a higher food cost but they are going to run a lower labor cost.
So their profit margin can be the same as someone who runs a standard food business, whereas steak house is going to be 37%-38% or 41-42% for food costs, most restaurants want to be in the 30% or below.
And then you have the fast-food, and most of the fast-food, if it is a franchise, a big portion of that goes to the franchise fee that they need to pay, back in the day, the franchise fee is 4%-5% but a lot of them today is 8% or 9% which makes it more difficult.
We've summarized and highlighted some significant topics that we talked about during our interview to help you grow your restaurant profit margin:
Running a roadmap
According to Murphy, the majority of the owners in the big restaurant business don't run with a budget. A lot of them just set it for the moment as if they need this, they buy it or they need that, they buy it.
But if you have a roadmap to guide you, it will be a lot easier to manage the budget and that is what his company has been doing for their clients.
For instance, a restaurant is doing a million-dollar, they take their numbers from last year, and then they find out that they overspend on one category.
So what they do is they set a budget for them and then they teach them how to get to that budget.
He also stressed out the significance of staggered hours in budgeting the labor for the restaurant.
He said some people don't stagger schedules when they come in, they bring everybody in to have a service meeting in X amount of time and then 5-6 people are standing around for 2 or 3 hours.
In today's labor market, if you save an hour a day in front of the house, and an hour a day in the back of the house, by letting someone go.
By staggering schedules, it is going to put $10,000-$12,000 a year in your pocket, which many people don't understand.
As restaurant owners, we want to pay our people more, give them raises, however, we always think that we don't have enough funds to do that since we need to purchase new equipment, we pay the rent, we buy supplies and all of that every time.
We spend so much without paying attention to the little details on how to spend and then we realize that we do have money.
Murphy stated that they had a client a few months ago who sent their numbers for them to do their budget. They have one category called Supplies and they spend over $90,000 on it, this immediately caught their attention, what are these Supplies?
As part of Murphy's company's job, the FobeSoft, what they've done was to divide the Supplies into 4 main categories, namely, Restaurant Supplies, Kitchen Supplies, China glassware, and silverware, to go with the Supplies.
So if we break it down into these 4 sections and they budgeted a million-dollar restaurant, the max that they are going to budget on those categories is probably about $25,000 or $30,000 in total.
For example, if you are a million-dollar restaurant and you give a chef $700-$900 a month to spend on what he needs, maybe a foil or plastic wrap, some new tongs, or maybe a Robot Coupe, now he needs to be mindful if that would still be within the allocated budget.
Therefore, with systematized budgeting, you just don't go and buy things because you think you need them, now you look at your budget and say, "I have X amount of money to spend and this is what I'm going to buy."
It is also a way to monitor the cash flow in your business because more details are specified.
If you only have one category that when the chef, the manager, or the owner needs something and then just put that into Supplies, it can be a gray area and you'll realize that a lot of money gets lost without you knowing exactly where they went.
It's like taking the money and tossing that out of the window. But when you have regimented goals and budgeted numbers, all of a sudden, it starts working.
Setting up a budget
A lot of people out there use Excel spreadsheets, but with Murphy's software, the FobeSoft, they put a million-dollar revenue in the first number, and then they go through the numbers that a client spent in the past.
Let's say for an Italian restaurant, the cost of goods is 37%-38%, they would set it to be at around 31%-32%.
They are not going to drop their budget 6 or 7 points, they're going to decrease it at 3 or 4 to give them something to shoot for.
On the other hand, for the labor, they break it down into two, the front of the house and back of the house, and in their budgeting process, they put salaries in and they also have an automatic multiplier in the piece of software that puts the Payroll taxes and the workers' comp in there. So when you analyze at a labor figure, you are looking at a real labor figure.
Automating the numbers
One of the things that Murphy emphasized is that they actually put in their software to automatically calculate everything for their clients every day, and it only takes someone 5 minutes a day to do that.
When they do someone's budget, they buy-in with the owner and initially lay down to them their cost of goods and ask them if they are okay with these numbers.
A client may ask to either raise or lower the point and they eventually explain some aspects like the front of the house and back of the house labor.
A lot of realizations happen every time they do this, they find out that nobody uses their management, they don't calculate the daily figures that managers' salaries go in.
Murphy said that next to the budget, they calculate the Payroll Taxes and the Workers' Comp, they have sections called Controllables which include the linen and laundry, restaurant supplies, kitchen supplies, repairs, and maintenance, etc.
This gives people the ability to make wiser decisions when it comes to spending.
For instance, a piece of equipment broke, so your first intuition is that you need to fix it immediately, but then when you look at your budget, you may have to think twice or thrice.
Get a couple of people and tell you how much it would cost to fix it. Spread it out over two months, as supposed to you just saying fix it right away and it's all of a sudden $2,000 or $3,000 out the door that can totally blow the budget.
And then they have a section called Non Controllables that Murphy guarantees that they can always find a point on a client's cost of goods or labor or Controllables or Non Controllables.
So when they took 6% profit, they can increase it more than 50%-60% or all of a sudden, they are making 10%, so if they are doing a million-dollar and only making 60, now they are earning a hundred.
That is what people in the business gets a little bit off track, they are so busy and if they only spend 5-10 minutes every single day to look at their numbers and have a system in place, it is going to be a lot easier for them to monitor their figures.
Murphy's company designed software especially for restaurant owners and managers, not for an accountant or a bookkeeper. Other systems out there are Accounting systems and you need to be an accomplished accountant or bookkeeper for you to manage it.
A lot of small restaurant owners don't have a budget because many of them haven't done once since they went to raise the money to open a restaurant.
They don't know how, and Murphy's team made it very simple for them.
"That's the difference between chains and independents or successful multi-unit operations and independents, all these over here run with a budget, very few independents run with a budget because they need help and a lot of people don't ask for it”, quoted Murphy.
Managing at the bottom line
According to Murphy, most people think that it is just the cost of goods and labor. With their system, if you go over budget, it's either red or green. There's a pop up that gives you 15-20 suggestions on how to lower your food costs, how to lower your liquor costs, how to lower your labor costs, etc.
He pointed out that one of the keys to increasing your profit margin is through your Controllables and Non Controllables.
He mentioned that they have a client from Atlanta who's doing 1.5 million dollars and spending $95,000 in advertising, which is 7% or 8% of the profit, and he totally opposed that.
You should not put your advertising at more than 2%, those are typically for the franchisees, for small restaurant owners, that should be kept around 1%.
"What we try to do is we are not going to say we will increase your revenue, we're going to take what you are doing and show you how to increase your profit,” stated Murphy.
The way restaurant owners must do is to break out the different categories from linen and laundry, chemicals and cleaning supplies, restaurant supplies, kitchen supplies, China glassware, postage, advertising, rent, etc.
When they list all these things and they put a budgeted number next to it and tell the restaurant manager, "Look you have $250-$300 a month to spend on stuff you need".
And this is where the gray area may come out because you can just add a number within the supplies that nobody is looking at.
Murphy also discussed some issues with the Point of Sale system (POS) that are commonly used by restaurants as their reference.
He pinpointed that the only thing that we are getting out of POS is the revenue through beer, wine, liquor merchandise, etc., the front of the house and back of the house labor.
If you are using it more than that, you are basically spending too much time with it.
"Those are only irrelevant factors that are coming out of POS today, unless, you have someone inputting the invoices every day because products change on a daily basis. You should be figuring that out by now, you can tell every day what your food cost is, your purchases because who keeps tons of products anymore today? You don't, so those are your real numbers,” he quipped.
He underscored that with their system, all you need to do is to put in your food, beer, wine, liquor merchandise sales, front of the house and back of the house labor because they already have the salaries in there that are populating the sale every day.
And then whatever invoices you've got that day, let's say your food distributors, you just put in the food number, the beer number, your kitchen supplies, and restaurant supplies, etc.
Instantly, you know, compared to a budget, exactly where you are standing at that day.
You will already have a clear idea as early as on the 7th day of the month if everything is running smoothly. If your food cost is running high, then you can pay attention to something else.
If you find out that your front of the house labor is high, then you can concentrate more on it, you have more than 20 days to fix it before the end of the month. We call this "Managing to the Bottom line" because what it does is it gives you a roadmap to get there.
Putting repair and maintenance together
Murphy said they basically put Repair and Maintenance together in one category and they budget it 1% of the annual sales. So if you are doing a million-dollar, that is going to give you a thousand-dollar a month to spend on repairs and maintenance.
"Think about it, that's a decent amount of money, now if something major happens, your air conditioning goes out and you spend $3,000 or $4,000 will you talk to your accountant about capitalizing that expenditure and putting it over time and depreciating it so that it ends up to tax benefit versus hitting your P & L with a $3,000 or $4,000 hit one time,” said Murphy.
He suggested that 1% of the gross sales should be budgeted for repair and maintenance. Somewhere between 1%-2%, 1% should be good enough for the majority of the local restaurants or smaller franchises.
That should also apply to bigger companies, however, it still depends on the facility where in some cases, it can be 2%.
If you come into a brand new building, and you do a brand new build-out, your repairs and maintenance should be less.
But if you come into an older building, and you need frequent plumbing repairs, for instance, those are things that need to be addressed from the beginning with the landlord because if you do that later, it can turn into a problem.
Getting rid of unnecessary items
Murphy's advice is for restaurant owners not to spend so much money on advertising, he even admitted that he is not a big advocate of advertising, especially print ads.
"A lot of people spend too much money, they don't know if they are getting it back or not, it's just kind of those things that you spend and then you hope", he claimed.
Meanwhile, for the Supplies category, he thinks that you need to look at what your chef or kitchen manager needs monthly in the kitchen.
A big one is your linen and laundry, are you handing everybody two towels or one apron a day? or do they keep going to the office or wherever they are and using rag after rag after rag?
Because again, if you are fine dining or you use a white table cloth, your linen and laundry should be maxed around 2%, if you are not using a table cloth, it should be less than 1%.
Let's look at those numbers, are you paying an inventory fee to the linen company and a lot of people don't understand that.
If you'd get a hundred chef's coats in, and you've used 50 of them, and they come the next week and bring you 50, they are charging you for those 50 that's in your closet for that week, and that's what people don't understand.
Murphy's company had broken out on their software, where they have the cost of goods, labor, the Controllables, and Non Controllables because restaurant manager or owner can get overwhelmed looking at it from the 30,000-foot view. But when you break it down on certain categories, it becomes a lot more manageable.
You can focus on things like on your Supplies category with $90,000 which you have no idea where that money went.
But if it's broken down to 4 or 5 different categories, restaurant supplies, kitchen supplies, wine glasses, etc. all at once, you can see how come you spend so much on wine glasses or water glasses, right?
Then you can address other issues, that's what you need to do. It's a penny business, we all know that, and if you watch the pennies, the dollars are going to take care of themselves.
Working with FobeSoft
Built by a team with over three decades of experience in the industry, FobeSoft goes deep inside your business to show you exactly where you are leaking money and makes specific recommendations to raise your profits.
It takes about 20-25 minutes to walk someone through their process, they give a client a demo to show how it works.
According to Murphy, most people now, 56%-57%, after they get them on the system and do their budget, buy-in. Clients are amazed that they can just do the work on their phones, and literally, it can only take 5-10 minutes a day because they just need to enter very few fields.
"So with FobeSoft, you are looking at a full Profit and Loss Statement every day compared to a budget, we have turned around and helped tremendous restaurants increase their profits, we say 20%-40% and a lot of them, it's more than that,” he affirmed.
Restaurant owners need to find ways to see if they can do some roles in-house, especially if they are not making a profit, they must use some tools and software that are going to help them long-term.
It is an investment, you pay for software but you are making that money back. For only $100 a month, a restaurant can enjoy all the benefits FobeSoft.com is offering.
"I had 6 Asian Noodle Restaurants in San Francisco for many years before I moved back to Florida. I had not formally educated managers using this software, it also teaches them how to read the P & L, it teaches people it's either red or green and people want to do well, people wanted to be green, and you can get your home management team working, and it gives them a roadmap to get and manage to the bottom line and tell them what they need to do,” ended Murphy.
Most of our people don't know how much different things are costing. Getting your managers involved, looking at the numbers, and having like an open book strategy to a point where they can see the numbers are some of the few benefits of this software.
Managers want to help but sometimes they just can't do it because they are not really aware of our outgoes.
Seldom we ask them, how much do you think we are paying for this or that? And they have no idea because they may be thinking that since we are cashing in so much money then we are making a lot. They don't know that we are not really keeping that much.
Those practical tips that Murphy stated will be a great help to your business if you put them into action, and as he mentioned, do not be overwhelmed, check yourself out where you start with one thing you can do today and make some dough!
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