Restaurant margins: the ratios to track in 2024

Every year in France, around 1 in 2 restaurants closes down before its third year. The reason? Poor financial management.

To minimize these risks and understand where you are losing money, you need to analyze several key indicators. Tracking these indicators, or ratios, will let you react quickly and boost your restaurants’ profitability.

Which ratios are essential in 2024? How do you analyze and interpret them? Which management approach should you adopt to improve them?

Calculating your margins and food cost

Theoretical gross margin

Gross margin remains the go-to indicator for assessing your business’s profitability and finding out whether you are really making a profit. It is your revenue minus the cost of raw materials.

Good to know: to avoid calculating your food cost, you can use the total of your raw material purchase invoices.

Gross margin is then calculated theoretically, so it does not take into account losses on the ingredients used (expired use-by dates, breakage, incorrect portions, theft).

👉 Theoretical gross margin rate = ((Revenue excl. VAT - Raw material cost) / Revenue excl. VAT) x 100.

Actual gross margin

To find your actual gross margin, you need to take the change in inventory into account, that is, the difference between your opening and closing stock levels.

It is also crucial to calculate gross margin over a clearly defined period to assess actual consumption. The calculation takes into account raw material spending, the change in inventory, actual sales, as well as losses, breakage, etc.

👉 Actual gross margin = ((Revenue excl. VAT - (Opening stock value + Purchases value − Closing stock value) / Revenue excl. VAT) x 100

Food cost

As a restaurant professional, you know that raw materials are a restaurant’s main expense. This ratio shows you where you are losing money and where you are making it.

By monitoring your food cost regularly, you can identify your most profitable dishes. You can also spot the ones that need adjusting to optimize your restaurant’s overall profitability.

A high food cost points to inefficiency in managing ingredients and costs. This inevitably reduces the restaurant’s profit margins. That is why you need to act quickly when your food cost is high.

👉 Food cost ratio = (Food cost / Revenue excl. VAT) x 100

Analyzing your food cost lets you make informed choices about the ingredients you use and how you price your dishes. You improve your profitability and strengthen your competitiveness.

Calculating prime cost

Prime cost covers all the expenses involved in making a dish and the raw materials consumed. If sales are lower than the daily food cost, the restaurant will make a loss. If sales are higher, the restaurant will make a profit.

To calculate it, simply add your food cost and payroll, then divide by revenue. It helps you assess the profitability of the business and its ability to cover fixed and variable costs.

👉 Prime cost = (Food cost + Staff costs) / Revenue excl. VAT

Restaurant profitability indicators

Calculating a markup multiplier

It is used to set the selling price of a dish based on its raw material cost. For food, a multiplier of 3 to 4 is usually applied to the purchase price. So how do you calculate the multiplier? For drinks, the multiplier varies widely, from 3 to 5 depending on the drink and up to 8 for spirits.

👉 Multiplier = Selling price / Raw material cost

Waste rate

This index measures the impact that a loss of raw materials could have on your business, and helps you identify its cause (expired use-by dates, incorrect portions, etc.):

👉 Waste rate = Food cost of what was thrown away / Food cost of everything purchased over the period x 100

Example: if I threw away €50 of meat and purchased €2,000 of ingredients, my waste rate will be: 50 / 2,000 x 100 = 2.5%

To keep your restaurant on an even keel, a good waste rate is below 5%.

Margin of safety

Your margin of safety is the gap between the revenue you generate and your break-even point. A restaurant reaches its break-even point when its income covers its expenses. In other words, it is the minimum revenue the restaurant needs to cover its costs.

👉 Break-even point = Fixed costs / Contribution margin ratio

The margin of safety measures how much your revenue can fall before your business starts making a loss.

👉 Margin of safety = (Margin of safety / Revenue) x 100

Operating margin

Operating margin shows the economic performance of your restaurant before expenses, taxes and exceptional items. It lets you assess the profitability of your sales and the long-term viability of your business.

Operating margin is calculated by deducting all operating expenses from revenue. Operating expenses include raw material costs, labor costs, taxes and overheads.

👉 Operating margin = Revenue − Operating expenses

Staff cost ratio

The payroll ratio measures wage spending relative to a company’s revenue. If your payroll is too high, it will obviously hurt your profitability. This approach is often used to optimize the cost of a dish by including staff costs, in particular gross wages.

The related key indicator is calculated as follows:

👉 Payroll ratio = (Gross wages + Payroll taxes) / Revenue

As a rough guide, the staff cost ratio is generally around 30% to 40% in the restaurant industry.

Average spend per customer

Average spend per customer is a measure often used by restaurateurs to find out how much each customer spends on average.

Calculating average spend:

Simply divide revenue by the number of covers (the number of customers who came to your restaurant):

👉 Average spend per customer = Revenue / Number of covers

This indicator is particularly useful for benchmarking against competitors.

How do you optimize these ratios?

Better management of your restaurants

Knowing and analyzing your ratios is good; knowing how to optimize them is better! Here are the areas you can work on to safeguard the profitability of your business as a restaurateur, caterer or baker:

• Negotiate with suppliers: your margins move with the size of your spending. Renegotiating purchase prices with your suppliers could reduce your raw material costs.
• Change your menu prices: margins vary from product to product, so you can adjust your prices while staying reasonable.
• Stick to your recipe cards and get organized to avoid food waste. You can prevent waste by forecasting the volumes to produce.
• Adjust your menu: highlight your signature dishes or finished products to get the most out of your production. For example, place your daily special in the middle of the menu to catch your customers’ attention.
• Rethink your inventory management system: it is important to understand inventory management. You need to strike a balance to avoid both stock-outs and surplus goods.

Yokitup automatically calculates your restaurants’ ratios

At Yokitup, we have designed a fully customizable dashboard that centralizes all your data in real time.

By tracking each restaurant’s key ratios in real time, you quickly identify where savings can be made. This flexibility not only helps you optimize your financial results, but also build customer loyalty.