What is cash margin? The number that pays your bills

Cash margin is the money a dish or a drink leaves in the till after you have paid for what went into it: the selling price, less VAT, less the cost of the ingredients. Gross profit percentage tells you what share of the price you keep. Cash margin tells you how many pounds. At the cheap end of a menu the two agree. At the top they do not, and cash margin is the one that pays the rent.

Two numbers, one plate

Every item on your menu has both. Take two dishes.

On a percentage, the pasta is the star and the ribeye looks like a problem. Most owners would be told to put the steak up, or take it off. But every ribeye you sell leaves £5.50 more in the till than every pasta. If you have forty seats and a Saturday night, the steak is doing more of the work.

That is the whole idea. A percentage is about your profit and loss account. Cash margin is about your cash flow. You need both, but they answer different questions.

Where the percentage misleads you

Pricing everything to the same gross profit feels disciplined. At the bottom of the menu, it is. At the top, it quietly costs you money, and wine shows it most clearly.

Price a bottle that costs you £6 for a 70% gross profit, and it goes on the list at £24: a fair price that guests are happy to pay. Price a bottle that costs you £25 the same way, and it goes on at £100. It sells once in a blue moon, and your cash sits in the cellar.

Now price it on cash margin. Once a bottle costs you more than about £15 to £20, add a fixed £20 to the cost, add VAT, and round it. The £25 bottle goes on at £55. Your percentage falls to about 45%, but if it sells six times a month instead of once, it brings in about £125 a month instead of £58.

How to work it out

For any item:

1. Take the menu price and remove the VAT. At 20%, divide by 1.2.
2. Take away the cost of everything on the plate or in the glass: garnish, sauce, and the bread basket that comes with it.
3. What is left is the cash margin. Divide it by the price before VAT, and you have the gross profit percentage.

Do it for your ten best sellers first. If the results surprise you, do it for the rest.

When to use which

Use the percentage:

• At the cheaper end of the menu, where a few pence on the cost moves the margin a long way.
• To check that a supplier's price rise has not slipped through.
• To compare one month with another.

Use cash margin:

• At the top of the menu and the wine list.
• To decide which dishes to promote, and which to put where the eye lands first.
• When the room is full and every seat has to earn its keep.
• For menu engineering, which sorts dishes by how often they sell and how much cash they leave.

In short: percentage at the bottom of the list, cash margin at the top.

"But my GP percentage will fall"

It will, and that is fine. Your gross profit percentage falls, while your gross profit in pounds rises, and you pay the wages, the rent, and the bank in pounds, not in percentages. The bottles you could not sell start to move, the cash tied up in the cellar comes back, and guests notice the value.

There are other gains. Your wine merchant sees you buying better bottles more often, and next year their price list becomes the start of a conversation rather than the final word. On the food side, a ribeye and a good bottle become a treat a couple can afford, not a once-a-year extravagance, and a menu that is generous where it counts earns you a little latitude elsewhere.

Bigger groups have priced like this for years. Most independents still do not, and it is one of the simplest changes I make with the owners I work with.

Start with ten items

Write down the ten things you sell most, work out the cash margin on each, and look at where the money really comes from. If the answer is not what the percentages told you, a Hospitality Health Check will show you the rest of the menu, and what to change first.