If you manage a restaurant, you’ve probably heard this statement from above-store management: “You need to know how to read a restaurant P&L statement.”
The restaurant industry has its fair share of acronyms and weird phrases—people outside the industry don’t know what you mean when you say FIFO or 86-ing something.
P&L may seem like just another acronym, but it is actually an extremely important tool for managing a successful restaurant business.
“P&L” refers to the profit and loss statement, a common type of financial report for businesses. The P&L breaks down how much your restaurant is making versus spending during a certain period of time. Most importantly, it can help you track whether you’re making a profit or operating at a loss.
Here, we’ll go over the basics of a P&L, plus a few other helpful restaurant accounting concepts you should know as a store-level manager.
Why you need to understand your restaurant’s P&L statement
As a store-level restaurant manager, you’re used to managing your inventory. You consistently track what’s going in and out of your kitchen so that you can better understand how your inventory is moving and where you can make improvements.
Basically, a P&L is doing the same thing: measuring what income is coming into your restaurant, and what expenses are leaving. It’s measuring the two most important drivers of profitability. Overall, you should understand your P&L because it reveals the financial health of your restaurant.
A profit and loss statement pulls from past data, but it can inform the decisions you’re making about the future of your restaurant. With P&L data in hand, you can create better budgets, make decisions about labor or food, or spot big trends in your sales.
Basically, knowing how to read a restaurant P&L gives you data that you can use to make better decisions. This is why it’s a key report for restaurant owners, operators, and store-level managers.
Restaurant accounting basics
Successful restaurants run on good accounting. But you don’t need to be a certified accountant to use basic restaurant accounting concepts to improve your operations.
As modern restaurant accounting solutions have become more sophisticated, it’s easier than ever to use data to drive your store-level decisions. Your restaurant management solution can automate calculations for you, saving you time and ensuring accurate reports.
Once you understand a few basic accounting concepts, you are ready to start applying them to your day-to-day business decisions.
Chart of Accounts
Your restaurant’s chart of accounts lists all the important financial information related to the business. It covers your assets, liabilities, expenses, revenue, and equity. From ordering new inventory to having a bump in sales after an extra busy Saturday night, every transaction that happens in your restaurant changes the balance of at least two accounts.
The chart of accounts captures the information that you will see on all of your financial statements, including your revenue and expenses.
Your profitability isn’t based on your sales alone. You need to know what it is costing your business to make those sales by accurately tracking your restaurant expenses.
Your expenses fall into four main categories:
- Labor costs are all the costs included with your labor. This includes hourly wages, salaried wages, payroll taxes, and any employee benefits you offer.
- Cost of Goods Sold, often called CoGS or food cost, is the total cost of all the food and beverage ingredients you use in your restaurant during a specific period of time.
- Occupancy expenses are the fixed costs of your physical location, such as rent, property taxes, and property insurance.
- Operating expenses are the cost of anything else you need to have to run your restaurant, like equipment repairs, marketing and advertising, or any professional fees.
Your prime cost is made up of your CoGS and labor for a certain period of time. These two costs are critical parts of your overall restaurant expenses.
Restaurant owners and operators frequently look at prime cost separately from the rest of expenses for two main reasons. First, prime cost represents your two biggest overall costs, food and labor.
Second, and perhaps more importantly, prime cost is made up of the costs that are flexible and can change over time. You actually have some control over your food and labor costs, as opposed to your rent. You can optimize your profitability by streamlining your prime cost, so it’s worth paying extra attention to it.
Prime Cost to Sales Ratio
For restaurant accounting in general, it’s usually not very useful to directly compare dollar amounts for categories like prime cost or CoGS. A business like a quick service restaurant versus a fine dining establishment will log significantly different dollar numbers for the same night.
Instead, it’s helpful to look at restaurant expenses as a percentage of sales. For instance, the prime cost to sales ratio can be calculated with the following formula:
Prime Cost ÷ Total Sales = Prime Cost Ratio
Comparing your prime cost to total sales, over the same time period, shows whether your restaurant is being efficient at driving sales at the same rate of spending money on costs.
In general, the prime cost to sales ratio number ranges from 55-65%. Your restaurant’s exact percentage will depend on your type of restaurant, as well as your pricing, hours, product mix, and geographic location.
Breaking down the P&L statement
The profit and loss statement goes by a few other common names, like the income statement or the statement of operations. All these different names can give you an idea why this financial report is so useful—you can see your profit vs. what you’re losing, your actual income, and what the cost of operations looks like.
But what does a P&L statement actually include when you look at it? Essentially, it’s a summary about revenue and expenses. The basic formula looks like this:
Revenue – Expenses = Profits
Let’s examine each element in turn.
Revenue, otherwise known as sales, is calculated by pulling from your sales data in your Point of Sales (POS) system. This process is usually automated through your restaurant accounting software, and you can even break it down by food vs. beverage, different menu categories, and single out manager comps and discounts.
Expenses in the above formula refers to both prime cost and all other fixed operating expenses. Your prime cost represents your food and labor costs that lie within your control, and other operating expenses include your occupancy expenses and other expenses.
The breakdown of restaurant expenses is an especially important part of the P&L to pay attention to because controlling and optimizing your expenses is a direct way to maximize your net profit.
Finally, profit is where you crunch the numbers and figure out your net profit, or net income, to see how your business is performing. If your net profit is positive, you can always still make operational changes that improve your profitability. If it is negative, you have some examining to do to understand what changes you need to make to get on steadier footing.
Submitting a weekly P&L statement to above store-level management
Many restaurant groups require store-level restaurant managers to run a P&L statement weekly (at least).
The more often you run and examine your P&L, the better. When you track your performance in live time, you have the information you need to adjust costs or make changes that drive up sales. You can address issues before they turn into persistent, drawn-out problems.
Luckily, running a frequent P&L doesn’t need to be incredibly time consuming. With restaurant accounting software that integrates smoothly with your POS, you can automate submitting a weekly P&L statement to above-store management.
Many restaurant groups also implement information sharing tools that allow store-level managers to compare side-by-side P&L data from different locations. The data may maintain anonymity by not including store names, but it allows you to see comparisons of things like guest count, guest check averages, food and beverage sales by category, discounts, and promotions between stores. With this information in hand, you can better understand the context for your store numbers and see where your strengths and weaknesses lie.
The P&L statement may contain some special vocabulary, but luckily, it isn’t a scary beast of a financial report for store-level managers. Now that you know more about the P&L accounting terms, you are empowered to understand how to read a restaurant P&L and use it in your day-to-day decisions.
If you’d like to be equipped with financial reports like the P&L, inventory management tools, labor and scheduling solutions, and sales forecasting to help control costs, consider an all-in-one restaurant management system. Restaurant365 incorporates restaurant accounting software, restaurant operations software, inventory management software, payroll + HR software, and scheduling software into a cloud-based platform that’s fully integrated with your POS system, as well as to your food and beverage vendors, and bank. Ask for a free demo of Restaurant365 today.