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