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  • Writer's pictureWolstonbury Hospitality Consultant

Part 1: What is GP in a restaurant? Gross profit (GP) explained. Includes actionable tips - 2024 SERIES

Due to the popularity of the Gross Profit blog I wrote a few years ago, I thought I'd give it a refresh and more depth. It will now span over several parts.


My aim is that it will really be useful for anyone reading and taking away the actionables at the end.


I really hope it helps. And thank you for reading.


 

For those new to hospitality, those who've been around it for a while or any person that sells products need a solid understanding their GP.


But what is GP? Why is it important? Why is it such a critical aspect of the business?



What is Gross Profit (GP)?

Put simply, GP is profit left after the cost of the sale is deducted.


This is more effectively demonstrated in the below example, where we're buying wine from our suppliers at £3 per bottle and selling for £10 to the customer.


 
£ Example - 1 Bottle of wine sold in our restaurant.

We're assuming that we sell 1 bottle on our menu for a price £10, and buying the bottle from our supplier for £3.

Revenue £10

Cost of goods sold £3

Gross profit £7


Here's the same example, but with percentage added alongside

£ %

Revenue £10 100%

Cost of goods sold £3 30%

Gross profit £7 70%


In this example we are achieving a Gross Profit Margin of 70%.

 

The direct cost of products sold are the only costs that contribute to your cost of goods sold, and therefore your GP.


DO NOT make the classic mistake that many entrepreneurs make on Dragons Den for example, getting Gross Profit mixed up with their Net Profit.


Gross Profit only looks at the direct cost of the sale, no other overheads.


Net profit comes later and includes other overheads such as utilities, labour, stationary.


GP is best thought of as:

'what the customer has left with in their hand'.


Your customers are not paying for and do not leave with your electricity, your post-it notes, or your printer ink.

So it is not included in the sale margin.



Gross profit not to be confused with Net profit

We just touched on the difference between Gross Profit and Net Profit. Here is a clear example of how they are very different, using a simplified profit and loss report.


Example profit and loss report (simplified)

In this example we have traded for one day and our revenue is £1000.


£ %

Revenue 1000 100%

Cost of goods sold 300 30%

Gross profit 700 70%


Labour 300 30%

Rent 125 12.5%

Utilities 50 5%

Telephone / internet 50 5%

Insurance 50 5%


Net Profit 125 12.5%

As you can see the difference between Gross Profit and Net Profit are vast.

They are highlighted on the profit and loss (in bold) so the profit at both stages can be clearly seen.


If your Profit & Loss doesn't look like this in respect of your Gross Profit and Net Profit inclusions, then it needs reformatting.



What is a good GP number to aim for?

You should aim to achieve minimum 70% gross profit.


Some items on your menu will likely be lower than 70%, and some items will be greater.


But when all is said and done at the end of the month, your total blended margin should be a minimum of 70%.


To achieve this, your menu should contain a balance of both high margin and lower margin products, because you'll need to offer balance of value, size and quality on your menu.


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, GP accounts for 30% of all costs. GP is usually the largest controllable cost. If your GP is out of control, this will really really hurt you.


The reason your GP is so critical is because it's proportional to your sales.


Put simply, if your margin is off-track, the busier you get, the greater your losses.


Other costs can usually be paid for by increasing sales, except for where gross margin is concerned.


GP 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 they can have.


If your margins are correct, the higher your sales, the more profit you can make.


Where to start? Do this:

If you don't have an accurate or up-to-date GP number, you're not alone. Here's a few pointers to get you started for part 1.


Only a little effort required and you can get in control pretty quickly.


  1. Calculate your menu item GPs

  • Download a list of your menu items from your till system to a spreadsheet

  • Add a 'cost' column to the spreadsheet

  • Make sure you are using sale prices Net of VAT. If you are, create a new column that removes 20% off of your menu price. Remember, businesses only use numbers Net of VAT always. VAT is irrelevant to our operation.

  • You can also download our Free GP Calculator Tool

  1. Improve your GPs

  • Now you know your item GPs, you may want to think about improving them.

  • This is a complex issue and can have many angles to approach it from.

  • The most basic you may start with are: haggle with suppliers (buy cheaper), or raise your prices.

  • Other methods can include menu engineering, changes recipes, menu layout, upselling better margin items, among others. All have their various methods, risks and upsides.

  1. Record your wastage every day

  • Recording wastage allows you to analyse ordering or handling errors which can be costly

  1. Check every delivery received against what has been invoiced

  • On delivery every item delivered should be checked for accuracy and any damage should be applied for a credit note from the supplier

  1. Tidy your stock areas

  • Keep your stock storage areas completely organised and tidy so that stock can be tracked

  • Stock items should ideally be stored only in one location to allow for improved stock control

  1. Complete weekly stock takes

  • Weekly stock takes can help you further analyse your actual GP vs your theoretical.

  1. Sell held stock

    1. If you have stock that holds value, such as wine etc that may spoil or is not moving, it's a good diea to sell it.

    2. Do not tie cash up in stock that doesn't move.

    3. Bite the bullet, put the cash in the bank, clear your stock areas, and make way for your new and improved stock control measures.



These are a great starting point for anyone looking to refresh their current practices for controlling their GP, stay tuned to this series for further advanced tips on improving the biggest cost in the business.


We really hope this helps, we'd love to hear success stories as well as difficulties, so feel free comment to help others in the community, or let us know via DMs how it's going in your business.


Cheers for now,

Sam Phillippe.



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