How to Track Restaurant Profitability

Most restaurant owners can't answer 'Are we profitable?' with confidence. They see money in bank account and assume success. But cash flow masks underlying problems—high revenue doesn't equal profit. Restaurants fail not from lack of customers but from not tracking numbers. Here's how to track profitability systematically and identify problems before they become fatal in your cafe or restaurant.

Profitability Reality

Average restaurant profit margin: 3-5% net. Restaurant doing €500,000 annual revenue at 4% margin = €20,000 annual profit. 2% increase in food cost or labor without notice = profit becomes loss. Weekly tracking prevents disasters, monthly review too slow to catch problems.

The Prime Cost Formula

Prime cost is single most important metric in HoReCa operations:

Understanding Prime Cost

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Prime Cost Formula

Prime Cost = COGS (Cost of Goods Sold) + Total Labor Cost. Example: €30,000 food cost + €35,000 labor = €65,000 prime cost. Typically 55-65% of revenue.

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Target Percentages

Quick service: 55-60%, Casual dining: 60-65%, Fine dining: 62-68%. Prime cost over 70% = unprofitable operation. Under 55% = possibly underinvesting in quality/service.

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Why Prime Cost Matters

Controls 55-65% of total expenses. Everything else (rent, utilities, marketing) only 20-25%. Focus on prime cost = control profitability. Ignore it = fly blind toward failure.

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Prime Cost Warning Signs

Above 65%: immediate action needed. 65-70%: margin squeezed, vulnerable. 70%+: losing money, unsustainable. Track weekly, not monthly—catch problems fast.

Weekly Prime Cost Tracking

Calculate prime cost every Monday for previous week. Takes 30 minutes: pull sales from POS, food invoices, labor hours. Trend line shows problems immediately. Monthly tracking too slow—already lost thousands before noticing.

Track Food Cost Percentage

COGS percentage reveals pricing and waste issues in restaurant management:

Food Cost Calculation

1Calculate Period COGS

Beginning Inventory + Purchases - Ending Inventory = COGS. Example: €10,000 starting + €25,000 purchased - €12,000 ending = €23,000 COGS.

2Determine Food Cost Percentage

Food Cost % = (COGS / Food Sales) × 100. Example: €23,000 COGS / €75,000 sales = 30.7% food cost. Compare to target and previous periods.

3Identify Target Ranges

Quick service: 25-30%, Casual: 28-35%, Fine dining: 32-38%. Lower isn't always better—too low may indicate portion sizes too small or prices too high.

4Investigate Variances

Food cost jumps 3%+ = investigate immediately. Common causes: theft, waste, over-portioning, pricing errors, supplier increases not passed to menu.

Monitor Labor Cost Percentage

Labor typically biggest expense after food in cafes and HoReCa:

Labor Cost Components

✓Hourly wages for all staff

✓Salaried management compensation

✓Payroll taxes (employer portion)

✓Benefits: health insurance, retirement

✓Workers compensation insurance

✓Overtime pay and bonuses

Labor Cost Targets

✓Quick service: 25-30% of revenue

✓Casual dining: 30-35% of revenue

✓Fine dining: 30-40% of revenue

✓Combined with food: prime cost 55-65%

✓Over 40% labor = overstaffed or underpriced

✓Track daily, adjust schedules weekly

Labor Cost % = (Total Labor Cost / Revenue) × 100. Example: €35,000 labor / €100,000 revenue = 35% labor cost. Adjust staffing if consistently above target.

Calculate Break-Even Point

Know exactly how much revenue needed to cover costs in restaurant operations:

Break-Even Analysis

Fixed Costs

Expenses that don't change with sales: rent, insurance, salaries, utilities base, loan payments. Example: €15,000 monthly fixed costs.

Variable Costs

Costs that change with sales: food, hourly labor, supplies. Calculate as percentage. Example: 30% food + 25% labor = 55% variable costs.

Break-Even Formula

Break-Even Sales = Fixed Costs / (1 - Variable Cost %). Example: €15,000 / (1 - 0.55) = €15,000 / 0.45 = €33,333 monthly break-even.

Daily Break-Even

Monthly break-even / 30 days. Example: €33,333 / 30 = €1,111 daily break-even. Any day under this = losing money that day.

Break-Even Reality Check

If break-even is 80-90% of current revenue, operating on razor edge. One slow month = loss. Healthy restaurant: break-even at 60-70% of average revenue, leaving cushion for variability and profit.

Daily Sales Per Labor Hour

Productivity metric showing labor efficiency in cafes and restaurants:

•Formula: Daily Sales / Total Labor Hours = Sales Per Labor Hour (SPLH)
•Example: €3,500 sales / 40 labor hours = €87.50 SPLH
•Quick service target: €60-80 SPLH, Casual dining: €80-120 SPLH, Fine dining: €100-150 SPLH
•Low SPLH = overstaffed, High SPLH = understaffed or service suffering
•Track by shift: lunch vs dinner, weekday vs weekend to optimize scheduling
•Trend over time: improving SPLH = better efficiency, declining = bloating staff

Track Profit Margins

Multiple margin metrics show financial health in HoReCa operations:

Key Margin Calculations

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Gross Profit Margin

(Revenue - COGS) / Revenue × 100. Shows markup on food. Target: 65-72%. Example: (€100k - €30k) / €100k = 70% gross margin.

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Operating Profit Margin

(Revenue - All Operating Expenses) / Revenue × 100. Before taxes/interest. Target: 8-15%. Includes rent, utilities, marketing, everything except financing.

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Net Profit Margin

Net Profit / Revenue × 100. Bottom line after everything. Target: 3-5% for restaurants, 5-10% for well-run operations. Industry average 3-5%.

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Contribution Margin by Item

Selling Price - Variable Cost = Contribution Margin. Shows profit per dish. Focus menu on high-contribution items.

Monitor Cash Flow Weekly

Profitability on paper means nothing without cash in restaurant management:

Cash Flow Tracking

1Weekly Cash Report

Every Monday: Beginning Cash + Revenue - Expenses = Ending Cash. Track actual cash position. Profitable on P&L but no cash = problem with receivables or timing.

213-Week Cash Flow Forecast

Project next 13 weeks: expected sales, scheduled expenses, loan payments. Shows when cash tight, when comfortable. Prevents surprises.

3Minimum Cash Reserve

Maintain 2-3 months operating expenses in reserve. €15,000 monthly expenses = €30,000-45,000 minimum cash. Buffer for unexpected expenses or slow periods.

4Identify Cash Gaps

When expenses exceed revenue in forecast, plan ahead: reduce inventory orders, defer non-essential purchases, arrange credit line before needed.

Cash vs Profit

Can be profitable but cash-poor: inventory tied up cash, customers owe money, large purchases. Can have cash but unprofitable: loans provided cash, selling assets, not paying bills. Track both—profitable + positive cash flow = healthy business.

Key Performance Indicators Dashboard

Track these KPIs weekly for complete financial picture in cafes and HoReCa:

Weekly Metrics

✓Total revenue vs budget/last year

✓Prime cost percentage

✓Food cost percentage

✓Labor cost percentage

✓Daily sales average

✓Sales per labor hour

✓Cash position

Monthly Metrics

✓Net profit margin

✓Operating profit margin

✓Break-even sales amount

✓Inventory turnover ratio

✓Revenue per available seat

✓Menu item profitability analysis

✓Customer count and average check

Variance Analysis

Compare actual to expected, investigate differences in restaurant operations:

✓Budget variance: actual vs budgeted for each line item—food, labor, utilities, marketing

✓Year-over-year: compare to same period last year—accounts for seasonality

✓Week-over-week: spot trends early—food cost creeping up 0.5% weekly = problem

✓Theoretical vs actual food cost: POS sales say should use X, inventory says used Y

✓Labor hours scheduled vs actual: overtime indicates scheduling problems

✓Investigate variances over 5% immediately—understand cause, implement fix

Simple Profitability Tools

Don't need complex accounting software to start tracking in cafes and restaurants:

Essential Tracking Tools

Spreadsheet Template

Google Sheets or Excel with weekly tabs. Columns: sales, food cost, labor, other expenses, profit. Takes 30 minutes weekly. Free, simple, effective.

Daily Sales Log

Record daily: revenue, covers served, labor hours worked. Identifies patterns. Low-tech paper log works—just consistency matters.

Invoice Tracking System

File folder or digital system: food invoices one pile, other expenses another. Tally weekly. Know exactly what spent on what.

Restaurant Accounting Software

When ready: QuickBooks, Xero, restaurant-specific platforms. €30-100 monthly. Automated tracking, P&L reports, integrates with POS. Worth investment as grow.

Don't Wait for Month-End

Monthly P&L from accountant arrives 15-30 days after month ends. By then, 6 weeks of damage if problems exist. Weekly self-tracking catches issues in real-time. Accountant provides official record, your tracking provides operational control.

Red Flags Requiring Immediate Action

These signals demand urgent investigation in restaurant management:

•Prime cost over 70%: losing money on operations, unsustainable
•Food cost increase 3%+ in one period: theft, waste, or pricing problem
•Labor cost over 40%: overstaffed or revenue too low for current staffing
•Negative cash flow 2+ consecutive weeks: running out of money soon
•Declining sales 3+ consecutive weeks: marketing problem or competition
•Break-even over 85% of current sales: no margin for error
•Increasing variance between theoretical and actual food cost: control problem
•Net profit under 2%: vulnerable to any cost increase or sales drop

"Started tracking prime cost weekly instead of waiting for monthly financials. Discovered food cost crept from 32% to 38% over 8 weeks—€6,000 lost to unnoticed waste and over-portioning. Implemented portion controls, retrained staff, renegotiated supplier prices. Food cost back to 31% within 6 weeks. Weekly tracking saved restaurant from quarterly disaster."
— Jennifer Wu, Owner, Urban Fusion

Restaurant Profitability Questions

What is prime cost and why does it matter for restaurants?

Prime cost = COGS (food/beverage cost) + Total Labor Cost (wages, taxes, benefits). Most important restaurant metric because it typically represents 55-65% of revenue. Target ranges: quick service 55-60%, casual dining 60-65%, fine dining 62-68%. Prime cost over 70% = unprofitable operation. Track weekly—catches problems before monthly P&L arrives. Focus on prime cost controls majority of expenses and determines profitability.

How do I calculate my restaurant's food cost percentage?

Food Cost % = (COGS / Food Sales) × 100. Calculate COGS: Beginning Inventory + Purchases - Ending Inventory. Example: €10k start + €25k purchases - €12k end = €23k COGS. €23k / €75k sales = 30.7% food cost. Targets: quick service 25-30%, casual 28-35%, fine dining 32-38%. Food cost increase 3%+ = investigate immediately for theft, waste, over-portioning, or supplier increases not reflected in menu prices.

What labor cost percentage should restaurants target?

Labor cost targets by concept: quick service 25-30%, casual dining 30-35%, fine dining 30-40%. Include all labor: hourly wages, salaries, payroll taxes (employer portion), benefits, workers comp, overtime. Calculate: Total Labor Cost / Revenue × 100. Combined with food cost = prime cost, should be 55-65% total. Over 40% labor alone = overstaffed or underpriced menu. Track daily, adjust schedules weekly based on forecasted sales.

How often should I track restaurant financial metrics?

Weekly minimum: prime cost, food cost %, labor cost %, total revenue, daily average, cash position. Monthly: net profit margin, operating margin, break-even point, inventory turnover, menu item analysis. Daily: sales, covers, labor hours (basic tracking). Weekly tracking catches problems in real-time. Monthly P&L from accountant arrives 15-30 days late—by then weeks of damage. Takes 30 minutes weekly, prevents thousands in losses.

What is a healthy profit margin for restaurants?

Net profit margin targets: 3-5% average, 5-10% well-run operations, 10%+ exceptional (rare). Gross profit margin: 65-72% (revenue minus COGS). Operating profit margin: 8-15% (before taxes/interest). Restaurant profitability lower than most industries due to high operating costs. Prime cost 55-65% leaves 35-45% for rent, utilities, marketing, profit. Focus on prime cost control—biggest lever for improving margins.

Key Takeaway

Restaurant profitability tracking requires weekly monitoring of prime cost (COGS + labor, target 55-65%), food cost percentage (target 28-35% casual), labor cost percentage (target 30-35% casual), break-even point (healthy at 60-70% of average revenue), and cash flow. Calculate prime cost weekly—takes 30 minutes, prevents disasters. Key metrics: sales per labor hour, net profit margin (3-5% target), variance analysis. Red flags: prime cost over 70%, food cost increase 3%+, negative cash flow 2+ weeks, labor over 40%. Don't wait for monthly financials—self-track weekly catches problems in real-time. Restaurant at 4% net margin = 2% cost increase eliminates profit entirely. Weekly tracking = operational control, accountant = official record.