How to Calculate Restaurant Profit Margin: Know What You Actually Keep
Calculate gross, operating and net restaurant profit margin with one worked example. Separate food costs, owner pay, loan payments and cash.
To calculate your restaurant's profit margin, divide profit by net sales for the same period, then multiply by 100. The important choice is which profit you mean: gross profit, operating profit or net profit.
Profit margin = profit ÷ net sales × 100.
Subtracting supplier payments from your POS sales does not tell you the restaurant's net profit. Some of those purchases may still be in stock, and the amount left after ingredients still has to cover payroll, rent and the rest of the operation. Calculate each profit figure from the same month's sales and the expenses that belong to it.
Start with one complete month and one set of sales
Use a completed monthly profit-and-loss statement, often called a P&L, with its supporting sales and expense records. Keep the location, dates and accounting method consistent throughout the calculation.
Start with net sales after discounts and refunds. Separate amounts collected for other people, such as employee tips or customer sales taxes you remit, according to your bookkeeping treatment. Your accountant can resolve charges that belong in different accounts. A bank deposit is not a substitute for sales: processing fees and payout timing can change the deposited amount.
Use the P&L and its supporting records to check that payroll, supplier invoices and inventory adjustments for the month have been entered. Otherwise, you are dividing by a complete sales figure while subtracting incomplete costs.
Calculate gross profit from the food and drink you used
Gross profit is net sales minus cost of goods sold. Gross profit margin is that amount divided by net sales.
For a restaurant whose cost-of-goods accounts contain food and beverage ingredients, the inventory calculation starts with opening inventory, adds purchases, and subtracts closing inventory. Here is a hypothetical month:
| Ingredient inventory | Calculation | Amount |
|---|---|---|
| On hand at the start | Opening inventory | $8,000 |
| Bought during the month | Add purchases | +$34,000 |
| Still on hand at the end | Subtract closing inventory | −$10,000 |
| Ingredients used | $8,000 + $34,000 − $10,000 | $32,000 |
Review waste, transfers and other adjustments with your bookkeeper rather than assuming every supplier payment belongs to that month's meals. The IRS explains the inventory and gross-profit calculation.
Subtract the ingredients used from net sales to find gross profit. That amount has not paid the staff or the rent. If your books include some labor or other costs in cost of goods sold, keep that classification consistent and do not deduct those costs twice.
Subtract operating expenses before calling it operating profit
Operating profit is what remains after the costs of running the restaurant, before interest and income tax. That includes expenses such as payroll, occupancy, marketing and depreciation that were not already counted in cost of goods sold. OpenStax's income-statement guide explains this progression.
Here is the same hypothetical month's full calculation. The operating expenses are separate amounts, with nothing already included in the ingredient cost above. These figures teach the calculation; they are not restaurant benchmarks.
| Monthly amount | Calculation | Dollars |
|---|---|---|
| Net sales | Starting amount | $100,000 |
| Food and beverage cost of goods sold | From the inventory calculation | −$32,000 |
| Gross profit | $100,000 − $32,000 | $68,000 |
| Payroll and related costs | Operating expense | $35,000 |
| Occupancy | Operating expense | $10,000 |
| Payment and delivery fees | Operating expense | $4,000 |
| Marketing | Operating expense | $3,000 |
| Utilities, insurance, repairs and software | Operating expense | $6,000 |
| Depreciation | Operating expense | $2,000 |
| Total operating expenses | Add the six expenses above | −$60,000 |
| Operating profit | $68,000 − $60,000 | $8,000 |
| Interest expense | Subtract from operating profit | −$1,000 |
| Profit before income tax | $8,000 − $1,000 | $7,000 |
| Business income-tax expense | Assumed expense in this example | −$1,500 |
| Net profit | $7,000 − $1,500 | $5,500 |
The difference between gross and operating profit tells you how much the rest of the operation costs. It does not, by itself, tell you that any one expense is excessive.
Calculate net margin after the remaining expenses
Net profit includes the remaining income and expenses, such as interest and applicable business income tax. The example above has no other income. Now divide each profit figure by the same net-sales amount:
| Margin | Calculation | Result |
|---|---|---|
| Gross margin | $68,000 ÷ $100,000 × 100 | 68% |
| Operating margin | $8,000 ÷ $100,000 × 100 | 8% |
| Net margin | $5,500 ÷ $100,000 × 100 | 5.5% |
The example assumes the business itself records that income-tax expense. Your entity may pass taxable income through to its owners instead. Do not insert an assumed tax percentage or subtract personal taxes from the restaurant's P&L just to make it resemble the example.
Write the label beside every percentage: 68% gross, 8% operating, 5.5% net. Calling all three “our margin” makes comparisons misleading.
Keep owner pay and loan payments in the right places
Owner wages, owner withdrawals and profit distributions are not interchangeable. Wages properly recorded as a business expense belong in the P&L. An owner's draw is different: the IRS states that a sole proprietor cannot deduct their own salary or personal withdrawals.
For your own planning, also ask whether the restaurant's reported profit depends on you doing a job without compensation. Estimating what replacing that work would cost is useful, but show it as a separate planning adjustment. Do not quietly change the reported profit figure.
Loan principal repayments reduce debt and cash; they are not another operating expense. Interest is an expense. Equipment purchases, depreciation and the timing of bills can also make cash change differently from profit. The SEC's financial-statement guide explains why a profitable income statement and cash in the bank are different measures.
Use the result to choose the next problem to solve
Compare the same margin across comparable months using the same cost classifications. If gross margin falls, inspect ingredient costs, waste, discounts, prices and the mix of dishes sold. If gross margin holds but operating margin falls, look at payroll, occupancy, marketing and other operating costs relative to sales.
Also look at dollars. A higher percentage on much lower sales can leave you with less money. Your goal is a restaurant that earns enough profit, not simply the largest percentage on a report.
Once the obvious cost problems are addressed, the next question may be whether additional orders would leave enough to help. The amount left from an extra order after the costs it creates is its contribution. That is different from the whole restaurant's net margin. Use that contribution when judging restaurant marketing ROI, rather than assuming the whole restaurant's net margin applies to every extra order. The guide to a good return on restaurant ads applies the distinction to advertising, while the restaurant marketing-budget guide connects a sales goal to the investment needed.
To increase margin without cutting more costs, sell more orders through the restaurant you're already paying to operate. When your existing kitchen and scheduled team can handle those orders, the same fixed overhead is spread across more sales. How to increase restaurant profit without cutting more costs shows what that does to the profit on the same order at two different sales volumes.
Your completed P&L supplies the cost side of that decision. Feast's Revenue Analyzer supplies a revenue analysis and a calculator built around your restaurant to help you plan the next marketing investment. See how Feast can help you plan your restaurant's revenue.