Most restaurant owners go into business because they love restaurants. This means food prep, menu creation, and good service. Math and accounting skills never seem to be a factor, but they are important when understanding the health of the business. The most basic document that provides a picture of the restaurants health is the P&L Statement. So - let’s break it down and find out what’s really in a P&L.
What is a P&L?
Your P&L (Profit and Loss Statement or Income Statement) is an assessment of how your business is doing financially. It shows a picture of how money comes in and goes out showing what is really left as profit. Your P&L will help you understand the health of the business so that you can make solid decisions.
What’s in It?
Sales/Revenue – The first section of a P&L always shows the money earned. This may be called revenue, income, or sales. It includes all monies that comes into the business. In the restaurant industry this may include dine in, carry out, catering, and merchandise revenue. The revenue should be broken into categories that make sense for your business. More detail will help you do more thorough analysis.
Other Income should be included in revenue. This includes any other revenue that may not be directly related to your day to day operations. Examples would be a sale of used equipment or a tax refund.
Expenses – The second section of your P&L is dedicated to money out. This includes anything that the company spends money on. For the best visibility it is divided into sections.
1. COGS – Cost of Goods Sold (COGS) is money spent on inventory for your restaurants. These are the direct costs of supplying product to your customers. Again, this should be broken into categories so that you can understand how the cost of major products affects your profit. Some restaurants will be comfortable with food, beverage, etc, but if you are a steakhouse then it may make sense to give beef its own category.
Calculation: Gross Profit = Revenue – COGS
2. Operating Expenses (OP EX) – These are the business expenses that are not directly related to inventory. This section should include rent, utilities, restaurant insurance, marketing, etc. These items are sometimes referred to as SG&A (Selling, General and Administrative costs).
3. Labor Costs – Technically labor is an operating expense, but in the restaurant industry labor is such a big factor that many companies make it a separate expense category. This gives you a bit more visibility on what factors impact changes in your expense patterns.
4. Depreciation – When you make large purchases for your company (equipment, vehicles, etc.) it can throw your P&L for a loop. These large chunks of cash spent at once can look bad for investors. With depreciation, you estimate the life of the equipment and spread the cost out over that time, since you expect to benefit from the purchase for multiple years. For example, if your restaurant had $40,000 profit last year, but you bought a $30,000 catering van, then your P&L would show only $10,000 profit. Instead, if you estimate the lifespan of the van to be 5 years, you could spread out the expense among that time (30,000/5 = 6,000). You would record a $6,000 expense each year and have a healthier profit of $34,000 that first year. Obviously, the actual cash was paid in year one, so the bank account and the profits are not in alignment. That’s ok, that’s what your balance sheet and cash flow statement is for.
5. Taxes – This is where one accounts for your state and federal taxes. Taxes are a part of doing business, but they don’t help much with your business analysis. It’s important to include them before your bottom line so that you can see if your company is really making money. However, for analyzing the performance and comparing sales and expenses, many business owners like to break out the actual cash in/out as EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization).
Calculation: EBITDA = Revenue – (COGS+OPEX+Labor) or Gross Profit – (OPEX+Labor)
Net Income – Net income is the last entry on the P&L and is literally the bottom line. This is the amount of money your business has left over after everything is accounted for. If you have a positive number, you are in the black, and that’s a good thing. Your business is making money. Keep it up. If you have a negative number, you are in the red. That means that your business has not made money this period. Time to do a little homework and see if you can find out why.
What Can I Do to Improve Net Income? – A little bit of analysis on your P&L can give you great insight into improving your numbers. Look at the different categories and see how they have changed over time and in relation to one another. Have your COGS gone up? Sales declined? Operating expenses jumped? Maybe you bought a second location and expanded too soon, maybe it’s time to look at renegotiating with your vendors or moving locations. Or maybe it’s time to adjust the menu. If items are selling seasonally but stocked year-round you could be losing a lot to inventory waste. Looking at your P&L should give you the answers you need.
To find out how Data Central by Restaurant Magic can help you manage your P&L and other reports, please call us at (813) 288-2633 (toll free – 1(800) 933-4711) or visit our website at restaurantmagic.com.