Restaurant Profit and Loss Statements: Understanding and Creating Them

 

A restaurant profit and loss statement, also referred to as a restaurant P&L, shows your business’ costs and revenue during a specified period of time.  In other words, your P&L functions as a bank statement for your hospitality organization to monitor your company’s financial health.  Calculating the profitability of most food service establishments comes down to basic fundamental business components: increasing sales or margins (revenue) and reducing costs or expenses.  Statistics show that 50% of new restaurants go out of business by year 5 because they fail to make a profit.  

A restaurant P&L statement is a pretty common financial reporting method for determining your restaurant’s profitability; where this might get a little confusing is knowing what to actually include in your restaurant’s P&L statement.  This restaurant P&L guide will walk you through the essential steps for creating a restaurant P&L report.  So, whether you chose to have a restaurant CPA generate your P&L or you use an accounting software to create it yourself, you will have a better understanding of reading and reviewing one.         

The difference between well managed NYC restaurants and not so well managed restaurants is the level of attention they pay to the numbers. – Scott Aber of Aber CPA   

Frequency of Reporting

Restaurant specific P&L report statements can be produced on a weekly, monthly or yearly basis.  For a busy or growing restaurant, we recommend doing a P&L every week, so that you have a real time snapshot of what is most costly (or profitable) to your restaurant’s operations. This way, if you need to make any adjustments, you will be able to pivot more quickly.  Most restaurants also have their accounting firm prepare monthly and yearly P&L statements to demonstrate overall progress.   

What Information Should You Include?

A restaurant specific P&L statement will usually consist of three main components:

  1. Section 1 of the P&L will include a breakdown of your sales and revenue.    
  2. The next section will list all your cost of goods sold (COGS).
  3. The last section will include operating expenses, such as the cost of restaurant insurance and occupancy expenditures.   

Another thing to mention is that the restaurant labor cost is usually listed as a separate expense between COGS and operating expenses.  To figure out where your largest profits or losses have occured, get more granular and break down your revenue and costs into smaller, more specific sections.     

Also, every business is different, so you can customize your P&L to your company’s needs; you don’t have to take a generic restaurant profit and loss example statement as the testament to follow.  You can make your statement as simple or elaborate as you want, but remember it will be more helpful to understand your accounts if you provide details of the costs and gains most relevant to your establishment.      

Revenue

Revenue is the profits you earn from selling items and goods to your customers.  Most restaurants will make their highest profits from their sales of food and beverages, but some chains will have other forms of revenue.  Make sure you list each form of income separately on your Profit and Loss statement.   

Food and Beverage Sales

In this category, you can break line items down into smaller subset sections under food, beer, wine and coffee.  Depending on what kind of food saleshospitality business you have, one section may be more profitable than others for you.  If you run a boutique coffee shop in Brooklyn, your coffee sales will likely be higher than selling food items.  If you are a high end steak house, you may generate more profits from food dishes than you do from selling wine.    

Other Business Ventures

  • Merchandise Sales– this could include any items that are sold or function as promotions for your restaurant.  Merchandise could include gift cards, t-shirts, mugs or hats.  The chain Hooters does a lot of merchandising, sales and promotion.  
  • Catering –  this is a great way to reach out to a new neighborhood and introduce people to your cuisine.  This could include doing high end special events or private parties, and it could include selling snacks for a fundraiser or local school event.  If your restaurant does any catering, make certain to list it as separate income item, on your P&L statement.   

Costs

Your restaurant’s costs should include any type of expense, such as inventory purchases, insurance costs and employee paychecks.  The three main expenditures you will encounter as a manager include cost of goods sold, restaurant labor cost and restaurant operating expenses which is usually listed as separate line items on the P&L statement.

Cost of Goods Sold

The cost of goods sold (COGS)  metric, or sometimes referred to as cost of usage, records the amount of money you spend on food ingredients and beverages that you supply to your customers.  If your restaurant has merchandise or a catering division, you should put those in COGS also.  To understand how the COGS works, you must calculate how much you end up spending on inventory to fulfil your sales transactions to your patrons.  Also, menu pricing is an important aspect to understand, especially if you are competing with many other similar food establishments.  Some restaurants use a tactic, called the portion control method, to decrease the amount of inventory they use each week by small amounts, which helps them to keep more in stock for the next week and thus lowering their COGS.

Restaurant Labor Costs

The wages and salaries of all your staff, from your head chef to your waiters, will determine your labor costs.   This can include payroll taxes,labor worker’s compensation and group insurance benefits.  The most important element to balance, that will help control your labor cost, is to figure out exactly how many employees you need each week in order to provide effective service without over scheduling.  Depending on how busy you are, every restaurant needs a chef, some servers and hostess.  This category, offers significant cost containment opportunities.  Labor costs can be improved with knowledge of a required resource allocation to demand, over-time prevention and continuous improvements in productivity – employee, or physical components of the business, e.g., labor saving equipment, optimized floor plans, etc. A smart restaurateur will figure out how to have some control over the amount spent on labor expenses, making a determination on which employees are an absolutely necessity to have on the payroll full time.  

Restaurant Operating Expenses

Operating expenses will include costs on everything from tablecloths to rent.  Now, depending on what type of hospitality business you have, your expenses and vary immensely.  Below is a chart listed with some of the most common restaurant expenses you should account for, but some of these may or may not be the most relevant to your type of eatery or bar.   

Occupancy Expenses

These costs or expenses include the nuts and bolts of running your business, which includes property taxes, utilities, interest, depreciation, rent and waste removal. Keep in mind to carefully review your leasing agreement, because some expenses may vary where others like the waste removal may be a fixed cost.  Another thing to be on the lookout for is possible unforeseen expenses like equipment, or even building, repairs that are a necessity to the safety and success of the business.  

Restaurant Insurance Cost

Insurance is a must have element when running a business which can cost thousands of dollars a year, based on the extent of the risk coverage you want.  Your restaurant’s insurance costs may include coverage for worker’s comp, business crimes, general liabilities, loss of income, equipment breakdown or even property damage.  It is recommended you shop around from a few vendors to see all your options.  

Controllable Expenses

You can think of miscellaneous costs as any daily expense that is necessary to your restaurant’s business such as the restocking of linen uniforms, cleaning supplies, napkins, paper cups, replacing glassware etc.  You also can also include advertising here.
Some expenses will obviously vary depending on the type of establishment you run. As an example, when comparing a 5-star Manhattan restaurant to a fast food chain, the 5-star restaurant will invest in more fancy chinaware and the fast food chain will purchase more disposable cups.  

Prime Cost

The prime cost is the sum of a restaurant’s food, beverage and labor costs.  Some restaurant owners will consider this their profitability costbenchmark number on their P&L statement.  Because the prime cost bundles the two largest cost categories, it represents a key indicator into whether the company will be profitable in the next reporting period.  Prime cost is also a direct reflection as to how management is controlling food, beverage and labor costs on a daily basis throughout the reporting period. A successful restaurant will keep its prime cost at 65% or lower.     

Net Profit / Loss

At the bottom, of the P&L statement, you must list your net profit or loss based on your costs and revenue. You calculate your net profit or loss by subtracting both the labor costs and the operating costs from your gross profit.  Your revenue obviously needs to be higher than all your combined costs for you to generate a profit.  Here is an example of what a restaurant P&L statement may look like:   

restaurant profit and loss statementRemember, your profit and loss statement should include only what is most relevant to your particular culinary business.  Bookkeeping Chef’s software, platform makes it easy to create and read accurate P&L statements so that you can understand your financial’s and grow your business.  Remember that successful businesses use and rely on data to make decisions.   By regularly creating income statements and tracking your prime cost overtime, you will start to recognize trends and areas that need more attention so you can make the appropriate adjustments.    

Learn how our customizable financial reporting software can help turn your restaurant into a profitable business.    

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