Many restaurant owners and operators may not completely comprehend a restaurant's Profit and Loss Statement (P&L). In fact, many individuals are unaware of where the data is coming from or how to turn it into relevant insights.
If you are a restaurant owner, you must understand your financial situation by employing a restaurant's profit and loss statement to monitor and ensure a profitable business. This financial tool represents your sales and operating expenses for a specified time period.
In this article, we'll walk you through the steps necessary to generate a restaurant P&L report. So, whether you hire a restaurant CPA to generate your P&L or use restaurant accounting software to do it yourself, you'll have a better understanding of how to read a profit and loss statement for restaurants.
What is a restaurant profit and loss statement?
A restaurant profit and loss statement, commonly known as a restaurant P&L, is a financial report that reveals your restaurant's costs and total revenue (net profit or loss) for a specific time period. In other words, your income statement serves as a bank statement for your restaurant business, allowing you to monitor your restaurant's financial health. Most foodservice businesses' profitability may be calculated by combining two key business components: increasing sales or margins (gross revenue) and decreasing costs or expenses. According to statistics, 50 % of new restaurants fail to generate a profit by the fifth year.
The profit and loss or income statement (revenue and expenses or sales and costs) should not be confused with its financial siblings, the statement of cash flows (cash in vs cash out) and the balance sheet (assets and liabilities). The P&L statement displays the amount of profit or loss generated by your restaurant operation. It will not reflect bank deposits from credit card batches or the amount owed on outstanding loans (balance sheet) (statement of cash flows).
How to create a restaurant P&L statement
If you record your revenue and expenses in your accounting system on a regular and precise basis, generating income statements may be as simple as clicking a button. Your P&L is generated on command by the accounting system. It's a little more complex and time-consuming to prepare a P&L manually. To design one, you can utilize a template. In general, you should accomplish the following:
1. Choosing a Timeline
Choosing a timeline is the first step in preparing a restaurant's profit and loss statement. P&L statements can be generated weekly, monthly, quarterly, or yearly. It's a good idea to create these statements on a regular basis so you always have a clear understanding of how different components of your business affect expenses and revenues. Enter your restaurant's name and the timeframe for your data on your statement sheet.
2. Record Sales for the Selected Timeframe
The sales column is the first to be filled out on an income statement.
The sales section indicates how much money your restaurant made from selling its food and beverages within the specified time period. As an example, food, wine, beer, liquor, and soft drink sales are all included in an income statement. You may fine-tune your sales tracking by classifying your food sales into more specific categories or menu groups. Alternatively, you might split the food and beverage sales to simplify your profit and loss statement. Higher net income frequently means that it attracted more customers.
You may simply get comprehensive sales statistics for your chosen timeframe if you have a restaurant POS system that includes sales monitoring and financial reporting.
3. Cost of Goods Sold (COGS)
COGS is just another way of saying the cost of the inventory needed to produce the food and beverage products sold within the time period you specify.
To understand how the COGS works, you must determine how much you spend on inventory to fulfill your sales transactions with your customers. Menu price is also a significant consideration, especially if you are competing with a large number of comparable food businesses. Some restaurants utilize a practice known as the portion control approach to reduce the quantity of inventory they consume each week by small amounts, allowing them to retain more in store for the next week and, as a result, lower their COGS.
If you utilize standardized recipes for all of your food and drink items, calculating your cost of goods sold should be quite simple. For example, if you sell ten chicken meals and each dish costs $5 to make based on inventory expenses, your COGS is $50 (10 x $5).
Most restaurants' largest expense is labor.
All salaried and hourly employees, as well as payroll related costs such as payroll taxes and employee benefits and insurances, are included in your restaurant labor cost. You should figure out how much you spent on each of these labor-related costs during the time period you choose and input it into the income statement template individually.
5. Operating Expenses
Most operating expenses are the controllable expenses that are associated with running your day-to-day operations. Supplies, repairs and improvements, marketing and promotion, music and entertainment might all fall under operating costs category.
On the flip side, non-operating expenses are cost that is unrelated to essential business activities. Non-operating expenses include loan interest payments, restructuring charges, inventory write-offs, and payments to settle disputes.
6. Occupancy Costs
Overhead costs and everything related to occupying a space, such as rent, insurance, utilities, property taxes, property insurance, and waste removal, are all included in your occupancy expenses. These are considered as fixed expenses because these cannot be altered or change from period to period but others, such as your gas bill, may fluctuate.
Depreciation is the gradual decrease in the value of an asset (in this example, the physical restaurant business and equipment). Although depreciation is unavoidable, it must be accounted for in order to accurately calculate your net profit or loss.
How to analyze a profit and loss statement
Many people are intimidated by numbers, but with a few simple tips and techniques on where to look and why, you'll be feeling confident and analyzing statements like an expert in no time.
Here is a list of some of the simplest yet most effective financial points to look at in your profit and loss statement:
Percentage of sales
If you utilize a free restaurant income statement template, you'll see that a proportion of total sales is used to pay labor, occupancy, food and beverage costs, and operational expenses. The percentages given here are a crucial indicator of how well your restaurant's finances and business performs.
Restaurant's expenses, such as labor and food costs, should account for the highest percentage of total sales, according to industry standards (Food costs usually approximately 30 percent for both quick-service and full-service restaurants).
The key takeaway is that every restaurant is different, but if you observe an exceptionally high amount being allocated to your labor costs, food and beverages costs, it may be necessary to reconsider staffing and low-margin menu items.
Gross Profit & Gross Profit Margin
Gross profit is calculated by deducting total sales from total cost of goods sold.
When you enter sales and COGS values into the income statement template on an interactive P&L template, gross profit is generated automatically. You will see a percentage next to the gross profit dollar number, which is your restaurant's gross profit margin.
Divide your gross profit by total sales to calculate your gross profit margin. Pay close attention to this measure over time and compare it to your historical data to have a better understanding of how food and beverage costs significantly influence your restaurant profit margins. Restaurants often analyze gross profit margin to determine where to set menu prices and portion sizes.
The income statement includes operating income. The final measure in the income statement template is generally the one you're most interested in- which is the bottom line, also known as net income or net earnings. Net profit/loss is an essential indicator for determining how well your restaurant performed during a specific time period. This value will be positive or negative depending on the performance of your restaurant's business.
You can calculate your net profit or loss by subtracting labor expenses and operational costs from your gross profit. To determine if your restaurant generate a profit, your income must clearly be more than your total costs.
If the figure is negative then it denotes that your restaurant's cost exceed its entire food and beverage sales. That might lead to problems if left unchecked over an extended length of time.
While calculating your restaurant's net profit or loss is essential, it is not a particularly actionable indicator for restaurant operators. This simply just highlights how the restaurant's bottom line has changed over time, but it doesn't always reveal how to improve.
If you want to cut costs and maximize profits, your restaurant's prime costs is the most useful indicator.
The total of a restaurant's food, beverage, and labor costs is known as the prime costs. Some restaurant operators would consider this their profitability cost benchmark figure on their profit and loss statement. Because the prime cost combines the two largest expenses categories, it is considered as an excellent indicator of whether a restaurant will be profitable in the following reporting period. The prime costs also reflects how management controls food and beverage items, and the labor cost on a daily basis during the reporting period. A successful restaurant should maintain its prime cost at or below 65 percent.
What is a restaurant profit and loss statement used for?
Restaurant profit and loss statements (or income statement) are monetary statement that displays your company's sales, costs, and expenses incurred for a specific time period. This financial statement for your restaurant allows you to examine your restaurant's financial health. You'll be able to identify where your restaurant is making or losing money, allowing you to take the necessary actions to enhance your bottom line.
Because a restaurant profit and loss statement is tailored to your specific needs, it is best to avoid using another restaurant's profit and loss statement as an example. Yours may be as simple or as complex as you desire. You may also split your operating expenditures into smaller categories, such as occupancy and marketing.
How often should I run a profit and loss statement in my restaurant?
Restaurant income statement can be implemented weekly, monthly, or annually. Weekly statements are recommended to keep track of what is most profitable or costly to your restaurant business operations for each week. This enables you to track sales and make adjustments fast, such as introducing strategies to reduce food and labor costs, that will ensure the financial viability of your business. Many restaurants also utilized restaurant profit and loss statements on a monthly and yearly basis to evaluate overall growth.
With accuracy and consistency, you may easily create an accurate profit and loss statement. Understanding your financial status enables you to forecast sales, identify the constraints of your restaurant, and ultimately improve your business.