Online Companion: Successful Restaurant Management, From Vision to Execution

Profit & Loss Statement

Figure 5-1

Profit and Loss Statement
The most commonly used financial statement a restaurant owner is concerned with is known as the profit and loss statement (P&L) or income statement, shown in Figure 5-1. The first part of the P&L shows the sales categories where revenue is generated, such as by sales of food, beer, wine, liquor, soft beverages, catering, retail sales, and any other forms of income that the owner would want to isolate for analysis. The second part of the P&L shows the expenses associated with generating the revenue, including inventories, rent, utilities, payroll, and other variable and fixed costs associated with operating the business. The difference between revenue and expenses produces either a pre-tax profit or a loss for the business.

The sale of food and beverages and possibly other items such as retail products generates revenue. The breakdown of these sales categories of the operation's P&L is determined by how much information an owner wants or needs for analysis. Soft beverage sales are often lumped into food sales by assigning soft beverage as a subcategory of food and then analyzing it as a part of food cost.

Cost of Sales or Cost of Goods Sold (COGS)
The cost of goods sold (COGS) is the restaurant's cost for the food and beverage inventories purchased to generate the sales. It is important to calculate the percentage of COGS as well as the dollars spent because it gives the owner or manager data to properly analyze these costs and locate potential problems or areas to improve. The percentage of COGS is calculated by dividing the cost by the sales generated in a specific category such as food, wine or beer. In the following example food cost is being calculated.

[(Beginning inventory ($Value) + Purchases)-Ending inventory ($ Value)]/Sales = % of cost
[($5,000+$3,000) - $4,000]/$11,500 = 34.78%
Food cost is 34.78%.

Gross Profit
The gross profit is calculated by subtracting the COGS from the revenue.

Expenses
Expenses associated with operating a restaurant are many. The P&L breaks these expenses into categories for easy analysis:

  1. Labor
    Labor includes direct management and hourly payroll expenses, but does not include associated costs such as benefits, FICA (otherwise known as social security, and instituted by the Federal Insurance Contribution Act), workers' compensation, unemployment insurance, and other insurances where applicable by law. These expenses will be entered as separate line items.
  2. Operational Expenses
    Operational expenses are the daily expenses incurred in operating a restaurant. They include items such as linen, paper products, china, silverware, glassware, and office and computer supplies.
  3. Occupancy
    Occupancy includes rent or mortgage, property taxes, water and sewer taxes, insurance, utilities, and repairs. These items are all included in occupancy costs, because in analyzing the viability of a site, an owner must consider all associated costs with that site. Although the rent might be reasonable, the combined expenses might put the site out of financial reach. Other expenses that might have to be calculated here are percentage rent and common area maintenance (very common in mall or strip mall settings).
  4. Indirect Expenses
    These expenses are usually associated with other expenses that have been incurred. These expenses include associated payroll expenses, employee benefits and credit card discount rates.1
  5. Management Labor and Bonus
    Management is normally paid by salary and adjusting the schedule to save labor costs on the bottom line. Control of this cost is determined annually, so it is separated from hourly labor. Some operations pay a bonus based on performance of the restaurant and possibly goals set by management.
  6. Loan and Lease Payments
    Loan and lease payments are made to banks or leasing companies. By understanding the P&L and balance sheets, an owner can make an informed decision about the amount of debt the restaurant can assume. Only the interest on the loans is tax deductible.

 

1Credit card companies make a portion of their income by the merchant paying a "user" fee for accepting a particular card. The fee paid by the merchant is known as the discount rate. It is a variable expense dependent on the types of cards used and the amount of sales that are paid by credit card.