Understanding the Economics of Running a Successful Hospitality Business
Running a hospitality business is an exciting endeavor, but it comes with its challenges—especially when it comes to managing the financial side of operations. From sourcing ingredients to managing staff costs, there are many moving parts that determine whether a business thrives or struggles. In this post, we’ll break down the core financial concepts and costs involved in operating a hospitality business, providing actionable insights to help you optimize your operations.
Key Metrics for Success
To ensure long-term sustainability and profitability, it’s essential to focus on key financial metrics. Here are some of the most important ones for any hospitality business:
Gross Profit Margin (GP)
The gross profit margin is a measure of profitability after accounting for the cost of goods sold (COGS). This includes the costs of food, drink, and packaging. A healthy GP margin for hospitality businesses is 70% or higher.
Example Calculation
Selling Price: £10 (including VAT)
Net Revenue (excluding VAT): £10 ÷ 1.2 = £8.33
COGS: £2.50
GP = [(£8.33 - £2.50) ÷ £8.33] × 100 = 70%
Achieving this target requires accurate tracking of supplier prices and precise menu costing. Tools like RocketOS are invaluable for managing supplier price files, calculating theoretical margins, and comparing them to actual margins through stocktakes.
Theoretical vs. Actual Margin
One of the most critical aspects of managing margins is understanding the difference between theoretical and actual performance.
Theoretical Margin: This is what you expect to achieve based on recipes and supplier costs.
Actual Margin: This is what you achieve in practice, factoring in waste, theft, or errors.
Regular stocktakes allow you to identify and address discrepancies between the two, helping you reduce unnecessary losses and improve profitability.
Labour Costs
Labour is one of the largest expenses for any hospitality business, with a typical target of 30% of revenue or less. However, it’s essential to account for additional costs, known as on-costs, such as National Insurance (NI) contributions and pensions. These on-costs add approximately 18% to gross wages.
Example Calculation
Employee Salary: £25,000
On-Costs (18%): £4,500
Total Cost of Employment: £29,500
It’s worth noting that recent changes to NI contributions have increased on-costs for employers, making it even more important to manage staffing levels efficiently.
Premises Costs
Premises costs, including rent, business rates, and service charges, are another significant expense. A general rule of thumb is to aim for premises costs to be 10% of revenue or less. However, this can vary depending on the type of contract:
Fixed Rent: A set lease amount regardless of revenue.
Revenue-Based Rent: Rent tied to a percentage of revenue, which can be beneficial for businesses with seasonal fluctuations.
In addition to rent, landlords may charge business rates (set by local councils) and service charges for shared facilities or maintenance.
Other Key Costs
While COGS, labour, and premises costs are the largest expenses, there are several other costs to consider:
Utilities
Electricity, gas, and water costs have been volatile in recent years but are stabilizing. Utilities typically account for 2-5% of revenue. Regular reviews of contracts can help you manage these expenses.
Insurance
Liability, property, and business interruption insurance typically cost 0.5-1% of revenue, but this can vary depending on the type of operation.
Cleaning and Waste Disposal
These essential services usually account for 1-1.5% of revenue, and managing them efficiently can have a noticeable impact on overall costs.
Professional Services
Accounting, legal, and other professional fees generally account for 1-1.5% of revenue. Investing in these services can save money in the long run by ensuring compliance and optimizing financial management.
Revenue Growth and Cost Control
While managing costs is crucial, growing revenue is equally important. For Double Puc Café, a Bristol-based catering and café operator, diversification has been key to success. By offering catering services for corporate clients and events, Double Puc has expanded its revenue streams beyond traditional café operations.
This approach not only helps offset fixed costs like rent but also allows us to better serve our community by providing high-quality, locally inspired food.
Tools for Financial Management
Running a profitable hospitality business requires access to accurate, up-to-date information. Systems like RocketOS are invaluable for:
Maintaining supplier price files.
Calculating theoretical margins.
Tracking stock levels.
Identifying discrepancies between expected and actual performance.
With the right tools, you can make informed decisions to protect your margins and ensure your business remains financially sustainable.
Targets for Financial Sustainability
To create a financially sustainable hospitality business, aim for these benchmarks:
Gross Profit Margin (GP): 70% or higher.
Labour Costs: 30% of revenue or less.
Premises Costs: 10% of revenue or less.
Other Operating Costs: 10-20% of revenue.
Net Profit Margin: 10-20% of revenue.
Example of a Profitable P&L
For a location generating £500,000 in annual revenue:
Revenue: £500,000
COGS (30%): £150,000
Gross Profit (70%): £350,000
Labour Costs (30%): £150,000
Premises Costs (10%): £50,000
Other Costs (15%): £75,000
Net Profit (15%): £75,000
The Bottom Line
The hospitality industry is fast-paced and competitive, but with careful financial management, it’s possible to build a sustainable and profitable business. Whether you’re a café owner, caterer, or restaurant operator, staying on top of costs while delivering excellent service is the key to long-term success.
At Double Puc Café, we’re proud to operate with these principles in mind, serving our Bristol community through our cafés and catering services. By focusing on transparency, efficiency, and community impact, we continue to grow while staying true to our values.
If you’re in the Bristol area and need catering for your next event, check out our offerings at Double Puc Café.