Gross profit on food and drink

What gross profit measures

Gross profit is your sales, less VAT, minus the cost of the food and drink that went into them. Gross profit percentage is that figure divided by net sales. A pub or restaurant works it out separately for drink, called wet, and for food, called dry, because the two carry different costs and different prices.

Food cost percentage is the other side of the same sum. A dish with a 30% food cost has a 70% gross profit. Wages, rent, energy and card fees all come below gross profit, so every pound lost from gross profit comes off net profit in full.

Take VAT out of sales first

Till reports show sales including VAT. Food eaten on the premises, hot takeaway food and drinks are standard-rated at 20%, so the VAT in each of those sales is one-sixth of the price. Cold takeaway food is zero-rated unless it is a type that is always standard-rated, such as crisps, sweets and bottled water, so it carries no VAT to take out.

If you are registered for VAT, your purchases go into cost of sales before VAT, because you reclaim the VAT on them. If you are not registered, the VAT you pay on purchases is part of the cost, and your sales figure is the full till total.

One £15 dish with £3.75 of ingredients

• Menu price, including VAT£15.00
• VAT at 20%, one-sixth of the price−£2.50
• Net sales£12.50
• Ingredients at cost, before VAT−£3.75
• Gross profit, 70% of net sales£8.75

The five points between 70% and 75% in that example belong to HMRC. A gross profit worked out on prices including VAT overstates the margin on every standard-rated sale.

Cost of sales from a stocktake

Invoices show what you bought in the month. Some of it is still on the shelf at the end of the month, and some of what you sold came from the month before. The stocktake accounts for both. Cost of sales for a period is:

1. the value of stock at the start of the period, from the last stocktake;
2. plus everything bought in the period, at cost;
3. less the value of stock at the end of the period, from this stocktake.

The closing stock of one period is the opening stock of the next, so the counts have to be taken on the same basis each time: the same day of the week, before opening, at the latest net cost price.

A month of wet and dry gross profit from two stocktakes

• Wet: opening stock £6,200 + purchases £9,800 − closing stock £5,900£10,100 cost
• Wet: £33,120 of drinks sales less VAT£27,600 net
• Wet gross profit£17,500, 63.4%
• Dry: opening stock £2,400 + purchases £8,900 − closing stock £2,100£9,200 cost
• Dry: food sales less VAT£31,000 net
• Dry gross profit£21,800, 70.3%
• Combined gross profit on £58,600 of net sales£39,300, 67.1%

Purchases need to land in the right period. A delivery on the last day of the month goes into that month's purchases and into its closing stock if it is still on the shelf. Credit notes for short deliveries and returned kegs go against the purchases of the month they relate to.

Why wet and dry are reported apart

A combined gross profit moves when the mix of sales moves, even when nothing has changed in the kitchen or behind the bar. A warm month that fills the beer garden shifts sales towards drink, and the combined percentage falls with no change in any price or cost.

The same two margins, two different months

Month one

Wet sales £27,600 at 63% and dry sales £31,000 at 70%. Gross profit £39,088 on £58,600.

66.7%

Month two

Wet sales £35,000 at 63% and dry sales £23,600 at 70%. Gross profit £38,570 on £58,600.

65.8%

Splitting the figures tells you where to look. A drop in wet gross profit points to the cellar, the bar and drinks prices. A drop in dry gross profit points to recipes, portions, suppliers and kitchen waste. Set up wet, dry and accommodation as separate departments on the till, with eat-in and takeaway kept apart for VAT.

Theoretical and actual gross profit

Theoretical gross profit is what you would make if every item was sold at its menu price with nothing lost. For a dish it comes from the recipe costing. For draught it comes from the cost of a keg and the number of pints in it.

Actual gross profit is what the stocktake shows. The gap between the two is the cost of waste, spillage, line cleaning, staff drinks, free drinks and meals given to customers, theft, missed charges and pricing mistakes on the till.

A 50-litre keg of lager

• 88 pints sold at £4.50 net, cost £15062.1%
• 82 pints sold, 6 lost to line cleaning and spillage59.3%

Alcohol duty is paid by the brewer, importer or warehousekeeper and is already inside the price of each cask or keg. A change in duty reaches you as a change in cost, and wet gross profit moves unless the bar price changes with it.

What moves gross profit

• Price. Raising the £15 dish to £16 takes net sales to £13.33 and gross profit to 71.9% on the same £3.75 of ingredients.
• Purchase prices. A supplier's increase shows up a month later in the stocktake. Check invoice prices against the agreed list each week.
• Portions and recipes. A recipe card with weights is the only way the kitchen can cook to the costing.
• Sales mix. Promoting dishes with a high cash margin lifts gross profit even where the percentage is lower.
• Waste and loss. Spoiled stock, returned plates, broken glass and line cleaning are all cost with no sale against them.
• Staff food and drink and complimentary items. They are cost with no sale. Record them so the gap between theoretical and actual can be explained.
• VAT coding on the till. A cold takeaway sale rung up as eat-in pays VAT that was not due. A hot takeaway rung up as cold underpays it, and the shortfall falls on you.

Commission paid to delivery apps and card fees are costs of selling. Keep them below gross profit so that the food margin stays comparable from month to month.

Pricing to a target

To find the menu price that gives a target gross profit, divide the cost by one minus the target, then add VAT. A dish costing £4.20 to make, with a 70% target, needs a net price of £4.20 divided by 0.3, which is £14.00. With VAT at 20% the menu price is £16.80. For a cold takeaway item that is zero-rated, the net price and the menu price are the same.

Price promotions move gross profit faster than any other lever. A pint of the lager in the keg example costs £1.70 and sells for £4.50 before VAT, a gross profit of 62.1%. Sold at half price in a happy hour, it makes 24.2%. Every pint sold at the lower price needs more than two extra pints sold to bring in the same cash gross profit, so set the hours and the lines covered against the till figures for those hours.

Set a target for each department from your own figures: last year's actual gross profit, the prices on the current menu and the current supplier list. Review the target when a supplier changes prices or when the menu changes, and cost every new dish before it goes on the menu.

Rooms, function hire and other income without a food or drink cost sit outside wet and dry gross profit. Report them as their own department so they do not lift the food and drink margins.

Records to keep

• Stocktake sheets for every count, signed and dated, with the cost price used for each line.
• Supplier invoices, delivery notes and credit notes.
• Till reports by department and by VAT rate.
• A wastage log and a staff food and drink log.
• Recipe costings and the price of each draught line per pint.

A company must keep a record of the stock it owns at the end of its financial year and the stocktakings used to work out that figure, and keep its records for 6 years from the end of the financial year they relate to. A sole trader keeps records for at least 5 years after the 31 January filing deadline for the tax year. VAT records are kept for at least 6 years.

Common mistakes

• Working out gross profit on prices that include VAT.
• Using purchases as the cost of sales, with no stocktake.
• Counting stock on different days or at different prices from one count to the next.
• Reporting one combined figure for food and drink.
• Putting delivery app commission into cost of sales one month and overheads the next.
• Leaving staff meals and free drinks unrecorded, so the stock result cannot be explained.

How we help

We report wet and dry gross profit each month from your stocktakes and till, check the VAT coding on your till, and set the figures against your plan in Business Pulse. Try the gross profit and menu pricing calculator, or see accounts and VAT.