What is a restaurant P&L statement?
A restaurant profit and loss statement, also called a P&L or income statement, is a financial document that details a business’s total revenue and expenses over a specific time period. A restaurant P&L provides a snapshot of the most fundamental metric a business has: how much profit is being made, and from where.
The P&L statement is crucial for restaurant owners to maintain profitability by analyzing various expenditures and optimizing the final cost. It provides them with a clear understanding of the key metrics of their business, including:
Sales Revenue: This includes all the income earned from food and drink sales.
Food Costs: food costs are the total amount spent on ingredients, including those that spoil or get wasted. To calculate your food costs, you need to track your inventory, monitor waste, and price your menu items accordingly.
Labor Costs: labor costs include all wages paid to employees, including salaries, hourly wages, benefits, and taxes. You also need to factor in overtime pay, training costs, and the cost of employee turnover.
Rent and Utilities: rent and utilities will vary depending on your location and size of your restaurant. This includes your lease, electricity, water, gas, and internet. You should negotiate your rent and utility bills to keep costs low.
Marketing Costs: marketing costs are the expenses you incur to promote your restaurant, including advertising, digital marketing, public relations, and sponsorships. You need to set a budget for your marketing efforts and track your return on investment (ROI).
Equipment and Maintenance Costs: equipment and maintenance costs include the purchase and upkeep of kitchen equipment, HVAC systems, plumbing, and furniture. You need to prioritize preventive maintenance to avoid costly repairs and replacements.
By carefully monitoring these business statement costs, you can manage your gross profit and maintain a healthy bottom line. Remember, maximizing your profits requires a focus on controlling your expenses.
The profit and loss statement is crucial for evaluating the financial performance of your restaurant. By analyzing this statement, you can identify areas where you need to cut costs or increase revenue. For example, if your COGS is too high, you may need to adjust your menu prices or switch to cheaper ingredients. If your operating expenses are too high, you may need to negotiate better deals with suppliers or reduce staffing levels.
The profit and loss statement can also help you make informed decisions about investments in your restaurant. For example, if your net income is positive, you may decide to use the extra funds to expand your business or invest in new equipment. On the other hand, if your net income is negative, you may need to take steps to improve profitability before making any significant investments.
How to Prepare a Restaurant P&L Statement?
Preparing a P&L statement for your restaurant can be done either manually or through management software. While manual preparation may be time-consuming, it provides better insights into individual accounts and allows for more detailed analysis.
The following are the steps to prepare a restaurant P&L statement:
- Record all sales and revenue earned over the reporting period, including discounts and refunds;
- Calculate food cost (the total COGS) by adding up the cost of all ingredients used in menu items sold;
- Record labor cost;
- Calculate prime cost by adding food cost and labor cost together;
- Calculate the gross profit margin by subtracting prime cost from total revenue.
- Record all operating expenses, including rent, utilities, marketing, and payroll.
- Subtract operating expenses from the gross profit to determine the net income or loss.
Understanding the Restaurant P&L Statement
Restaurant Revenue
The backbone of your daily sales report should be your sales data. This includes the total amount of sales for the day, broken down by categories such as food, beverages, and merchandise. You should also include the number of transactions, average transaction value, and any discounts or promotions that were applied.
Cost of Goods Sold (COGS)
Cost of goods sold, or COGS, is a crucial metric that every restaurant owner must understand. It refers to the total cost of all the ingredients and materials used in creating your menu items. This includes everything from the food itself to the packaging it comes in.
Why is understanding COGS important? Simply put, it has a direct impact on your restaurant’s profitability. If you don’t know how much it costs to produce each dish, you won’t be able to accurately price your menu items. This can leave you with either too little profit margin or prices that are too high for customers to be willing to pay.
To calculate COGS for your restaurant, you’ll need to keep track of all your inventory and ingredient costs. Here’s a simple formula:
- Beginning Inventory + Purchases – Ending Inventory = Total Cost of Goods Sold
Here’s an example: Let’s say you have $10,000 worth of inventory at the beginning of the month. You purchase $5,000 worth of additional inventory during the month. At the end of the month, you have $7,000 worth of inventory left. Your COGS would be:
- $10,000 + $5,000 – $7,000 = $8,000
This means that your total cost of producing your menu items for the month was $8,000. You can use this figure to determine your profit margin on each item and adjust your pricing as needed.
Restaurant Labor Costs
Restaurant owners and managers must track their labor costs closely to ensure that they do not exceed their budget. This means regularly monitoring employee hours, calculating payroll taxes, and factoring in overtime pay. By tracking these metrics, restaurant owners can identify areas where they may be overspending and adjust their staffing levels accordingly.
While keeping labor costs low is important, it is equally crucial to maintain excellent customer service. Staffing levels must be sufficient to provide prompt and efficient service, ensuring customers have an enjoyable dining experience. It is essential to find a balance between staffing levels and cost savings to maximize profits while retaining satisfied customers.
There are several ways that restaurants can reduce labor costs without compromising service quality. These include:
- Employing automation to streamline tasks such as order taking and payment processing
- Cross-training staff to perform multiple roles, allowing for more efficient scheduling
- Offering flexible scheduling options to reduce overtime costs
To calculate your restaurant’s labor cost actuals, you’ll need to add up all the wages and benefits paid to employees during a given period. This figure should include all hourly wages, salaried employee salaries, overtime pay, bonuses, and benefits such as health insurance and retirement plans. Payroll taxes, such as social security and unemployment insurance, should also be included.
Once you’ve calculated your total labor costs, you can divide that figure by your total revenue for the same period to determine your labor cost percentage. Ideally, your labor cost percentage should be around 30% of your total revenue. If it’s significantly higher than that, it may be time to make changes to your staffing or operations in order to increase efficiency and reduce costs.
Prime Costs and Controllable Expenses in Restaurant
Prime costs refer to the direct costs that go into producing the food and drinks served by a restaurant. This includes the cost of ingredients, labor, and other expenses directly related to preparing and serving meals. Essentially, prime costs are the expenses that are essential to keep the business running.
Calculating prime costs requires adding up the cost of all goods sold (COGS), including the cost of raw materials, beverages, and other supplies required to prepare dishes. The labor cost component includes not just wages but also payroll taxes, benefits, and overtime pay.
Controllable expenses include all the indirect costs associated with running the restaurant business. These expenses are considered variable because they can be controlled or managed by the owner or manager. Controllable expenses include things like rent, utilities, advertising, and insurance. These expenses can vary from month to month and can be influenced by factors such as demand for the restaurant, seasonality, and competition.
Managing controllable expenses is essential to ensure profitability because these costs can quickly add up and eat into profits if left unchecked. Owners and managers need to regularly review their controllable expenses and look for ways to minimize them.
Using Prime Costs and Controllable Expenses to Optimize Profits
Understanding prime costs and controllable expenses is crucial to maximizing restaurant profits. By tracking these costs and making strategic adjustments where necessary, owners and managers can optimize profitability. For example, if prime costs are too high, they may need to adjust menu prices or negotiate better deals with suppliers.
Similarly, if controllable expenses are too high, they may need to look for ways to reduce overhead costs or improve operational efficiency. This could involve finding more cost-effective suppliers, renegotiating leases, or implementing energy-efficient solutions to reduce utility bills.
Gross Profit for Restaurant Businesses
Gross profit is the amount of revenue left over after deducting the cost of goods sold (COGS). COGS represents the direct costs associated with producing a dish or meal, such as ingredients and labor costs. Gross profit does not include indirect costs such as rent, utilities, and marketing expenses.
Gross profit is a critical metric because it gives you an idea of how much money you are making on each dish or menu item. A high gross profit means that you are charging enough for your dishes to cover your costs and still make a profit. On the other hand, a low gross profit indicates that you may need to adjust your prices or find ways to reduce your costs.
How Often Should You Update Your Restaurant P&L Statement?
How often do you need to update your restaurant P&L statement? The answer depends on various factors, such as the size of your restaurant, the complexity of your operations, and the frequency of your transactions. Here are some guidelines to help you determine how often you should update your restaurant P&L statement:
Monthly Updates: If you own a small restaurant with simple operations, updating your P&L statement monthly would suffice. By doing so, you can track your income and expenses accurately and make adjustments if required. Monthly updates allow you to see trends in your revenue and expenses, which help you forecast future profits.
Weekly Updates: If your restaurant has a higher volume of transactions, you may want to update your P&L statement weekly. Doing so will enable you to identify any discrepancies or errors quickly. Weekly updates also help you react promptly to unexpected events, such as an increase in food costs or a drop in sales.
Daily Updates: For large restaurants with complex operations and high transaction volumes, daily updates to your P&L statement are essential. Daily updates allow you to keep track of your cash flow and identify any issues that may arise. Monitoring your revenue and expenses daily will help you stay on top of your finances and make informed decisions about your business. In conclusion, how often you should update your restaurant P&L statement depends on the size and complexity of your business. While monthly updates may suffice for small restaurants, weekly or daily updates may be necessary for larger ones. Regularly updating your P&L statement will help you stay in control of your finances, make informed decisions, and ultimately ensure the long-term success of your restaurant business.
Conclusion
A restaurant P&L statement is a critical financial document that helps restaurant owners understand their business’s profitability. It summarizes key metrics such as revenue, costs, and expenses, allowing them to make informed decisions regarding pricing strategies, menu offerings, and operational costs. Analysis of the data in the profit and loss report, identification of areas for improvement is part of the financial analysis of the restaurant. By regularly analyzing their P&L statements, restaurant owners can ensure they are maintaining profitability and making informed data-driven decisions.