What is GP in a restaurant? Gross profit (GP) explained
For those new into the world of restaurants, or even for some that have been around it for a while - or indeed in any person who watches Dragon’s Den or runs a business that 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, is quite difficult to explain simply, so here I shall attempt to do so.
In simplest of terms, it is the first stage of profit that you have after the cost of the product that you have sold has been removed, better demonstrated in this example:
Cost of bottle of wine £3
Bottle of wine retail £10
Gross profit = £7
£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 product (wine) costs us £3 to buy.
Cost of sales does not include any other overheads.
Gross profit not to be confused with Net profit
Net profit is the profit that is left after all of your other overheads have been taken into account as well. 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 it more clearly.
An image to demonstrate the difference between gross profit, net profit and overheads
What is a good GP number to aim for?
Fundamentally, you should be aiming to achieve a 70% gross profit across all of your sales mix.
Some items will likely be lower than 70%, and yet some items will be greater.
Your menu should contain a balance of both because you will need to offer quality items on your menu. The way these are balanced-off, however, is by the sales of starters, desserts, sides to average the overall meal for this particular diner.
An image to show some examples of low and high GP gross profit items in restaurants
Why is GP (Gross Profit) so important?
The primary 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 GP is out of control, this will really really cost you.
The second reason your GP is so critical, 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 is 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.
For example, worst case scenario 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.
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).
The more you make, the more money you will lose - if your gross profit margins are setup incorrectly (if your pricing is wrong).
In this 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 recipe costs for each of your menu items. Calculate the portioned cost of each plate and what you are selling it for (don’t forget to take into account your VAT!)
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?
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).
I really hope this helps you. Please share your experience of how you have improved your GP with me I am always happy to hear how people are getting on.
Still need help?
If you are still stuck with your GP or need help where to start, get in touch.
Thanks for reading
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