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For those new into the world of restaurants, those who've been around it for a while, or any person who sells a product will need to be understanding of their GP.
But what is GP? Why is it important? Why is it such a critical piece of information for the business?
What is GP (Gross Profit)?
The gross profit of a business, in which for this example we are talking about restaurants in simple terms, is the profit made after the cost of the product sold has been removed, better demonstrated in this example:
Item £ % (formal name)
Bottle of wine retail price £10 100% (revenue)
Cost of bottle of wine £3 30% (cost of sale)
Gross profit £7 70% (gross profit)
£Sales - £Cost of product sold = £gross profit
What is cost of sales?
Cost of sales is what the sale itself costs you to sell. In this case, our cost of sales is £3, because the bottle of wine costs us £3 to buy.
Cost of sales, and gross profit, does not include any other overheads.
Gross profit not to be confused with net profit
Net profit is profit made after all other overheads have been taken into account. Overheads such as electricity, wages, rent, rates, insurance, utilities, etc.
Here is a simplified profit and loss which demonstrates where gross profit and net profit sit, and can help you to see the difference more clearly.
What is a good GP number to aim for?
Generally in a hospitality business, you should be aiming to achieve minimum 70% gross profit across all of your sales mix.
Some items will likely be lower than 70%, and some greater.
Your menu should contain a balance of both higher and lower margin items because you'll need to offer quality items on your menu and balance these to ensure you make profit.
Why is GP (Gross Profit) so important?
The first reason your GP is so critical is because it is your single biggest cost in your restaurant business.
As you can see above (these figures are roughly accurate), it accounts for £30,000 of the £43,300 costs. If your gross profit margin is out of line, this will really really hurt your profitability.
The second reason your GP is critical is because it directly relates to each sale that is made and effectively can either cost you or make money for every sale you make. It's proportional to your sales. This is intrinsically different to other costs you incur, for example your electricity bill, because these typically are finite in terms of the impact that it can have.
As an example, if you run over on your electricity for one month, it can be easily rectified by some tweaks to your equipment or negotiating the contract, with a total likely cost of a comparatively small amount of money, maybe a hundred or so pounds worst case.
If your GP is wrong, it is affected upon every transaction you make within the business. If in the example above, we were just 1% our on our GP, then this would cost an additional £1000 the the business in a single period (1% of £100,000).
In other words, the more you make, the more money you lose - if your gross profit margins are setup incorrectly (if your pricing is wrong).
In the example above, if sales were £200,000, and your margin was 1% out, this would cost you directly £2000 (£1000 more in one period). Now multiply this if you have a small chain of 5 restaurants 1% out on their margins, this is now £10,000 total lost, still at 1%.
Now, that electricity bill that is £100 over is not so significant any more, is it. (these should still be looked at, by the way).
If your margins are correct, the more money you take (in sales), the more you make (in profit).
Top 5 tips for making sure your GP is in line?
Staying on top of your GP is critical and requires concentration, respect and management on a daily and weekly basis.
Work out your GP for each of your menu items. Calculate the portioned cost of each plate/item and what you're selling it for (don’t forget to take into account your VAT!) Use our free calculator if you like
Haggle with your suppliers - negotiate hard - contact 5 suppliers and get prices for your products and make sure they know you are doing this. Bargain, negotiate and buy at the right price.
Are the actual portion sizes in your recipes correct? Are you using expensive cuts of meat? Can you change the recipe altogether to use a different product? Are you making good use of any wastage from your meat cuts or otherwise to make delicious supplementary menu items, e.g. soups for starters, etc.
Price correctly - take into account that 20% you will likely have to pay for VAT. (e.g. £10 = £8 net sales to which you should use to calculate your GP on, not the £10).
Control your operation. Make sure your chefs are preparing food to recipe, wine is poured to correct quantities, and your front of house team are selling better GP items - usually such as cocktails, restaurant-made desserts, sides and starters to boost your overall GP. (i.e. higher margin items can improve your overall balance across your menu as not all menu items will be able to achieve 70% GP).
These first five are a good place to start, but download our full Gross Profit white paper which includes a full actionable checklist for your restaurant.
For any support please contact us and we'll be very happy to assist you put permanent fixes in place that will provide recurring improved profitability.
Thanks for reading, I really hope it helps you out.
Sam