As a current or aspiring restaurant owner, you’ll want to make close friends with your profit and loss (P&L) statement. This indispensable tool provides a quick overview to how well your business is performing at any given moment.
But while you may be loosely familiar with the concept of restaurant P&L, it pays to dive deep—and understand the nitty-gritty details of how it works, what it measures, and ways you can leverage it to make sure you’re hitting your financial targets—and maximizing every opportunity to grow.
That said, here are a few essential elements mastering your restaurant’s P&L:
- Learn how to read a restaurant P&L.
A P&L statement (or just “P&L”) measures two things: costs and revenues.For example, your P&L is a restaurant balance sheet that enables you to quickly quantify expenses like rent, wages, supplies, and ingredients. Since there are many moving parts in running an establishment, your restaurant P&L reveals a snapshot of your financials at a glance — and enables you to quickly take stock.
- Understand restaurant P&L. Your costs can usually be divided into three categories: cost of goods sold (COGS), labor costs, and operating costs. Before you can make changes that cut spending and save you money, it can be helpful to analyze costs category-by-category. Experts recommend, for instance, that food costs fall between 30-35%, and this expense would fall under your first category: cost of goods sold. Thinking about restaurant P&L in this way can help you stay organized.
- Check in regularly. It’s helpful to analyze profits and losses within a specific timeframe. Whether you’re running your restaurant P&L at end-of-month or with weekly or daily reconciliations, having a routine review time will give you a predictable framework for gauging the ways that your spending and earning fluctuate over the year, e.g. with seasonal ebb and flow. That said, the more closely you measure and assess your financials, the easier it’ll be to gauge trends, leading to new insights—and potentially new opportunities.
- See the big picture—by capturing the small details. It’s tough to track every individual cost that your restaurant incurs. But try to get as close to the mark as possible—so your restaurant income statement is of the highest possible fidelity. To make it easier, keep a list as you shop the wholesale markets — and then hand that over to bookkeeping to tally up. You might track habitual purchases and tally their sub-totals as a unit. Finally, leverage systems and software to gain reporting metrics.
We’ve covered the first step in getting the most out of your P&L—running your statement. Next up is learning how to read restaurant P&L. If you’re keeping frequent records of your revenue, you may start to notice interesting trends that influence your spending and revenue. But how can you extract insights from them in a way that allows you to replicate your successes?
Take note of patterns. Start taking your restaurant’s financial temperature. When do your profits dip? When is your revenue strongest? Which weeks and months are most profitable for you — and which hurt your bottom line? A P&L can help you identify these recurring trends so you can account for them in the future.
- Benchmark. Every restaurant is different, but it’s still worth comparing your P&L breakdown to restaurants in your category. Do your labor costs fit into the norm for dine-in restaurants, for example, or are they higher? Questions like these can help to determine whether or not you may be overspending in some areas, which can nudge you to adjust your budget when necessary.
- Respond to what you find. All of the data that you collect means very little if you don’t create an actionable plan. Once you’ve gained insight into your operational strengths and weaknesses, compile more actionable plans to optimize things. If you notice that a certain time of the year is slow, staff your restaurant accordingly. Once you know your trends, you have the ability to respond to them.
Once you’ve run your statement, double-checked the math, and drawn inferences from the trends, it’s time to use your P&L statement to gauge your restaurant’s overall financial standing — and strategize new ways to bolster it in the future.
Here are some simple — but powerful — questions that every restaurant owner should ask themselves while monitoring P&L:
- Did we stick to our budget? If you created a budget at the beginning of the year, take a look at it in comparison to what you find in your P&L statement. Markets evolve and circumstances change, but getting crystal clear on where you followed your budget — and where you deviated from it — can help ensure that your next budget is even stronger — and more realistic.
- Were we profitable? Most restaurants will begin turning a profit within three to five years — meaning it’s normal to go through an initial period of time where you aren’t profitable. Every restaurant needs to spend money to make money. In the meantime, make sure you’re checking in on your own profitability regularly.
- How do our accomplishments compare to last year? Think about how your profitability varies over time. This year, were you more or less profitable than in previous years? If there’s a sizable shift, what explanations come to mind? If you’re a new restaurant, you can use smaller increments of time to measure and monitor trends in your profitability.
Once you answer the big questions, you can zoom in on the smaller, more specific details that might be impacting what your P&L statement reveals. Did you make significant changes in your operations and see corresponding changes in your P&L? Take note! Here are some examples of operational changes that you can think about with respect to profitability:
- Shifting hours of operation. Perhaps you opened your doors for a weekday breakfast and saw your sales skyrocket, or realized that business is slow in the evenings, so you stopped serving dinner. Your P&L statement can be an awesome tool when analyzing how these types of adjustments impact (or don’t impact) your profitability. Because your hours of operation impact every category of spending — from labor to goods sold to operations — this is a crucial thing to be aware of.
- Moving around the menu. If nobody orders the expensive steak, you’ll eventually want to take it off the menu. But if everyone is ordering it, and hungry for more, you can promote it and add other dishes like it. Over time, your menu is bound to change. By looking closely at your P&L statement with menu items in mind, you can see how your profitability might be changing with it.
Understanding restaurant P&L is an essential part of mastering your restaurant’s financial plan. For a starter P&L template with more insights on how to interpret your findings, download our eBook: Financing Your Restaurant and Projecting Profits.
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