Gross Profit vs Net Profit in the Food and Beverage Industry

There’s so much that goes into managing a restaurant or food and beverage business. Beyond branding, crafting the perfect menu, customer service, and company culture you must actively manage and monitor your financial health. From your cost of goods and controllable costs to understanding the difference between gross profit vs net profit.

These are all factors to consider before you add a Zumex commercial juicer to your hotel, restaurant, or commercial kitchen.

Here’s what you need to know to make an informed decision.

What is the difference between net profit and gross profit?

These two terms sound similar and have a lot in common, but just like your personal gross income and personal net income, the difference between the two is defining.

What is gross profit?

Also referred to as gross income, revenue, or earnings, understanding the difference between gross profit vs. net profit is essential for making informed financial decisions.

Gross profit formula

Gross profit is calculated by subtracting your total revenue from your cost of goods sold (COGS). In the restaurant industry, this includes the menu ingredients and disposable items required for serving, takeout, and delivery. Your full labor line is not included in gross profits, but you must factor in prep and cooking time. Especially when adding new items to your menu.

Why gross profit matters?

Gross profit determines if you’re making money or losing money on each menu item. It’s your profitability.

What is net profit?

Also referred to as your net earnings, net income, net profit, or bottom line, you subtract more from your gross profit to calculate your net profit.

Net Profit Formula

Net profit (your bottom line) is calculated by subtracting all overhead expenses. This includes rent, utilities, insurance, labor, taxes, and any other sales and operational and administrative costs.

Why net profit matters?

Net profit determines if you’re making money after your expenses are paid. It’s a measurement of your business’s performance. Most businesses aren’t net profitable for the first 3 to 5 years, even if they have strong gross profit margins.

Can gross profit be higher than net profit?

When calculating net vs. gross profit, gross profit is almost always higher than net profit. This is because more expenses are deducted from net profit. It’s not impossible for net profit to be higher, but it’s rare across all industries, and almost unheard of in the food and beverage industry.
For net profit to be higher, there must be extremely low overhead costs or extremely high automated or minimum-labor revenue streams.

What is cost of goods sold?

While non-food establishments can monitor their COGS monthly, most food and beverage companies monitor their COGS on a weekly basis. With a perishable inventory, your core product purchase price can fluctuate from one week to the next or one season to the next.
Counting your food products and disposable serving items on a weekly basis allows you to keep a close eye on your COGS. Most restaurants aim for a 30% to 35% COGS ratio, with anything below 30% being exceptional. The lower your COGS, the higher your profitability.
This goes beyond monitoring inventory when placing weekly food and supply orders, to strategic management of the following:

• Short shelf-life items: Fruit, vegetables, meat, dairy, refrigerated beverages, condiments, etc.
• Shelf-stable items: Canned goods, spices, alcohol, nonrefrigerated beverages, etc.
• Food packaging: Cups, lids, straws, disposable cutlery, condiment cups, takeout packaging, etc.
• Product-specific prep time: Food prep time is part of your internal operations, but you must identify ways to optimize prep time. For example, staffing the right person for prep work and utilizing a commercial juicer instead of juicing by hand.

How to calculate the cost of goods sold

To accurately determine your gross vs. net profit, you must calculate your COGS. The basic formula for calculating your COGS is:

Beginning inventory – new inventory = ending inventory

After calculating your COGS, divide your total food and beverage costs by your total revenue.

For example, if your May COGS is $4,500 and your total sales for the Month of May are $15,000 your COGS is 30%.

$4,500 / $15,000 = 0.3

0.3 x 100 = 30%

How to Optimize Both Gross Profit and Net Profit Margins

Below are some general tips and best practices for optimizing your profit margins.

• Implement FIFO: Train your staff on the importance of “first in, first out” (FIFO). This is the process of rotating perishable food items on shelves and in the fridge and freezer to minimize food waste.
• Train on food prep best practices: Ensure your team understands how to properly label prepped food and estimate how much food to prep per shift.
• Forecast: Another reason to complete inventory on a weekly basis is to adjust your order volume to minimize food waste. This is achieved by analyzing recent sales, seasonal sales trends, and upcoming promotions and events.
• Innovate: If food is nearing expiration, have your team brainstorm how to best utilize what you have in stock. Maybe create a menu special that combines food that’s close to expiration. At the very least, explore tax-deductible options, such as donating food before it expires.
• Shop around: Reassess your vendors, suppliers, and service providers at least once per year in search of more competitive pricing.
• Don’t go it alone: Work with your accountant or financial consultant to manage your existing line items, explore new revenue streams, and optimize your financials.
  

  How Understanding Gross Profits vs Net Profits Increases Your Success

  According to the National Restaurant Association, 60% of restaurants fail in the first 12 months, and 80% fail in their first 5 years. Understanding your gross vs. net profits empowers you to make informed financial decisions and increases your odds of food industry success!