Small Business Growth Series #2: Restaurants & Cafés
Why restaurant profit needs a smarter approach in 2026
The quickest way to improve restaurant profit margins is rarely a price rise. Diners notice higher prices straight away. They rarely notice a better-run business behind the scenes.
Costs have climbed sharply. The National Living Wage rose to £12.71 an hour in April 2026, a 4.1% increase. UKHospitality estimates this alone adds £1.4 billion to the sector’s wage bill. It follows the employer National Insurance rise of April 2025.
The good news is that many profit gains are invisible to customers. Below are seven practical ideas, several of which owners often overlook. Some are operational. Others are tax and accounting points where the right advice can make a real difference.
1. Engineer your menu around cash profit, not food cost percentage
Many restaurants judge dishes by food cost percentage. That can be misleading. A dish with a low percentage may still earn you fewer pounds per plate.
Menu engineering fixes this. It was developed by Michael Kasavana and Donald Smith at Michigan State University in 1982. Each dish is scored on two measures: contribution margin (selling price minus ingredient cost) and popularity.
This sorts every dish into four groups:
- Stars – popular and profitable. Give them the best spots on the menu.
- Plough horses – popular but low margin. Rework the recipe or garnish quietly rather than raising the price.
- Puzzles – profitable but rarely ordered. Rename them, describe them better or have staff recommend them.
- Dogs – unpopular and low margin. Remove them to cut stock, prep time and waste.
A small trick most owners miss: consider how you show prices. A Cornell University study found diners spent around 8% more when menus showed plain numbers without currency symbols. Writing “14” rather than “£14.00” costs nothing to test.
The study took place in one US restaurant, so results may vary. Treat it as a low-risk experiment, not a guarantee.
2. Let your bins tell you what to change
Food waste is profit thrown away. It is also one of the few costs you can cut without customers noticing.
WRAP research found that 45% of hospitality food waste comes from preparation. Another 34% is left on customers’ plates, and 21% is spoilage. WRAP also puts the cost of avoidable waste at between 38p and £1 for every meal served.
Plate waste is the clue most owners overlook. If the same side dish keeps coming back half-eaten, the portion is too big. Trimming it saves money and customers rarely notice, because they were not eating it anyway.
Practical steps:
- Weigh waste for two weeks, split into prep, spoilage and plate waste.
- Check which garnishes and sides return most often.
- Offer bread or chips on request rather than by default.
- Use trimmings in staff meals, soups or specials.
There is a compliance angle too. Under England’s Simpler Recycling rules, businesses with 10 or more full-time equivalent staff have needed a separate food waste collection since 31 March 2025. Smaller firms must comply by 31 March 2027 (South Norfolk and Broadland Councils). Less waste means lower collection costs.
3. Measure revenue per seat, per hour
Hotels track revenue per available room. Few restaurants track the equivalent for seats, yet a seat is your most limited asset.
Cornell professor Sheryl Kimes developed a measure called RevPASH, or revenue per available seat-hour. It combines time, capacity and revenue in one figure.
The calculation is simple. Divide sales for a period by the number of seats multiplied by the hours open. A 40-seat restaurant open for four hours has 160 seat-hours. If it takes £3,200, RevPASH is £20.
Tracking this hour by hour shows where profit hides. Kimes highlights two main levers: managing how long tables are occupied, and adjusting pricing by demand.
Ideas that customers welcome rather than resent:
- Fix the table mix. Two diners on a four-top waste two seats at peak times. Movable tables let you match party sizes.
- Remove dead time, not dining time. Bring the bill and card machine promptly. Guests enjoy their meal and nobody waits 15 minutes to pay.
- Fill quiet hours with fixed-price menus. An early-evening set menu brings in new trade. It uses dishes that are quick to cook from stock you already hold.
- Protect your peaks. Avoid discounts on Friday and Saturday nights when you are already full.
4. Check the wording on your service charge (and other VAT details)
Some of the easiest profit gains sit in your VAT return. Customers never see them.
Service charges. A compulsory service charge is part of the price of the meal, so VAT is due on it. A genuinely optional service charge is outside the scope of VAT. HMRC’s own manual confirms this where the menu makes clear that service is optional.
The wording matters. “A discretionary 12.5% service charge will be added” reads very differently from “service charge 12.5%”. Customers also tend to prefer clearly optional charges.
Takeaway sales. Food eaten on your premises is standard-rated. Hot takeaway food is also standard-rated. Many cold takeaway items, however, can be zero-rated. If you sell sandwiches, salads or cakes to take away, check your till is coding them correctly.
Kitchen equipment. New ovens, fridges and dishwashers usually count as plant and machinery. The Annual Investment Allowance lets businesses deduct up to £1 million of qualifying spend from taxable profits. Timing a purchase before your year end can bring the tax saving forward.
VAT and capital allowance rules have exceptions. Always take advice on your own circumstances before changing how you charge or claim.
5. Put your energy bill where the chefs can see it
Energy is a large overhead, and much of it is wasted out of habit. In many kitchens, every appliance goes on at the start of a shift and stays on.
The Carbon Trust estimates most hospitality businesses can cut energy use by 10% to 14% (NatWest). Speaking at the Hospitality Show, a Carbon Trust adviser described savings of up to 20% through behaviour changes alone.
He gave a memorable example. Raymond Blanc’s kitchen at Le Manoir aux Quat’Saisons displays its gas and electricity bills for the whole team to see.
Low-cost changes worth trying:
- Create a switch-on schedule based on real warm-up times, not habit.
- Label equipment with its pre-heat time.
- Turn off anything unused for more than two hours.
- Keep fridges away from heat sources and check door seals.
- Appoint an “energy champion” on each shift.
None of this affects the guest’s experience. It may even make the kitchen cooler and more pleasant for staff.
6. Review how tips are shared, and how rotas are built
People are your biggest cost and your biggest asset. Two areas deserve a fresh look.
A properly run tronc. A tronc is an arrangement for sharing tips and voluntary service charges among staff. Where a genuinely independent troncmaster decides the allocation, employer National Insurance is not due on those payments.
With higher employer National Insurance since April 2025, this saving matters more. Staff also benefit, because tips paid this way carry no employee National Insurance either.
The rules are strict. Since 1 October 2024, the Employment (Allocation of Tips) Act 2023 has required all tips to reach workers without deductions. The troncmaster can be a worker, an accountant or an independent company. If you control the allocation, the National Insurance saving is lost.
Rotas built on data, not habit. Many rotas start as a copy of last week’s. Instead, compare staffing hours with sales by hour from your till system. You may find two people standing idle at 3pm and too few at 7pm.
Cross-training also helps. A server who can run the bar, or a porter who can prep, gives you flexibility without extra hours. Customers simply experience better service at busy times.
7. Know your numbers every week, not every year
Annual accounts tell you what happened. Weekly figures let you change what happens next.
The most useful single measure is prime cost. This is your cost of food and drink plus your total labour cost, shown as a percentage of sales. A widely used industry benchmark is around 60%.
For example, a restaurant with £20,000 of weekly sales and £12,000 of food and labour costs has a prime cost of 60%. If that creeps up to 64%, you know within days rather than months.
Other figures worth tracking weekly:
- Average spend per cover, split by food and drink.
- Gross margin on drinks, which is often higher than on food.
- Labour cost as a percentage of sales, by day.
- Supplier prices for your top 20 ingredients.
That last point catches many owners out. Suppliers raise prices gradually, a few pence at a time. Re-costing your main dishes every quarter shows where silent price rises are eroding your margin.
Good bookkeeping software and a linked till system make this almost automatic. It also puts you in a stronger position for Making Tax Digital and for conversations with your bank.
How Jermyn & Co can help
Improving restaurant profit margins does not have to mean higher prices or smaller portions on the dishes customers love. Often the biggest gains come from clearer figures and correct tax treatment.
At Jermyn & Co, our chartered accountants work with hospitality businesses across Norfolk. We can help with:
- VAT reviews, including service charges and takeaway sales.
- Setting up or reviewing a compliant tronc scheme.
- Capital allowance claims on kitchen equipment.
- Weekly or monthly management accounts and KPI reporting.
- Payroll, including National Living Wage compliance.
If you would like a fresh look at your restaurant’s numbers, please get in touch with our team.
This article is for general information only and does not constitute professional advice. Tax rules change and individual circumstances vary. Please speak to an adviser before acting.