How to Read a Restaurant Profit and Loss Statement

This blog post was originally published on September 10, 2019 and updated on April 15, 2021.

Understanding a restaurant profit and loss statement (P&L) is a critical part of running a restaurant business – especially if you are a restaurant owner with multiple locations. A P&L statement can provide valuable insight into the net income and bottom line for each of your store locations.

A restaurant profit and loss statement, otherwise known as a restaurant income statement, is a financial report that gives an overview of your restaurant’s revenue, costs, and expenses during a specific period of time. This tool helps you understand your net profit or loss.

The numbers from your P&L can help you identify what is helping or hurting your business, enabling data-driven decisions about cutting food costs, adjusting labor scheduling, or changing menu prices. With detailed numbers about your total costs and total sales breakdowns, a P&L provides actionable insight into the strengths and weaknesses of your business.

At first glance, the number of columns and terms on a P&L can be confusing. Below are the main sections and terms as an example of a profit and loss statement for a restaurant.

What are the four main categories of a restaurant profit and loss statement?

A restaurant profit and loss statement can seem confusing at first, but essentially, it tracks four key categories: sales, prime cost, operating expenses, and net income. This data indicates the state of your restaurant’s financial health, and it can even help you and your managers understand where you can start improving profitability.

1. Sales

The revenue calculation pulls from restaurant menu sales data. If you have an integrated Point of Sale (POS) system, compiling data can be done automatically. To provide even more insight, some P&Ls break down sales by menu categories or food and beverage costs. Depending on your specific business model, certain sections like food, wine, liquor, or coffee may have different sales and profitability.

The sales category may also include other information that affects sales, such as comps and discounts given out by managers at different locations. Overall, you need to include all items from different revenue streams and track the sales brought in by each.

2. Prime Cost

Prime cost, the bulk of your expenses, are made up of two types of costs: food and labor. Because these are the two largest expenses for your restaurant, prime cost reflects the health of your business model, and how well store-level managers are doing at controlling food, beverage, and labor costs throughout a certain period.

The first expense is Cost of Goods Sold (COGS), or how much you buy to make the items that you sell. COGS is the total cost of the inventory you used to make the food and beverage items you sold during a specific time period. You can break down COGS by menu groups and targeted categories or divide them into customized configurations of food and beverage.

The second part of prime cost is labor costs, which includes all of your salaried and hourly employees. In addition to the hourly labor costs, you should also include payroll taxes, workers compensation, and employee benefits like health insurance.

Together, your prime cost–COGS and labor–makes up the the majority of your expenses. In general, prime cost varies between different types of restaurants, but industry standards put it around 55%-65% of total sales.

Crucially, prime cost is comprised of the controllable expenses for your restaurant that can actually be adjusted (as opposed to operating expenses, explored below). Managing your prime cost is almost always the most direct way to maximize your net profit.

3. Operating Expenses

Operating expenses are generally “fixed,” staying the same independent of sales. These expenses can cover a wide range of costs, such as occupancy expenses (your fixed overhead in rent, real estate, or property insurance) or your corporate overhead.

Most operating expenses are fixed and cannot be adjusted. This may include your rent, waste removal, or the telephone bill. Some operating expenses may be somewhat flexible in the short-term, like equipment upgrades or new marketing techniques. And other operating expenses may come with no warning, like equipment or building repairs that are necessary to operate your business. All these fixed expenses need to be tracked in the operations portion of your P&L.

4. Net profit or net income

The final section of your restaurant profit & loss statement crunches the numbers of the first three sections to give you key indicators of how your business performed during a specific period – your net profit, otherwise known as net income.

Your net income is what remains after you subtract prime cost and operating expenses from your sales. Depending on the financial health of your business, this number may be positive or negative.

Even if your net income isn’t exactly where you would like it to be, it is essential to track this data consistently, so you know how your restaurant is performing. You need to know where you stand to make any improvements in your financial health.

What is a restaurant profit and loss statement used for?

A P&L is a management tool for your business. It can be used to analyze your operations, your budget, and your growth.

When you know the numbers of the total sales, controllable expenses, and operating expenses of a business, you can improve the profitability of your business. If your net profit is positive, you can grow to become more profitable. If your net profit is negative, you can make changes to either decrease costs or increase revenue.

A P&L statement looks back in time for data, ideally on a daily basis, but it helps you run your business looking forward. With detailed numbers, you have insight on what experiments or initiatives are working in your business.

The P&L may look like a simple report, but it can actually facilitate invaluable insights that can help you optimize every element of operations. In particular, a profit and loss statement provides store-level managers with the information they need to know to make daily tweaks. Rather than making large, knee-jerk adjustments to food and labor costs whenever a report is run, frequent P&Ls empower managers to stay on track to hit goals throughout the week, month, and quarter.

How often should I run a profit and loss statement in my restaurant?

The scope and impact of your P&L statement data depends on how often you run the report. Running a profit and loss statement only once a month, for example, provides you with a large overview of business operations, but less insight into how day-to-day decisions impact your sales and expenses. In addition, by the time you run a P&L at the end of the month, if you have been overspending on food costs for 29 days, or your labor spend has been too high for a few weeks, it is too late to recoup extra expenses. You have already burned through your cash.

Running a daily profit and loss statement, however, ensures that you are able to take corrective measures in the moment. By tracking the day-to-day strengths and weaknesses of your business, you can make immediate, informed adjustments to your business operations and avoid persistent, costly problems.

If running a daily P&L statement is too time consuming for your team, consider using restaurant accounting software that automates the daily report. With automated daily insights, you can grow your operation or add more locations without adding more accounting staff, and your managers have more time to spend with their teams and their customers.

Profit and loss statement comparisons for multi-unit or multi-concept operators

Advanced P&L statement reporting has a special value for multi-unit restaurant operators. Some restaurant accounting software allows you to compare P&L metrics for different locations, side by side. This comparison highlights variance, helping managers see where they can improve.

With a single-platform restaurant management software solution, corporate can give permission for store-level managers to compare their numbers with the metrics from other locations. Depending on security concerns, store names can be replaced by anonymous location numbers, allowing for easy comparison while maintaining anonymity.

With side-by-side true comparisons, managers can compare metrics like guest count, guest check average, total food and beverage sales (broken down by category), comps, promotions, and discounts. Sharing numbers enables managers to be more productive and make smart, data-driven decisions that can impact their bottom line.

Conclusion

At its core, a restaurant profit and loss statement analyzes your revenue and expenses to show the profit or loss generated by your restaurant over a given period of time. Knowing how to read your P&L statement shows you the relationship between your sales, costs, and profit, empowering you to make the most strategic decisions for your business growth.

If you’d like to review your P&L statement daily but are impeded by manual data entry, consider an all-in-one restaurant management system, now with the new Smart Ops Release. 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.

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