As a restaurant owner, your salary is tied to your restaurant’s profit. This profit depends on two primary factors: how much your restaurant sells, the revenue your business generates and how much your restaurant needs to operate, how much it costs to make that revenue.
There are a number of factors that determine how much of the profit you can take home. If your business is in debt, then your salary may go to servicing that debt. If you are aiming at growth, then you might reinvest your profits back into the business.
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Restaurant Owners Make a Little and a Lot of Money
The profit and the percentage of the profit you can afford as salary are both highly variable. As a result, no two restaurant owners’ salaries are comparable. Some owners make as little as $30K to $40k a year, while some owners enjoy a 6–7 figure salary ($200K+)each year. Some st4ruggling restauranteurs can be on the even lower end of the spectrum and be required to put money into their business (negative salary).
You can try several methods to understand where you lie on this broad spectrum.
You could look at a business that is similar to yours in terms of style, size, business model, business aim, and operations. Make some adjustments to their numbers and try to estimate yours. However, finding a restaurant that is close to your style and getting numbers from them is not as easy as it sounds.
You could also go by a rule of thumb. For instance, the National Federation of Independent Business claims that in profitable small businesses, the owner takes less than 50% of the profits home.
However, these rules are very general and do not reveal an accurate picture. They do not account for many factors that are relevant to you, such as the debt and the growth factors we discussed above.
When there are important decisions to be made, you cannot rely on these general estimates or on numbers derived from someone else’s success. You need to sit down, ask some tough questions, and calculate your own benefits.
In this article, we will help new restaurant owners understand the important metrics they need to know in order to calculate revenue potential, estimate costs, and salary potential. We will also cover expert advice and tips throughout the article.
Your Restaurant Revenue
Your restaurant revenue should not be confused with your profits. Revenue is the total money your restaurant will generate from all kinds of sales.
Food orders, drinks, swag orders, deliveries, gift cards, packed food, catering, private services—any and all money earned falls under this broad revenue category.
Your revenue is dependent on a dozen factors, including location, concept, pricing, inventory management, operation style, opening hours, and services (to name the main ones).
For a Restaurant Starting From Scratch
As a new owner, you need to do a lot of estimation, but there are many numbers you already know and can use.
Capacity, Table Time, and Table Turns
You already know the number of tables you have and how many customers you can accommodate at a particular time. Say your restaurant has 50 seats.
Let’s assume that you are a full-service restaurant that serves a three-course menu and usually preps most of the food beforehand so that the wait time is reduced. These factors can help you calculate your average table time.
Your customers sit, order, eat, pay, and leave. Then you clean, reset, and arrange the table. This whole process is included in the table time. For our example, 90 minutes is a reasonable average to assume.
Next are your table turns. Table turnover rate is basically how often your customers occupy your tables during your opening hours. Your table time will help you determine your table turns.
For instance, if you are open for four hours during lunch and your table time is 90 mins, you have about 2–3 table turns during the lunch hour. Try to determine your daily average.
Your capacity and your table turns will help you determine your potential covers. Take your total capacity and multiply it by table turns per day. In our example, 50 seats * (2 lunch + 2 dinner + 1 breakfast) = 250 covers a day.
Average Order Value (Average Check Size)
Finally, you need to determine the average receipt amount or average order value. Your menu will have several different options, and each customer’s check will be slightly different. You need to find an average of all the orders. This is difficult to estimate with accuracy. However, you can be smart about it and try a few different approaches.
1. You can predict which items will sell during each meal and create a bill estimate. For instance, for breakfast hours, you might predict that people will have one drink (coffee/tea), one meal (sandwich, omelet), and one side (hash browns/bacon strips).
The items under the three categories will have similar pricing, so you can mock up a bill to get an estimate of your average receipt.
2. You can ask your friends and colleagues in the industry for their estimates.
3. You could look up several reports online (such as public company filings that are your competitors).
For those will restaurants already in operation, this number can be generated through a simple report from you point of sale (POS).
Once you have these three numbers, you will use the following formula:
Primary Revenue = (Daily covers * average receipt * number of days open)
You will also add your other revenue streams (such as merchandising, catering, etc.) from rough predictions.
Total revenue = (Daily covers * average receipt * number of days open) + Other revenue streams
P.S. If this is too complicated, my financial model helps you with all this!
For an Established Restaurant
If you have already been running a restaurant for a while, this process is easier for you. You have a lot of intricate details which will help you determine your revenue potential more accurately.
You will use the same metrics and formula as above. However, you can account for fluctuations.
For instance, regarding your average receipt amount, some days are busier than others. Instead of taking an average receipt from predictions, you have the actual breakdown of sales for each day of the week. You also have the breakdown of the different meals (breakfast/lunch/dinner).
You can either use these figures to calculate an average or add them separately if the difference is significant.
For instance, the primary revenue formula could be broken down by meal:
(Breakfast receipt + Lunch receipt + dinner receipt) * weekdays cover * total number of weekdays + (Breakfast receipt + Lunch receipt + dinner receipt) * weekends cover * total number of weekends
You can adjust the revenue formula to suit your business figures.
Your Restaurant Costs
To determine your profits, you must subtract the costs from your total revenue figure. The costs in the restaurant business are never-ending.
According to a report by IBISworld, most restaurants have a profit margin of about 6%. This thin margin can help you get an idea of the costs that a restaurant incurs.
This doesn’t mean you can’t beat the average, I have seen a successful restaurant with a 25% profit margin, though they are few and far between.
All the costs can be broadly identified into two categories: fixed costs and variable costs.
Restaurant Fixed Costs
Fixed costs are easy—one bill, one price over a certain period of time. For instance, your rent is a fixed cost.
You probably have a rental agreement, so the price remains constant at least for a couple of years. Rent, utilities, licenses, interests, salaries, and insurance all fall under the fixed cost category.
Determining fixed costs is usually straightforward.
If you are based in New York, you can easily find out the cost of renting a certain building size in a particular location. Details on permits, interests, average salaries and insurances are all available.
Variable costs depend on the number of units sold. Inventory, contractors, deliveries, supplies, and marketing fall under the variable expenses. Often, you will also have renovations, equipment maintenance, training, consulting, and other such variable costs.
We deep dive into how much it costs to open and run a restaurant. You can read that here to get an idea of how much costs you could expect.
Your Restaurant Break-Even Point
Using a formula, profit = revenue – costs. However, there are additional layers to this that you need to account for.
For instance, if you have a startup loan, your interest will be counted as a fixed expense, but you also need to return the capital amount.
Next, you could have some heavy costs such as equipment purchases. In such cases, you only start making a profit when you have covered up these capital or hefty expenses in addition to the fixed and variable costs.
The break-even point helps you understand how much sales you need to bring in profit.
Your break-even point is:
Total Fixed Costs ÷ ([Total Sales – Total Variable Costs] / Total Sales)
Your Other Considerations
When trying to estimate the owner’s salary potential, there are additional factors to consider.
- Tax Structure: Different restaurant types and structures will have different rules for taxes. If you are a franchise owner, a sole owner, or your restaurant is registered as an LLC versus as a c-corporation, it will influence the tax rate. Your location, size, and earnings will also affect your taxes.
These taxes are cut from your total revenue. Do not forget to account for this deduction when you calculate your total profit pool and determine the tax rate relevant to your business.
- Business Partners: If you have a business partner(s), your profits will be shared between you. In such a case, your salary will be further divided and reduced.
- Experience: Restaurants are complex businesses to run. You manage production and selling simultaneously. The costs are high, the margins are low. There is a myriad of activities happening at the same time in a large group of people. This means the chances of errors and mistakes are high.
But with experience, you can learn. If you are experienced, you will be able to train your staff and retain them, attract customers from the start, have a greater speed for optimization, know the restrictions and regulations, and know-how to tackle the fierce competition.
You will already know many things needed to run a restaurant profitably. If you are already an experienced owner, then you can expect a higher salary from the start. All the newbies will have to make do with a longer waiting time.
Your First Year as an Owner
If you are a new restaurant owner, there are certain things you should be realistic about.
1. Unexpected Costs: At the start, the focus is to get the restaurant running, not to optimize. As a result, you could have high costs. Setup costs, wastage, staff mistakes, and theft are common expenses experienced by restaurants in the beginning. Do not be discouraged by that.
Over time, you optimize and bring down your costs, and naturally, this will help you increase your profit margin and salary that you can take home.
2. Fluctuating Salary: As a restaurant owner, expecting constant and predictable paychecks is asking for too much. There will be slow months, seasonal factors, unexpected competition, economic changes, employee turnover, and other such hiccups. These will impact the profits and, ultimately, your salary.
Over time, you will learn how to tackle these situations. For instance, you will get smarter about scheduling and avoid under or overstaffing. You will know how to pivot or rely on other revenue streams during slow months.
3. Biggest Paycheck: Even if you are the founder or owner of your restaurant, you do not always walk out with the biggest check at the end of the month. It could be that even your waiting staff can make more than you due to all the tips they collect.
Over time, when you have a more established operation, your paycheck size may increase.
4. Losses: At the end of the month or your quarter, when you look at all your financial records, there is a high chance you did not make any profit. This is not alarming for the first year or two.
We studied the concept of the break-even point; that figure and revenue potential could help you understand when you will reach your profit-making phase. Until then, do not be discouraged by looking at negative figures on your statements.
Over time, when you have paid off your loans, equipment, and other heavy expenses, you will make a profit.
When you are estimating the revenue potential or salary potential, be pessimistic about the first year, but then you can have more optimistic projections. Account for growth, reduced costs, and optimization.
More Than Just Revenue
The start of your restaurant business could be like a rollercoaster ride. However, success is amazing once you cross the main hurdles and establish your eatery.
Spending time with your friends and family in the restaurant, enjoying a new lifestyle, finally taking home decent paychecks, planning your growth and new locations, tasting new dishes and chef’s specialties regularly—these are just some of the many benefits you could reap from all your hard work.