Managing Your Restaurant Balance Sheet and Financial Statements

As a restaurant owner or operator, you know that without monitoring, restaurant expenses can easily grow out of control. Your financial statements, such as your restaurant balance sheet and profit and loss statement, are tools to understand your business. Now more than ever, as your business runs in a delivery/takeout/curbside model, and prepares for an anticipated phased-in reopening, records of financial activity, organized by different kinds of financial statements, help you lay the foundation for a strong business and make informed decisions now and in the future.

Restaurant profit & loss statements

A profit and loss statement, otherwise known as a P&L statement, summarizes the revenue, costs, and expenses of your business over a certain period of time. A P&L statement tracks your restaurant’s business performance against expenses, restaurant sales, and Cost of Goods Sold (CoGS).

Your P&L reviews all of your revenue and expenses over a certain time and helps you decide your next steps. A positive P&L means that you can proactively make decisions to become even more profitable, and a negative P&L means you need to alter your business strategy to decrease costs or increase revenue.

Calculating your profit and loss statement

Your Profit & Loss statement tracks detailed information about your sales, CoGS, and expenses, calculating your total profit or loss with the following formula:

Sales – Cost of Goods Sold – Expenses = Profit or Loss

Your P&L is extremely valuable to manage your operations, budget, and future business growth. By monitoring key metrics, you can compare your business to industry targets or monitor different experiments you may be running. For both single-unit operators or nationwide restaurant groups, your data can help you have context for your future decisions about controlling expenses, menu adjustments, or labor cost controls. Some financial reporting software can even segment your P&L data by location, helping you drill down to identify the strengths and weaknesses within your organization.

The importance of automated daily reporting for P&L statements

Not all P&L statements are created equal. One of the most important considerations for preparing your P&L is the timeframe for reporting. To stay proactive, the standard frequency for running a P&L is daily, or at the very least, weekly.

Before modern restaurant management technology, P&Ls required labor-intensive data tracking and analysis. This reality meant that some restaurant owners only ran P&Ls once a month or once per reporting period.

However, with modern restaurant operations software, you can automate reporting and tracking data through an integration with your Point of Sale (POS) system. Automated daily reporting ensures that preparing your P&L statement is quick and easy.

If you are only running your P&L statement once a month or quarter, by the time you receive your data, it is already outdated. Without the opportunity to make immediate, data-driven decisions with anomalies in P&L numbers, you are leaving money on the table. Running your P&L frequently, through automated daily reporting, allows you to take proactive steps in the moment to counter any immediate problems before they become persistent or costly.

Managing your balance sheet

While your P&L is a key restaurant financial statement, it doesn’t tell the full story of your financial health. Your P&L doesn’t include how much cash you have on hand or in the bank, the state of your inventory, or if you are staying up to date with your bills. Your restaurant balance sheet is another critical financial report that complements the P&L statement and helps you understand the full picture of your financial health.

Creating your restaurant balance sheet

A balance sheet shows the net worth of a restaurant at a certain moment in time, detailing your restaurant’s assets, liabilities, and equity. Your balance sheet empowers you to understand your general financial health in the moment, as well as forecast your short-term and long-term cash flow. With your cash statement in hand, you know whether you are losing money, making money, or breaking even.

There are three main line items in a restaurant balance sheet:

Assets

Restaurant assets are what your restaurant owns, such as cooking equipment or inventory. Assets also include cash on hand.

Liabilities

Restaurant liabilities are what a restaurant owes for a certain period of time, like outstanding vendor bills, rent for property or equipment, lines of credit, or loans.

Equity

Restaurant equity tells the life-to-date story of earnings or loss. Equity can be thought of as net assets because it is the difference between assets and liabilities. Part of equity is retained earnings – a restaurant’s net income from operations and other business activities retained by the company as additional equity capital. Retained earnings are thus a part of the restaurant’s equity. They represent returns on total equity reinvested back into the restaurant.

Bringing it all together

Robust restaurant accounting software, with tools like automated AP and a full POS integration, can help automate the process of tracking expense and revenue data that makes up your total assets, liabilities, and equity.

Once you have collected the information about these three line items, you can view your balance sheet. With your total assets listed on one side, and liabilities on another, your restaurant’s net worth is what is left over. Another way to understand the relationship between your assets, liabilities, and equity is with the following formula:

Liabilities + Equity = Assets

Cash flow statement

Your cash flow statement details your business cash flow, which is money coming in and out of a business. It itemizes the sources and uses of cash – where is your cash coming from and what is using it. This financial statement can help you understand your business health by tracking how much money you have on hand, which may differ from what you have “on paper.”

What is recorded in the cash flow statement?

One of the principal insights of a cash flow statement tracks your operational activity. Your operational activity includes the cashflow related to fundamental business operations, and how it flows in and out of your business. Your core operational cash out will include expenses such as your restaurant labor costs, food costs, and services such as advertising. Operational cashflow in will primarily include restaurant sales and the selling of assets.

Another key metric recorded in your cash flow statement covers your debt and financing, because taking on debt or financing assets will cause changes in your cash flow. For example, an increase in debt could mean an increase in cash since you are gaining cash from something like a loan or waiting to pay cash on an accounts payable. A decrease in debt can mean a decrease in cash because you are paying off a liability.

Your debt and financing tracking should take into account the difference between short-term and long-term assets. Short-term assets, also called liquid assets, can be easily converted into cash. Short-term assets may include the funds in your bank account or food and beverage inventory. Long-term assets, otherwise known as non-liquid or fixed assets, cannot easily be translated into cash on hand. This may include land, kitchen equipment, or your restaurant building.

Calculating cash flow for a period

When calculating your restaurant’s cash flow, first choose your reporting period. Then:

  1. Start with your restaurant’s net income for that period of time.
  2. Add operational cash inflows. This will primarily be from restaurant sales, and it may also be from sales of any assets.
  3. Subtract all operational outflows. This will include your operational expenses, any investments, and debt.
  4. Compare your ending cash with your beginning cash. The difference between these two values is called your “net cash change”, otherwise known as your restaurant’s cash flow for this reporting period.

Conclusion

Your success as a restaurant is dependent on making smart, data-driven decisions in the moment that set you up for long-term success. Staying up to date and informed about important financial statements, such as your restaurant balance sheet, prepare you to meet operational and financial challenges both today and into the future.

If you would like to easily track financial data and automate financial statements, consider a comprehensive, restaurant-specific management solution. Restaurant365 restaurant accounting software is a cloud-based platform that’s fully integrated with your Point-of-Sale system, as well as to your food and beverage vendors, and bank. For more information, schedule a free demo today.

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