4%-7% Profit?

[BBQMAN]

I don't currently own a raunt, but this one has gotten me thinking.

For those of you that do, how can this possibly be your true ROI?

Now I'm not expecting anyone to post their $$$ figures (I wouldn't myself), but an accurate profit percentage, and an honest answer to an apparent contradiction would be much appreciated.

The best explanation I've seen (here at this forum) was SoEzzy's:

I can see that profit margins could be that low, remember that is after all payments have been made, taxes accounted for, wages paid including the owners.

It's not what's left to go in the owners pocket as spending money, it's the profit that is increasing the companies coffers.
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BBQMAN
"I Turned A Hobby Into A Business".
Providing "IMHO" Since 2005.

[Pit Boss]

Sorry to be the bearer of bad news, but it certainly can be that low. As a matter of fact it's possible to be a negative number (those places tend to not last very long).

Remember that most of these percentages you see floating around are based on TOTAL SALES. They are not ROI figures (which is much more complicated).

Real simpleton math here. If you do $800,000 in sales and you are able to scrape out $56,000 for yourself and the business, then you recognize a 7% profit.

If you're thinking in terms of ROI, then your figures won't jive with those who speak in terms of gross sales percentages.

KEEP IN MIND...the numbers you are hearing are a PERCENTAGE OF SALES...not a percentage of your total investment in the company. Those are two very different things.

Hope that's a little clarification.
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Somewhere in Kenya...a village is missing their idiot.

[Pit Boss]

If you have annual sales of $3 million (which isn't that hard to achieve if you seat 200-400+ and have a decent business) and you only make a 4% profit, you're still going to bring home $120,000. There's alot of work involved to earn that $120k, but the percentage is what we're talking about.

Now, would I stay in business if all I ever realized was a 4% profit (remember, that's a percentage of SALES)? Well no I wouldn't.

There are times when the low percentages will sneak in on you. I would say that SHOULD NOT be the norm, but it can happen. I'd like to think a "normal" restaurant that's run under "normal" circumstances can realize a yearly profit (as a percentage of sales) of 7%-15%...sometimes less...sometimes more.

I also think that the lower your sales figures the higher your profit ratio should be (mainly because the owner should be taking on more of the workload to offset labor costs). If an owner can cut labor and recognize a higher percentage of profit (let's say 15%), even on $300,000 gross sales he/she should realize $45,000.

Let's say an "average" small place (<100 seats) brings in a gross of $800,000 in sales. There are two partners in the mix and they do everything right and realize a 15% profit for the year. They each could theoretically make $60,000 (unless they want to leave a bit in the business account).

So...take that same information and let's say your total operating costs (minus owner profit) for the year are $680,000. You also have lease payments of $4,000 per month. What would your ROI figure be? I ask because I'm curious. I've never seen anyone (other than restaurant investors...I stop short of calling these people restaurant "owners") figure the ROI on a working restaurant.
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Somewhere in Kenya...a village is missing their idiot.

[Joe Bryant]

It's also important to be clear exactly how folks are calculating this number. One might talk about a business (any business) making a 4% bottom line profit. But that can be after the owner is paid a very nice salary and upgrades and improvements are made to the restaurant including servicing the debt on the mortgage.

I see people throw numbers around lots of times in business and not everyone is clearly speaking from the same page.

J

[Pit Boss]

I agree Joe.

ROI can be figured several different ways and is subjective to which way you choose.

When I, and many other restaurant professionals, speak of profit in terms of a percentage of gross sales (which is NOT your Return on Investment) I'm talking about what is left after ALL payables are spent for the year. Upgrades and improvements will have their own percentage as will rents/mortgages. Those things are not profit in my opinion.

I've never been in a restaurant w/o a lease or a mortgage. If you own a piece of real estate and don't have to pay these large expenses, then your profit will surely go up.

As an example:

If I have gross sales of $800k, I am paying myself $50k, and there is $12k left over at the end of the year we can assume that $62k is our profit for the year (that's how I look at it). That works out to be 7.75% of gross sales. BUT, what if you're seeing those numbers AND paying a $60k per year mortgage? At the end of your mortgage period you would recognize that extra $60k as profit. Doing the exact same amount of business and all other factors being equal you now have $122k in profits...or 15.25% of gross sales.

Some people consider mortgage & rents in their profit figures. I feel that this doesn't give a clear picture of what you're actually able to call "profit" and view those monies as expenses.

To me...profit is the money you can literally see in your personal or business bank account at the end of the year above what you started the year with. And that figure tends to fall into the parameters discussed in this thread.

You can honestly say that profit is determined by the unique situation you put yourself in. If you have rents or a mortgage, you will see a lesser profit than if you did not.
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Somewhere in Kenya...a village is missing their idiot.

[Harry Nutczak]

Lets look at it this way, Most of you guys set your food cost to about 33.3%
Then you have labor costs to deal with, these should typically be less than 33.3% (if they stay at projected figures, Which I can gaurantee they will not)

So 2/3rds of every dollar you just brought in is already gone to cover your food and labor cost's. and most typically less than that due to accidental waste or employee meals, or that freebie you gave a friend of yours. or Otis the retarded dishwasher working an extra hour here and there.

So this leaves you less than 33.3 cents of each dollar to cover the rest of your expenses. what are those expenses? Some of the majors I listed for you are;
Rent.
Insurance
Licensing
Property taxes
Advertising

Now lets not forget about those disposable napkins, towel and uniform service, employee clothing, cleaning supplies (including dish machine chemicals). Replacing broken or worn tableware, getting the exhaust hood steam cleaned. Do you want to be a nice guy and offer health insurance to your employee's too? how much do you plan on pitching in to defray those costs? Employee meals?? how did you figure that into your 33.3% projected foodcost ratio?

Now that your realize your actual foodcost started creeping up a little, and how about your labor cost that is higher than what you expected?
this takes away even more of that 33.3 cents to cover all the other expenses of operating that restaurant.
Guys, something as simple as a cook dropping excessive ice crystals into the fryer with the fries can cause your foodcost to skyrocket, because that fryer shortening isn't lasting as long as you projected and changing it now costed you extra money you did not expect. End of the month comes around and you see you barely covered your costs. Now What?? hike the prices to try and make up for it? how much is it going to cost to get those new menu's printed?

Catering is a cakewalk compared to running a restaurant! almost any moron can show a profit when catering, But running a restaurant and showing a profit at the same time is a whole different animal altogether.

I have left out alot of other real expenses becuase they may not apply in all situations, I am sure you can figure it out, or your financial advisor will point it out for you before you apply for that big loan to get your own place.
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Just remember that the toes you may step on during your climb to the top will also be attached to the a$$es you'll be forced to kiss on your way back down!

[PorkQPine]

Anyone who goes into the restaurant business as his first business is bound to fail. It takes a business person to make a restaurant profitable. In fact, you need to be an accountant, a salesperson, a marketing person and a cook to have an even chance of making your restaurant successful. If you can't read a financial statement and you think the public will beat a path to your door because your food is so good and you don't think marketing is something that is valuable then say goodby to your investment and hello to your BK attorney.

Having insured many restaurants over the last 30 years what I have seen as a common denominator is lack of business experience and financial management understanding plus being under captialized. Being under captialized is probably good since they went out of business sooner and were back on the job market at an earlier age.

[BBQMAN]

Thanks for the replies.

I'm wondering if anyone that CURRENTLY owns a raunt is going to check in?

I also disagree that "any moron can make a profit with catering". That may be somewhat true, but it takes good business sense to make any business actually work and in the long run be profitable. If by "profits" you mean "beer money", I could see that having some validity to it.

I also don't agree that everyone that opens a ruant as a first business is guaranteed to fail. I do agree that there is the POTENTIAL for failure in any business that is not properly funded/planned for, with raunts being in the top of that failure category.

One of the reasons I asked the question in the first place- given these figures the profit margin just really isn't there in some cases.

Obviously, the profit potential is there, or nobody would open a food establishment.

I don't work for free, nor do I intend to unless it's family, (close) friends, or the charities that I support.
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BBQMAN
"I Turned A Hobby Into A Business".
Providing "IMHO" Since 2005.

[Pit Boss]

BBQMan, I would hope that you don't discount what "non-current" restaurant owners have to say. What is said today would have been true 10 years ago, 5 years ago, or even 20 years ago. The ratios just don't tend to change that much. There are things that YOU have the power to change, but the ratios in general stay pretty much the same throughout time.

As far as not being a current restaurant owner and to give you a bit of my restaurant background...I have been in restaurant ownership for six years and in restaurant management for 8 years. I sold my restaurant venture less than a year ago and take possession of my new spot next week. You're correct in thinking that I'm not a current owner as I am not. But don't discount good information solely on that reason.

I would like to know the ROI on the scenario I laid out above. I have no idea how ROI plays into real, everyday restaurant ownership and would like to know more. I know how it is useful for those rich fellows who buy franchises and other restaurants as an investment. To them a restaurant is the same as owning stock...and in that case an ROI is important.

I do hope you see that I've made no snide remarks. I'm honestly trying to help you get a better understanding of how the restaurant business is run. There are a ton of things that I don't know as my experience is with small business, but I do know about alot of the common sense things. I know how to look at my profit at the end of the year and compare it my gross sales number...and that the resulting number is not ROI, rather simply a percentage of gross sales.

If you need any help, don't hesitate to ask. I don't mind giving an answer or an opinion.

Jay
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Somewhere in Kenya...a village is missing their idiot.

[Pit Boss]

One little point that I'd like to clarify and if I'm wrong, please don't hesitate to set me straight.

The title of this thread is "4%-7% Profit", but then in your second sentence we read,

[BBQMAN]

I appreciate your checking in on this Jay, and understand what you are telling us.

By "current" I meant how others are doing now (considering the economy is the worst it's been in many decades).

So it's not that I discount what you (or anyone else) has to input on the subject.

I'm looking foward to seeing what you put together...................

I also feel that there is a lot to be learned by others failures as well.

In other words "this is what I did that didn't work, and this is how I would do things differently next time around".

This business is tough, it ain't always "Sunshine and lollipops"
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BBQMAN
"I Turned A Hobby Into A Business".
Providing "IMHO" Since 2005.