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!
