Succesful Profit Margin – Paying Minimum Wage

Dear M&M:

I own a small restaurant and am wondering what a successful Profit Margin would be.

– Lydia

 

Dear Lydia:

The profit margin of a successful restaurant varies widely across the industry. As a small-business owner, you must determine what a successful profit margin looks like for your company and set product prices to achieve that goal. Remaining conservative in the early days of your restaurant’s life can allow you to expand your business slowly and sustain growth in the long term.

First Year of Business- Temper your expectations for profit when your restaurant is in its first year of business. Anticipating to break even, that is earning enough to pay all your debts and employees without anything left over for a profit, is a reasonable expectation for a restaurant in the first year. Planning for this can allow you to conservatively estimate your cash flow and expenditures without counting on an unattainable level of profitability. Once your restaurant makes it out of the first four quarters, you can begin to set profit expectations and plan for more available liquidity to make improvements and sustain growth.

Setting Food Prices – Profit for a restaurant comes down to food cost versus the price on the menu. If your restaurant uses higher end ingredients with minimal processing, your cost will be higher and your menu prices will rise. According to Kevin Moll, CEO of the National Food Service Advisers, the average food cost for restaurant menu items are between 38 percent and 42 percent of menu price. For example, a $25 restaurant entree has a food cost between $9.50 and $10.50, allowing a restaurant to earn between $15.50 and $16.50 per entree served.

Alcoholic Beverage Sales – The price of alcoholic beverages provides the largest area for profit potential in a full-service restaurant. For example, a standard keg of beer holds 165 servings at 12 ounces or 124 servings at 16 ounces, according to Realbeer.com. If your restaurant charges $4 per glass, a standard keg earns you between $490 and $660 if you charge the same price per serving size. If the keg costs your restaurant $100 to purchase, this gives you a profit margin of as much as 500 percent.

Successful Profit Margins – A profit margin should leave your restaurant with enough room to make purchases, pay employees and have enough left over to pay for any unanticipated equipment problems or special opportunities that may arise in the course of business operation. The profit margin of your restaurant varies depending on the prices you set for your food and drink as well as how large your business is and how locations are in operation.

– M&M

Dear M&M:

I own a retail shop and only want to pay minimum wage because the more money spent on payroll, the lower the profits of a business.  My friend told me there are consequences to that.  What do you think?

-Helen

 

Dear Helen:

While many factors come into play when looking at the net profit of a successful retail business, one of the most important is the amount of money being spent on payroll. In a retail business, payroll does not simply cover employees. It also encompasses management and owners of the business. The more money being spent on payroll, the less net profit the business makes.

There are other things to consider:

Payroll -Payroll is an important factor of any equation involving net profit within a retail business. While it is necessary to pay for the best possible personnel for a business, spending too much on the payroll cuts into profits. Finding the right amount to spend on payroll is an individual matter, although a general rule of thumb is that service businesses can spend more on payroll than production businesses. This is because service businesses do not actually manufacture a product, and this reduces product overhead.

Reducing Payroll– When it comes to increasing net profits in a business; one way to accomplish this is to reduce the amount of money being spent on payroll. For example, if a company has 15 employees and spends $3,000 a month on payroll, reducing the number of employees results in having to spend less money each month on payroll. The trade-off in profit, however, can be an increased workload on the employees, resulting in higher worker dissatisfaction.

Quality Personnel – There also is a relationship ratio between sales and payroll. To generate sales, the personnel on the payroll must be well-trained and competent. If a business attempts to increase net profit by spending less on trained personnel, it might see a slight increase in profit temporarily, but without quality personnel, long-term profits are unlikely.

Adjusting Ratios – Successful businesses have reasonable payroll expenses, along with reasonable overhead costs. If payroll expenses start rising, a business needs to find a way to increase revenue. If it does not do so, the business begins to lose profits. One way to combat higher payroll expenses is to increase the price for goods or services the customer pays. Doing this risks alienating the customer base, however, and many businesses are reluctant to go that route. Instead, businesses might use cheaper material to balance higher payroll costs, but this approach reduces the overall quality of a product. Once again, this might lead to a smaller customer base.

– M&M

 

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

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