from an article by Christine Aldridge, Demand Media
As an owner or operator of a restaurant, there are several key pieces of financial information that you will need to understand. Net-profit margin, and what directly affects this financial ratio, is probably most important. The net-profit margin directly correlates to how much money the restaurant receives and makes over the course of a period of time.
You calculate net-profit margin by dividing net income by sales. Each of these variables are found on the income statement for a restaurant, or chain of restaurants. This financial ratio shows how much sales remain once all expenses of the restaurant are paid. Therefore, if your restaurant operates with a 30 percent net-profit margin, then $.70 of each sales dollar goes toward paying expenses and $.30 goes toward profits.
There are two primary types of expenses that greatly affect the net-profit margin of a restaurant; food costs and labor expenses. Food costs include the purchase price of all food and beverages. Waste and theft are big concerns within the restaurant industry. Food-safety measures and spoilage can cause food costs to soar, as can theft of expensive foods or alcohol. The weather and economy also play significant roles in determining what your foods are in your restaurant. A bad storm, drought or rising gasoline prices can cause food prices to climb, which translate into increasing food costs for a restaurant.
The second expense that is of great concern to managers and owners of restaurants is labor. Labor costs include the wages and salary of management, chefs, cooks, dishwashers, hostesses, servers, bartenders and any other person that the restaurant employs. Reducing these expenses by "cutting" people, letting them clean up and go home, after the restaurant's rush can help to increase the net-profit margin of the business.
Increasing menu prices can help to offset rising food or labor costs. It can also aid in increasing the net-profit margin of a restaurant. However, if you increase your prices by too much or do not keep them in line with the quality of the food, the demand for your restaurant will decline. This will actually cause the net-profit margin to decrease over time since many of your overhead costs will not go down despite less food being sold. This is important to keep in mind when considering ways in which to increase the overall profits of the business.