The Restaurant P&L Explained

There are many aspects to restaurant management that present everyday challenges, but understanding the restaurant P&L makes the job a bit easier.  One of the most difficult management responsibilities is balancing the mandate of providing excellent guest service with the requirement of serving a quality product while maintaining bottom line profitability as measured by the P&L.  Even though those core objectives seem to be constantly tugging in opposite directions, a great restaurant manager can pull them together and operate a successful organization. 
 

On the financial side of the business, understanding the restaurant P&L, also called an Income Statement, and knowing what the numbers actually mean is absolutely critical.  Once the restaurant Income Statement is mastered, managing revenues, expenses and cost controls becomes second nature.  Then, when the financial management of the business is solidified, the management team can then focus on other critical elements of restaurant operations such as service and product quality.

If you are managing a corporate or chain restaurant, your financial reports are likely in-depth and detailed.  They might include projected P&L forecasts, sales log summaries, a balance sheet, an operational budget, tax burden reports, individual unit sales (vs. other location sales), a statement of cash flow, corporate performance reports (shareholder value), controllable costs reports, etc.  For smaller operations and independent operators, financial reports are a bit more simple and are basically broken down into three basic categories: Revenue, Expenses and bottom line profit.

So let's get to it. What is an Income Statement, why is it important and how does a manager read it?

The Income Statement tells the story of whether an organization made a profit or not. It has the following basic elements:

     * Revenue

     * Cost of Sales or Cost of Goods (COG)
     * Expenses
     * Profit or Loss

In simple terms, the P&L is calculated as:

Revenue - (COG + Expenses) = Profit or Loss

Don't be fooled into thinking that understanding the Income Statement is as simple as making sure the number at the bottom of the page (the profit or loss number) is a positive number indicating a profit was generated.  Understanding the details of the P&L will paint a picture as to what exactly is happening in the business and where financial improvements can be made.  And becoming familiar with the data trending within specific categories can alert the astute manager that some element of the business may be wrong such as over serving portions (both food and beverage), theft or data entry errors.

Let's examine this sample P&L from a Fictitious Fabio's Restaurant.

 

 

Income Statement

Fictitious Fabio's Restaraunt

Month ended January 31, 2099

Sales
Food	$      710,321		70.0%
Beverage	$      237,544		23.4%
Other	$        67,324		6.6%
Total Sales		$ 1,015,189	100.0%
Cost of Sales
Food	$      227,451		32.0%
Beverage	$        59,444		25.0%
Other	$          2,475		3.7%
Total Cost of Sales		$    289,370	28.5%
Gross Profit		$    725,819
Controllable Expenses
Salaries & Wages	$      315,946		31.1%
Employee Benefits	$        80,155		7.9%
Restaurant Supplies	$        14,355		1.4%
Repairs & Maint	$        11,345		1.1%
Advertising	$          4,342		0.4%
Other Expenses	$        16,242		1.6%
Total Controllable Expenses		$    442,385	43.6%
Income Before Occupancy & EBIDA		$    283,434
Other Expenses
Occupancy Costs	$        73,541		7.2%
Interest	$        37,641		3.7%
Depreciation	$        62,134		6.1%
Total Other Expenses		$    173,316	17.1%
Restaurant Net Profit		$    110,118	10.8%

In order to more easily understand the Income Statement, let's break it down and discuss each section individually.

Header:

For single unit operators, you'll only be interested in the date as the Income Statement could cover a one month period, a fiscal quarter or a full year.  Multi-unit managers and Food and Beverage executives will also need to note the restaurant name as there may be multiple outlets being reported.

Sales:

The first data category on any P&L will be sales.  This sample P&L for Fictitious Fabio reports sales for three categories; food, beverage and other.  If your operation sells T-shirts, hats, souvenir cups or any other non food and beverage merchandise, these sales are typically reported in their own separate categories.

One element of this P&L that I'm not crazy about (even though I created it) is that there is no detail within the sales categories by which a manager can easily see trends and trouble spots within the sales numbers.  For example, if Fictitious Fabio's served breakfast, lunch and dinner then it would be valuable to have those day parts reported as individual P&L elements within the sales category.  The same applies to the beverage data item.  It would be important to break the beverage sales down to non-alcoholic, beer, wine and liquor to effectively paint an accurate picture of where sales are coming from while revealing weak points in the operation.

Cost of Sales:

The Cost of Sales category shows how much money was spent to purchase goods that are to be re-sold.  These reported categories should match the product type breakdown as listed in the above Sales section.  This is important because, in food and beverage operations, it is critical to accurately calculate the cost of sales (sometimes called Cost of Goods) as a percentage of the sales of that particular category.  In Fictitious Fabio's example P&L we can see that the cost of sales for food was divided by the revenue generated from the sale of food only.  The same is true for the beverage and other categories as well. This allows the manager to spot sales trends as well as trouble spots such as over purchasing.

Gross Profit:

The Gross Profit is simply how much money was generated less the amount of money spent to purchase those goods that were sold.

Controllable Expenses:

These are operating expenses that are under the direct control of management.  These expenses must be watched closely on a daily basis to ensure profits are maximized and include items such as labor, supplies, repair costs, etc.

Income Before Occupancy & EBIDA (Earnings Before Interest Depreciation and Amortization):

This number is simply a statement of how much cash the business generated.  It is calculated before considering occupancy expenses and before any accounting rules for interest, depreciation or amortization are applied.

A simple example would be if your business only sold banana muffins and you only sold one muffin for the reporting period.  If you sold that muffin for $1 and your controllable expenses were $0.40 then your true cash generated (EBIDA) would be $0.60.

Other Expenses:

This category completes the expenses picture by adding in all other expenses that are not related to cash flow such as interest paid on loans, depreciation charges for owned equipment or amortization costs for purchased real estate.

Net Profit:

The bottom line subtracts all expenses from all revenues to answer the all important question of whether or not the business was profitable for that particular reporting period.

OK, that all sounds simple enough, right?  So why can't I just grab my P&L and just look at the bottom line to see if I made a profit or not?  Isn't that the ultimate goal?

Well, I'm glad you asked.  Yes, of course profitability is the goal, but understanding the Income Statement and how it tells the story of your everyday business operations is incredibly important.  Tying together the daily record keeping and the monthly P&L can tell stories that could mean the difference between operating at a loss or turning a profit.

Here's an example.

Fictitious Fabio reported a food cost of 32.5% on their Income Statement.  The manager notices this is a pretty high number since her food cost is normally in the 28% to 29% range on a consistent basis.  After doing some investigative work, she realizes that a case of filet mignon was ordered but not delivered since the vendor was out of stock that particular day.  Then the chef submitted second order the next day but somehow both charges found their way to the accounting department when only one order was actually delivered.  

 

Aha! Mystery solved, right?

Well, no because given that the overall food sales $710,321, one case of filet mignon wouldn't cause her food cost to jump by such a large margin.  Something else must be amiss.

Further investigating revealed that, although Fabio's doesn't normally host weddings, the town mayor had a huge wedding at the restaurant to the tune of $60,000 which was accidentally posted to the "Other" sales category.  Ahhhhh, that makes sense because a 6.6% COG for merchandise sales seems way too low.  Once that revenue was re-classified, the numbers started falling in line with the norms.

If the manager didn't understand each particular category of the Income Statement, she might not have realized errors were made which could have affected her bottom line P&L performance, especially if revenue wasn't recorded at all for a particular day, a shift or even a single event.

A tremendous amount of business intelligence can be ascertained by effectively managing the P&L and the data that makes up the P&L numbers.  A good manager will understand everything about the P&L and daily operations to be able to manage category sales, per person averages (PPA or also called guest average), server sales effectiveness, check averages, etc.

Was this P&L explanation helpful to you? Were you able to use this Hospitality Gem in your food and beverage operation?  I would love to hear how you got along with this Gem so please leave a comment below or feel free to contact me at davidknight825 @ yahoo.com with your comments, queries or feedback!