Restaurant P&L: A guide to restaurant profit and loss statements

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Restaurant profit and loss statements, also known as income statements or abbreviated to P&L statements, are the North Star for any business to monitor and showcase its financial health. Profit and loss statements organize a company’s total income compared to its costs, split up into different line items. Ultimately, they show how much net profit was made over a specific time period, often known as a fiscal year.

Small businesses and Fortune 500 companies alike use income statements, and P&L statements are one of the most important methods of understanding a restaurant’s financial health.

Preparing financial statements can be daunting, especially for a small business owner already strapped for time. Also, we know that many people didn’t get in the business for their love of restaurant accounting or the joys of managing payroll taxes.

However, this aspect of the restaurant business is unavoidable, and the better you get at it, the more successful your restaurant will be. Understanding the difference between P&L statements, balance sheets, and cash flow statements adds a layer of complexity to restaurant management.

When you dive in, however, chances are you’ll find the process isn’t as complex as you think. Knowing the defining factors and core components of a restaurant P&L statement will have you well on your way to effectively understanding your bottom line.

Restaurant profit and loss statement vs. balance sheet

First, it’s important to note the difference between an income statement/P&L statement and a balance sheet. Each are core financial reporting tools, and they even hold some of the same information but serve very different purposes for business owners.

Balance sheets summarize a company’s assets and liabilities. The company owns assets, such as accounts receivable (money owed), while liabilities are what the company owes, such as accounts payable (money you owe to others). Below liabilities on a balance sheet is shareholder equity, which is the value of the business after all liabilities have been deducted. Balance sheets are aptly named since a company’s assets must equal or balance out its liabilities plus equity.

Balance sheets report a company’s assets and liabilities up to a specific date, often the end of the fiscal year. Conversely, an income statement summarizes that company’s sales, costs and net income over a particular period of time, often a full year.

Restaurant P&L statement vs. cash flow statement

Cash flow statements are an offshoot of restaurant P&L statements, showcasing the amount of cash a company is bringing in and spending over a period of time. While income statements track all expenses, including noncash expenses such as depreciation and amortization, cash flow statements focus solely on cash expenditures.

With income statements, the bottom line is effectively the end of the story. Cash flow statements are more of a statement of operations, sharing what the company does with the money it makes. A company with strong financial performance may choose to invest its cash back into the business or distribute it to shareholders.

Restaurant income statement structure

Most restaurant P&L statements follow the same basic structure. At their core, income statements categorize various costs and compare them to a company’s revenue, with the bottom line, or net profit, revealing whether the business made or lost money that year. Here are some common line items you’ll find on a profit and loss statement.

Sales

Your restaurant’s on-premise and off-premise sales are grouped together at the top of your income statement. Sales, or total revenue, is often referred to as the top line since it’s literally the first thing you see on a P&L statement.

COGS

Cost of goods sold, or COGS, are the direct total costs associated with your sales (namely your menu items). While labor, rent, and utilities are all costs to be mindful of, they’re indirect costs and accounted for further down in your profit and loss statement. Managing food costs helps plan all sorts of aspects of the restaurant, from menu prices to seasonal offerings and more.

To easily calculate your COGS, simply subtract your ending inventory from your beginning inventory plus any purchases made.

Gross profit

Gross profit is your profit before any operating expenses are taken into consideration, or think of it this way: Sales – COGS = gross profit. It’s also referred to as gross margin or profit margin, providing a foundation for how much you make on each dish so you can make key business decisions without getting bogged down by additional factors.

Sales per square foot

Sales per square foot give a good idea of how profitable your restaurant will likely be over a long period. It provides an overall glimpse into how valuable you’re making your space—the higher, the better. This metric is calculated on a yearly basis. Depending on location and real estate or rent costs, north of $250 per square foot will land a restaurant in the profitable zone. A restaurant making under $150 per square foot should take that as a warning sign and implement changes to ensure profitability.

Increasing occupancy rates and boosting food sales and beverage sales will help improve your sales per square foot. Note that this metric only looks at sales and does not take into account rent cost percentage, property taxes, or other overhead that varies by location and can impact restaurant operations.

Operating expenses

The cost of running a restaurant spans far beyond your raw ingredients, of course. Operating expenses account for everything that goes into getting food to customers beyond what’s on the plate or in the bag.

Operating expenses typically fall into two categories. Costs related to tangible items, such as rent, kitchen equipment, and your POS system, fall under property, plant, and equipment (PPE). Costs related to non-physical items and people, such as labor, utilities, and your marketing budget, are categorized as selling, general, and administrative expenses (SG&A).

Operating profit

Your operating profit is also referred to as EBITDA, or earnings before interest, tax, depreciation, and amortization. Interest expenses and tax are typically beyond your control, as are depreciation and amortization on large-ticket items with costs spread out over a multi-year life. EBITDA is one of the most popular metrics used in financial reports since it shows a company’s profit accounting for the main factors within its control.

Simply put, gross profit – operating expenses = operating profit.

Prime cost

Prime cost is one of the most critical metrics in the operating costs category. Prime cost shows the combined cost of your restaurant labor costs and COGS, including management salaries and employee benefits like medical insurance. These are controllable expenses only to a certain degree, which is why they’re called “prime.”

Think of prime cost in these terms: Labor costs + COGS = prime cost

Generally, restaurants should aim to keep their prime cost under 60% of total sales to maintain revenue and total profit. You can calculate this cost over certain periods of time versus a whole year to see when your prime costs go up or down or keep track of labor expenses.

Net income

Net income, also known as net profit or net earnings, is what you’ve made after total expenses at the end of the fiscal year or another given period. Because net income is the last line of your income statement, it’s naturally referred to as the bottom line.

Help with creating a profit and loss statement

Most restaurant owners didn’t get into the business for the accounting side of things. While you can create an income statement on your own using P&L templates in Excel,  plenty of software options will help you easily create and manage your restaurant P&L. Here are a few recommendations:

• QuickBooks: Created by the same people who make TurboTax, QuickBooks starts at $25 a month. They offer industry-specific solutions, including the restaurant industry.
• FreshBooks: Known as the most mobile-friendly option, FreshBooks is built for owners who need to manage their business on the go.
• Xero: Ideal for businesses with multiple co-owners, Xero’s platform allows unlimited users.
• Zoho Books: Zoho is an all-in-one tool focused on CRM and email marketing, but it also has a bookkeeping feature. A free plan is available, with paid options starting at $20 a month.

A valuable tool to help boost your bottom line

Creating and maintaining a restaurant profit and loss statement is necessary to monitor your business’s financial health, to file your income taxes, and to maintain good standing with lenders and the IRS.

However, bookkeeping probably wasn’t what you dreamed of when you first thought about opening a restaurant. Using an Excel template or accounting software that does the heavy lifting can make all the difference, letting you spend more time on other priorities.

Yelp for Restaurants provides that same sense of freedom and then some. With a complete front-of-house system that automates reservations and waitlists, Yelp saves time and reduces stress for both you and your team. Let Yelp do the heavy lifting for your front-of-house team. Get started today.