What is Gross Profit / GP ?

All hospitality businesses must understand and monitor the costs, yields and profitability of the products they sell.

Soaring cost inflation is hitting the bottom line of every restaurant, pub, bar and cafe in the country. In the final quarter of 2022, the resulting pressures upon profits and viability resulted in 18 hospitality businesses permanently closing every day. The rate of is closures is expected to increase in 2023 as inflationary pressures increase.

With profit margins so tight and volatility in supplier prices set to continue, all hospitality businesses must understand and monitor the costs, yields and profitability of the products they sell. Throughout the industry we call this the gross profit, or GP.

Gross profit is the percentage of net sales that remains after the cost of sales is deducted. It is represented by the formula 

This formula can apply to an individual drink, a category of drinks or all drinks sales to calculate the achieved GP.

For example: The GP for a drink bought for a net cost of £1 and sold for a net price of £2 is calculated as:

Let’s make this more realistic

Let’s picture a bar that sells only bottles of lager. The owner has calculated that they must achieve 50% GP on these bottles to remain viable. 

The bar buys a box of 24 bottles of lager cost £24 before VAT.

Bottles are sold for £2.40 each. When we take off 20% VAT (2.40/1.2) each bottle provides net sales of £2.00. If all bottles are sold at the selling price, net sales will be £48 and a 50% GP will be achieved.

In truth, this GP may not be the actual GP achieved. Why?

What if the price of the box goes up by £1 without being noticed and/or without a corresponding price rise.

The actual GP achieved with as a result of this cost increase becomes 47.9%, below the 50% required for the bar to remain viable. The increase in this example is just 4%, how much have your supplier costs increased?

In addition your yields may fall; you may not sell all 24 bottles in the box for the full selling price. A bottle may get broken, you may have a theft problem, staff may be giving away drinks or you might decide to comp a bottle or two. If just 2 bottles are not sold for the selling price, the bar receives £44 instead of £48 in net sales for the box of bottled lager. The cost remains the same.

The actual GP achieved from this fall in yield is now just 45.5%, below the level required for the bar to remain viable once again.

The above examples show how a small change to costs or received sales can have a huge effect on achieved GP and possibly the viability of a business. It highlights the need for accurate pricing, diligent cost monitoring, constant yield awareness and precise GP measurement and tracking.

Need a Little Hepl with your GP?

At Hepl, our systems have been developed to give owners and operators the tools to achieve the GP required to keep your business healthy and viable. We are not a software company nor do we charge a monthly subscription; our systems are mainly spreadsheet based and are adapted to your business. They put you in control of your costs, yields and profitability to ensure the viability of your business.

Contact us today to discuss how we can help.