How to Read Restaurant Profit & Loss Statements?

A restaurant profit and loss statement, popularly known as a P&L income statement, is a financial document that keeps a tab on the restaurant’s total revenue and expenses over some time. Since it contains financial details, reading a restaurant’s profit and loss statements is a complicated task, especially for those who have zero to little knowledge of reading, understanding, and analyzing P&L statements.

Inflation is hitting every industry, especially the hospitality industry. In September 2023, food and drink inflation was about the highest of all categories, at 12.2%, in the UK, according to the Office of National Statistics report. This has caused a significant rise in the operational costs for the restaurants that were surviving on tight profit margins.

This is why every restaurant manager should know how to read a profit and loss statement to monitor the business’ financial health. The statement will help you take control of your financial well-being, from getting your sales reporting right to keeping your expenses in line. 

Are you unaware of how to read your restaurant’s P&L statement? Then, this blog has got you covered, as we will cover about profit statement in detail.

How to Create a P&L Statement? 

Before we understand how to read a P&L statement, we must understand its key elements and how to create one. There are four crucial elements of a P&L statement: sales, prime costs, operating expenses, and net profit. Understanding these elements is important because some knowledge about them will be required to decipher the statement effectively. 

• Sales 

This represents the total amount you made by the sale of food and beverages at your establishment. 

• Prime Cost 

The prime costs represent the two major expenses: food and labor. They represent how well the managers are optimizing inventory and labor. 

• Operating Expenses 

Operating expenses cover all the costs associated with running your restaurant except the prime costs (labor and food costs). Most of the operating expenses are fixed costs, which are costs that are bound to happen regardless of the sale you make, like Internet, electricity, rent, and others. 

• Net Profit 

Net profit is the amount left after subtracting the prime costs and operating expenses from the overall sales. This tells whether your restaurant is running in profit or loss. 

Once you have understood these terms, we can discuss how to create a P&L statement using accounting software. Creating a P&L statement using accounting software is simple. All you need to do is select a timeframe (weekly, monthly, quarterly, or annually) and then input the data, like sales, which can be automatically uploaded from your point-of-sale (POS) system. 

Ensure that the accounting software can easily be integrated with other business softwares, like POS, so you do not have to update the data manually.

Here’s what should be in your P&L statement: 

• Mentioning the Sales 

The sales section highlights the revenue generated by your business operations. You can choose to keep sales tracking relatively simple or track them category-wise, like food, alcohol, eat-in vs. driveaway, and others. This entire process can be automated if the POS system offers tracking and reporting and if it is integrated with the accounting software. 

• Tracking Cost of Goods Sold (COGS)

Now, you will have to enter the cost of goods sold, which represents the cost of inventory used to create the sold menu items during a particular time period. Standardized food and drink recipes are essential so you can easily calculate the cost of cooking a dish. For instance, the COGS value will be $100 if you sell 20 salads, and the cost to make a salad is $5. 

• Accounting the Labor Costs 

After mentioning the COGS, it is time to consider the labor costs, both full-time and part-time. Ensure that your accounting software can be integrated with workforce management, as it keeps tabs on time and attendance management and employee leaves. All the data will be updated directly in the accounting software if it is integrated with workforce management software.

• Adding the Fixed Costs

Now, you will have to mention the fixed operating costs, which include supplies, insurance, repairs, advertising, and occupancy expenses like rent, real estate taxes, and utilities. You can also include depreciation if you own the establishment or expensive kitchen equipment. 

How to Read the P&L Statement? 

The final step is to read and analyze the created P&L statement. While reading the P&L statement, the focus will remain on the four important aspects, which are the percentage of sales, gross profit and gross profit sales, net profit/loss, and prime costs. Here’s how you can understand what each of these aspects should ideally represent. 

• Percentage of Sales 

This will represent how much of your profits are consumed by each of category of expenses, like food and labor. For instance, the average food cost should be between 28% to 35%; however, it depends upon the type of food you serve. When you see that the particular cost percentage is increasing, then it is a warning sign that you need to address to lower the percentage. 

• Gross Profit And Gross Profit Margin

Gross profit is left after subtracting the COGS from total sales, and gross profit margin represents the percentage. This will help you analyze how food and beverage costs are affecting the profit margins, and you can accordingly set menu prices that account for things like inflation. 

• Net Profit/Loss 

Net Profit/Loss takes into consideration all sales and expenses. It is simple to understand this value, as your business is in profit if the value is positive, and your business needs to do something if the value is negative. 

• Prime Costs 

Prime costs are the sum of COGS and labor expenses. Unlike fixed costs, prime costs can be controlled by managers and owners after analyzing the trends in P&L statements. Monitoring the prime costs will help you reduce expenses and increase profits. 

Key Elements of Restaurant P&L Statement

There are different components of a restaurant P&L statement, and here’s how you can calculate them. Usually, with the help of accounting software and POS system, you do not have to worry much about the calculation. However, the main focus will not inputting the correct values. This can be simplified as well, if the accounting software can be integrated with other business softwares. This can be simplified as well, especially if the accounting software is integrated with other business systems like Restaurant Management Software, which streamlines operations and financial tracking.

Nonetheless, here are some of the components that you can calculate to create a P&L statement. 

1. Revenue

Sales or revenue indicate a restaurant’s top-line future, representing the income generated from selling food and beverages. They also help understand whether the restaurant’s other incoming activities, like catering or merchandise, are working out as expected.

Formula: Sum of total sales of each product and income source

Example: The restaurant’s monthly revenue is $120,000 if the restaurant earned $80,000 from food sales, $30,000 from beverage sales, and $10,000 from other income streams 

$80,000+$30,000+$10,000 = $120,000

2. Cost of Goods Sold (COGS)

COGS includes the direct costs of producing the food and beverage sold. It provides the total cost of food, beverages, and supplies. This section will provide insights into inventory management and expenses directly tied to the production process. 

Formula: Initial Inventory Cost + Purchases – Ending Inventory

Example = The COGS for a restaurant is $34,000 if the initial inventory $5,000, the purchase made was $35,000, and the ending inventory was $6,000. 

$5,000+$35,000-$6,000 = $34,000

3. Gross Profit

Gross profit for your restaurant’s P&L statement can be calculated by subtracting the total expense from revenue. It represents the profit after deducting COGS from total sales. It is the preliminary profit indicator.

Formula: Total Revenue − Calculated COGS 

Example: The gross profit of a restaurant comes to be $86,000 if the monthly revenue was $120,000 and the CGOS was $34,000. 

$120,000 – $34,000 = $86,000

4. Gross Profit Margin

After Gross Profit comes Gross Profit Margin, which indicates how the sales are efficiently converted into profits in percentage. The ideal benchmark for gross profit margin for restaurants is 70%.

Formula: (Gross Profit/Total Revenue)x100

Example: The gross profit margin of the month would be 71.67% if we divide $86,000 by $12,000 and then multiply the answer (0.7166..) by 100. 

($86,000/$12,000)x100 = 71.6% 

5. Prime Cost

Prime cost is basically the total of COGS and labor costs, and indicates the operational efficiency. The prime cost should be lower than 60% and no more than 65% of the sales. 

Formula: Total sum of food costs + beverage costs + labor costs 

Example: The prime cost turns out to be $55,000 if the food costs are $20,000, beverage cost is $10,000, and labor cost is $25,000. 

$20,000+$10,000+$5,000 = $55,000 

6. Operating Expenses

The operating expenses portion includes various costs incurred to run your restaurant. These include labor costs (salaries, wages, benefits), rent and utilities, marketing and advertising, maintenance and repair, and depreciation, along with other miscellaneous expenses. These directly impact the profit.

Formula: Total sum of the expenses for a specific period, let’s say, for a month. 

Example: The operating expenses for a month would be $50,000 if labor costs were $25,000, rent was $10,000, utilities costs around $5,000, marketing expenses were $5,000, and insurance expense was $5,000. 

$25,000+$10,000+$5,000+$5,000+$5,000 = $50,000

7. Net Profit (or Loss)

The net profit or net loss is the final figure in P&L statements, obtained by deducting all expenses from the revenue generated. It reveals the company’s overall profitability or loss. Besides, it helps to assess the restaurant’s sustainability and ability to reinvest in the future. 

Formula: Total Revenue – (COGS+Operating Costs)

Example: The net profit would be $36,000 if we add the COGS ($34,000)and operating costs ($50,000), and subtract the total ($84,000) from total revenue ($120,000). 

$120,000 – ($34,000+$50,000) = $36,000 (Profit) 

Best Practices for Maintaining Accurate P&L Statements

Maintaining accurate P&L statements is crucial for a healthy financial management system for your restaurant. Here are some best practices to implement to achieve the goal.

• Reconcile accounts regularly: Ensure regular updates and reviews of your accounts, including bank statements, credit cards, and vendor statements. This will help you identify any discrepancies or errors and rectify them promptly. 
• Keep detailed and organized records: Maintained well-organized; comprehensive records are vital for accurate accounting.  Ensure to properly categorize and store all financial documents including invoices, receipts, and bank statements. It will make it simple for you to track and verify every transaction.
• Utilise accounting software: Make use of reliable accounting software to streamline the record-keeping process and reduce human error. These tools will automate calculations, track transactions, and produce accurate financial reports.
• Invest in training and development: It is also important to invest in training and development programs for employees to ensure that they possess the necessary knowledge and skills to execute their duties accurately and efficiently. 

Wrapping up,

Understanding your restaurant’s P&L statement is essential to know where the income is coming from and where the money is going. It is where your hard work manifests into numbers that determine the health of your business. 

Ensure to regularly view and understand the components of your P&L statement, and choose a best timeframe to make informed decisions. Armed with the right knowledge and the tools, you can readily take on the changes in your restaurant finances and set your business towards streamlined operations and improved profitability. For additional strategies on how to enhance your restaurant’s efficiency, visit this guide on improving restaurant operations management.