What Makes Up a Restaurant’s Profit and Loss Statement
Regardless of if you are running a five-star, elegant dining restaurant, or a smaller, mom and pop style eatery, a profit and loss statement is a necessary tool. More than just having a P&L, you must know what it shows, how the statement works, and how you can use the information it contains to determine the strengths and weaknesses of your business.
The Restaurant’s Profit and Loss Statement Defined
The profit and loss statement used by restaurants is also referred to as a statement of operations, statement of earnings, and income statement. It’s like the P. Diddy of restaurant accounting forms. A P&L is a management tool used for reviewing the total expenses and revenue of your restaurant during a certain time period.
At its most basic level, your P&L is going to reflect costs that are being subtracted from sales. The result of this provides a rough estimate of your restaurant’s overall financial health. For example:
- Positive results: These mean you are making a profit and doing well financially. You can use the information on the P&L restaurant account templates to make future strategic decisions to make your restaurant even more profitable.
- Negative results: This means you are losing money and you need to change your business strategy to figure out where you can cut costs or increase your revenue.
Essentially, the P&L is designed to help you have a clear understanding of what is happening at your restaurant – financially – over a specified amount of time. You should use the P&L restaurant account templates to analyze the restaurant’s growth, budget, and operations. Reviewing the statement regularly with your management staff will help ensure you remain aligned with your overall business objectives.
The Parts and Components of Your Restaurant’s Profit and Loss Statement
To get the most out of your P&L, you have to understand all of its parts. Some of the most important parts of this statement are found here, as well as how they relate to one another and how they can add context to how much you understand your business.
The gross margin represents the financial result of your operating activities. This is usually expressed as:
Sales – Cost = Profit
The operating activities are typically defined as the “core business activities.”
The “Big 3” core business activities for any restaurant include:
- Revenue: Selling food and beverages
- Cost of goods sold (CoGS): Producing food and beverages
- Labor: Made up of sales (front of house) and production staff (back of house)
The combination of the labor and CoGS are called the “prime cost” since these are the main expenses involved with making revenue.
Every item on your menu will have its own profit margin, which is expressed by the following equation:
[menu price (revenue)] – [CoGS] = [gross margin]
Prime Costs and Controllable Profit
The prime cost is the total of cost of sales plus all the payroll-related costs. These costs represent most of the costs that can be controlled by management, and when the costs are controlled, it is the easiest way to increase the restaurant’s net profit.
The closer a certain cost is tied to your sales, the more control that the management staff will have on the final number seen on the P&L statement. Controllable costs and profit can be influenced by management more than non-controllable or fixed expenses, such as insurance, interest, taxes or rent.
Cost of Goods Sold (CoGS)
The Cost of goods sold is the total raw material costs for the items on your menu. This represents the actual amount of beverages and food used for producing what you sell. There are three basic numbers that must be known to determine CoGS including:
- Beginning inventory: Total food and beverage in stock on the first date for the date range you are reporting.
- Purchases: All the food and beverage invoices that are added to your inventory.
- Ending inventory: The food and beverage items you have at the end of the period.
Reading and Analyzing Your P&L Statement
The profit and loss statement is organized and also analyzed with a left to right, three column approach. The three columns include actual this year, the budget this year, and the actual last year. Every column of numbers is followed by the proper cost-to-sales ratio in percentage form.
The accounting line items will be organized from the top to the bottom, from the most controllable to the least controllable. Common section headers include Sales, Labor, CoGS, promotional expenses and marketing, operational expenses, occupancy, maintenance and repairs and corporate overhead.
The larger your restaurant is, and the more complex figure you have, then the more line items you are going to add to each section. However, if you are running something simple, such as a coffee kiosk, you will only need a few line items.
The Bottom Line
Understanding the profit and loss statement for your restaurant is a vital part of any business’ success. You can use this statement to check on your overall financial health; however, keep in mind, this isn’t the end of the story about your business because the information you glean from these restaurant account templates can be used to assess your opportunities and successes to make improvements. The fact is, when you understand the profit and loss statement, you have access to a powerful tool that will help you maximize your profits and help you make difficult decisions that will contribute to the long-term viability of your restaurant.
Keep in mind, regardless of what accounting software you choose to use to create your profit and loss statement, Sourcery can help you make smarter decisions by providing you access to price alerts and innovative, insightful analytics.