Contribution margin: what it is and how to calculate
Contribution margin is one of the essential indicators for a restaurant's financial management. Through it, the owner can more clearly assess the profitability of the business and make strategic decisions to get better results.
In this article, we'll look at what contribution margin is, how to run this calculation and why it matters to your restaurant's success. Keep reading to find out more.
What is contribution margin?
Contribution margin is an indicator that represents the difference between total revenue and the variable costs tied to selling products and services.
It helps you understand how much of your revenue goes toward covering the company's fixed costs. A partir disso, você pode descobrir se o negócio realmente consegue gerar lucro.
The idea is simple: to keep your restaurant running, you have certain fixed costs, such as rent, water, electricity, payroll, among others.
Although they aren't directly tied to producing the dishes and drinks you sell, they still need to be factored into your expense calculation, because they affect profitability.
Contribution margin lets you understand the impact of these fixed costs, and it's also used to calculate the break-even point of the business.
So understanding contribution margin is crucial for strategic decision-making, because it lets managers identify which products or services contribute most significantly to covering fixed costs and, consequently, to generating net profit.
Contribution margin vs. Profit Margin
Contribution margin and Profit margin are two fundamental indicators for a restaurant's financial management and are often confused. Understanding the distinction between one and the other is crucial for a more accurate analysis.
Contribution margin is calculated as the difference between total revenue and variable costs:
Contribution Margin = Revenue – Variable costs
Profit margin, on the other hand, factors in every cost, including fixed expenses such as rent, salaries and other costs that don't vary with production or sales:
Profit Margin = Revenue – Variable Costs – Fixed Costs
So contribution margin shows how much money is available to pay the fixed costs. Profit margin, on the other hand, shows how much money is left after every cost has been deducted.
Check out: Free Restaurant Profit Margin Calculator
How to calculate contribution margin for restaurants?
We've already seen the contribution margin formula above; now let's look in more detail at how to calculate it.
First you need to identify your total revenue and your restaurant's variable costs.
Total revenue is the sum of every sale made. So to run the calculation accurately you need a record of everything you sold. Using a platform like EPOC helps you have reliable data and makes this kind of analysis easier.
The second step is to list the variable costs and expenses, that is: all the costs of producing and selling your products and services that vary with sales. For example:
- Taxes
- Card Fees
- Delivery Fees
- COGS
Want to run the calculation? Use our free COGS calculator!
Add up all the variable costs and then plug them into the contribution margin formula. For example: if your total revenue was R$ 20,000 and your variable costs and expenses were R$ 10,000, then:
CM = Revenue – Variable Costs and Expenses.
CM = 20,000 – 10,000
CM = 10,000
In other words: R$ 10,000 is the amount you have to cover your restaurant's fixed costs. If your fixed costs were higher than that, it means you're not turning a profit yet.
Contribution margin is used to calculate the ponto de equilíbrio, an indicator that shows how much you need to sell to cover all your costs and expenses.
For a more detailed analysis, you can also calculate the contribution margin of each individual product. This way, you'll be able to see which products contribute most to covering the fixed costs.
From this data, you can map out strategies to boost sales of these products, revisit the pricing of products that don't have a good contribution margin, cut variable costs and increase your business's profitability.
What is the ideal contribution margin for restaurants?
Determining the ideal contribution margin for restaurants is a complex task, since it varies according to several factors, including the business model, the market segment, the location and the competitive strategy.
Even so, the contribution margin needs to be enough to cover all the fixed costs and generate profit. A good profit margin for restaurants sits between 10% and 15%.
There are also some general guidelines that can help you assess the operational efficiency and profitability of the business. Take a look below!
Menu Item Analysis
Assess the contribution margin of each menu item individually. Identify the products that contribute significantly to the overall contribution margin and consider adjusting your product mix, promoting the ones with higher margins.
Variable Cost Control
Put efficient variable-cost control practices in place. That includes negotiating prices with suppliers, optimizing processes to reduce waste and training your team to increase productivity.
Continuous Monitoring
The ideal contribution margin is dynamic and can shift over time. Keep monitoring it constantly, adjusting strategies as needed to face market changes, seasonality and other factors that may impact profitability.
By bringing these strategies on board, you can make better-informed decisions, spot growth opportunities and strengthen your restaurant's financial health.
Contribution margin isn't just a number; it's also a powerful tool that can drive a restaurant's growth when used intelligently and strategically.
Drive your restaurant's growth with EPOC
EPOC is a platform built for your restaurant to grow. With innovative, customizable features, you can improve customer service, cut operating costs and increase profitability.
Explore our POS, ERP, digital menu, self-service solutions and much more. Schedule a free demo and talk to our specialists to find out how we can help your restaurant!
