What is a restaurant profit and loss statement?
A profit and loss statement is a financial report that summarizes a restaurant's revenues, costs, and expenses over a specific period. It shows whether the business is making a profit or operating at a loss, helping guide financial decisions.
How to Read and Use Your Restaurants Profit and Loss Statement
Overview
If you own a restaurant, you probably spend most of your time focusing on food, staff, and customers. But behind every plate served is a number that tells you if your business is actually making money. That number lives inside your profit and loss statement, or P&L for short.
A P&L shows how much money your restaurant brought in, how much you spent, and what's left over. It helps you answer big questions like - Are we making a profit? Are food or labor costs too high? What can we fix to keep more of what we earn?
Here's something to think about- according to industry reports, up to 60% of restaurants fail within their first year, and poor financial management is often a big reason why. Many owners don't track their numbers closely or wait until it's too late to make changes. That's why learning how to read your P&L is one of the smartest things you can do - no matter how small or new your restaurant is.
Understanding Restaurant P&L Statement
Before we dive into the details, it's important to understand the overall structure of a restaurant profit and loss statement. Think of it like a recipe for your business's financial health. Each section gives you a piece of the bigger picture - how your restaurant is performing and where your money is going.
A standard P&L is usually broken into three main sections -
1. Revenue (Sales) - This includes all the money your restaurant brings in - food sales, drink sales, delivery orders, catering, and more.
2. Expenses - These are the costs of running your business, such as ingredients (Cost of Goods Sold), wages, rent, utilities, and marketing.
3. Profit (or Loss) - What's left after you subtract your expenses from your revenue. This is your bottom line.
P&Ls are typically created monthly, but you can also review them weekly or quarterly. The more often you check, the faster you can spot problems - like food costs creeping up or sales dropping. Even if you're not a numbers person, getting familiar with your P&L helps you catch issues early and plan ahead.
Here's another reason it matters - small errors can easily add up. A few percentage points lost to high labor costs or food waste might not seem like a big deal at first, but over the course of a year, it could mean thousands of dollars gone.
In short, your P&L is more than just a report - it's a tool for staying in control. Once you know how to read it, you'll be able to make better day-to-day decisions and set your business up for long-term success.
Understanding Revenue
The revenue section is the first and often most familiar part of your profit and loss statement. But to truly understand how much money your restaurant is making, you need to look beyond just the top-line number. Here's a breakdown of the key parts -
1. Gross Sales
This is the total amount of money your restaurant brings in before any deductions. It includes all sales - dine-in, takeout, delivery, catering, alcohol, and any other services. It's the first number listed on your P&L and can look impressive, but it's only the starting point.
2. Discounts and Promotions
Next, your P&L subtracts any discounts offered to customers. These can include coupons, online order codes, happy hour specials, or employee discounts. While discounts can boost traffic, too many can lower your actual earnings. Track them closely to avoid giving away too much value.
3. Comps and Voids
Comps are items given for free - usually due to a guest complaint, mistake, or special treatment. Voids remove items from a ticket that were entered by accident. Both reduce your actual revenue. High numbers here may signal operational issues that need attention.
4. Net Sales
This is the number that matters most. Net sales = Gross Sales - (Discounts + Comps + Voids). It reflects what your restaurant truly earned. This figure will be used to calculate your costs, profit margins, and overall performance.
Understanding these four parts helps you get a real sense of your income - not just what comes in, but what sticks.
Cost of Goods Sold (COGS)
Once you know how much money your restaurant actually made (net sales), the next step is understanding how much it cost to produce the food and drinks you sold. That's where Cost of Goods Sold (COGS) comes in. This is one of the biggest expenses on your P&L - and one of the most important to manage.
1. What Is COGS?
COGS includes the cost of all the ingredients and materials you used to prepare the items you sold. For a restaurant, this means things like meat, vegetables, oil, spices, bread, beverages, and takeout packaging. It does not include labor, utilities, or rent - just the raw materials used in your dishes.
2. How Is COGS Calculated?
The formula is simple
Beginning Inventory + Purchases - Ending Inventory = COGS
This tells you how much product you used during a specific period. If you start the month with $10,000 in food, buy $5,000 more, and end with $4,000 left, your COGS is $11,000. That means you used $11,000 worth of product to generate your sales.
3. Why COGS Matters
COGS helps you see how efficiently you're managing your ingredients. If it's too high, it cuts deeply into your profit. In most restaurants, COGS should be around 28% to 35% of net sales, depending on your concept. Higher-end restaurants may have higher food costs, but should price accordingly.
4. Controlling COGS
Track inventory regularly, monitor waste, and train staff on portion sizes. Buying in bulk can save money, but only if you're not over-ordering and throwing things out. Small adjustments - like better prep habits or tighter ordering - can have a big impact.
Understanding and managing your COGS is key to protecting your profits. It's not just about what you sell - it's about how much it costs you to sell it.
Labor Costs
After understanding your food costs, the next big piece of the puzzle on your P&L is labor costs. For most restaurants, labor is the largest controllable expense and usually takes up about 25% to 35% of your net sales. This section includes everything related to paying your team, from chefs and servers to managers and dishwashers.
1. What's Included in Labor Costs?
Labor costs aren't just wages. They include hourly pay, salaries, overtime, payroll taxes, benefits like health insurance, and any bonuses you offer. Sometimes, restaurants also include costs related to uniforms or training under labor expenses.
2. Why Labor Costs Matter
Labor directly affects how smoothly your restaurant runs and how happy your customers are. But labor costs that are too high can eat away at your profits. On the flip side, cutting labor too much can lead to overworked staff, poor service, and even lost sales. The key is balance.
3. How to Calculate Your Labor Percentage
Your labor cost percentage is calculated by dividing your total labor expenses by your net sales. For example, if your net sales are $100,000 and labor costs are $30,000, your labor cost percentage is 30%. Knowing this percentage helps you understand how much of your revenue goes to staffing.
4. Controlling Labor Costs Effectively
Good scheduling is one of the best ways to manage labor costs. Use sales forecasts to schedule the right number of staff during busy and slow times. Cross-training employees so they can handle multiple roles can also improve flexibility and reduce the need for extra shifts.
Keep an eye on overtime - excessive overtime is a warning sign that staffing levels may be off. Also, track productivity measures like sales per labor hour to see if your team is working efficiently.
Managing labor costs is a balancing act. By understanding this section of your P&L, you can make smart staffing decisions that keep your restaurant running smoothly while protecting your bottom line.
Operating Expenses
After covering your food and labor costs, the next section on your P&L includes operating expenses - the everyday costs that keep your restaurant running but aren't directly tied to making or serving food. These expenses can sometimes fly under the radar but have a huge impact on your overall profitability.
1. What Are Operating Expenses?
Operating expenses include a wide range of costs such as rent or mortgage payments, utilities (electricity, water, gas), insurance, marketing, repairs and maintenance, supplies (like cleaning products), credit card fees, and software subscriptions. Unlike food and labor, these expenses usually don't change directly with sales volume, though some can vary somewhat.
2. Fixed vs. Variable Expenses
It helps to think of operating expenses as either fixed or variable. Fixed expenses, like rent and insurance, stay about the same every month regardless of how busy your restaurant is. Variable expenses, such as utilities or marketing, can rise or fall depending on how much you're selling or promoting.
3. Why Operating Expenses Matter
Even if you keep food and labor costs in check, high operating expenses can quickly eat into profits. For example, a sudden increase in utility bills or a poorly planned marketing campaign can add hundreds or thousands of dollars to your monthly expenses. Regularly reviewing this section helps you catch these increases early.
4. How to Control Operating Expenses
Start by categorizing your expenses clearly and comparing them month-to-month. Look for trends like rising utility costs during certain seasons or unexpected repair bills. Negotiate your rent when possible, and shop around for better insurance or service providers. For marketing, focus on strategies that bring a good return rather than just spending blindly.
Understanding your operating expenses gives you a fuller picture of your restaurant's financial health. These costs may not be as obvious as food or labor, but managing them carefully can mean the difference between a healthy profit and a tight squeeze.
Profit Margins and Net Income
After you've looked at your revenue, costs of goods sold, labor, and operating expenses, you finally get to the most important part of your profit and loss statement- the profit margins and net income. This section shows you what's left after all expenses are paid - essentially, your restaurant's bottom line.
1. What Are Profit Margins?
Profit margin is a percentage that tells you how much of each dollar earned is actually profit. There are a few types, but the two main ones to focus on are -
Gross Profit Margin - This is your net sales minus the cost of goods sold (COGS). It shows how much money you keep after paying for your ingredients and supplies. A healthy gross profit margin in restaurants is usually between 60% and 72%, depending on your concept.
Net Profit Margin - This is what remains after you subtract all expenses - including labor, operating costs, taxes, and interest - from your net sales. In the restaurant business, a typical net profit margin ranges from 5% to 15%. If your margin is lower, it's a sign you need to review your expenses or pricing.
2. Why Net Income Matters
Your net income is the actual profit you keep after covering every cost. It's the money you can reinvest in the business, save, or use to pay yourself. Tracking this number regularly helps you understand if your restaurant is sustainable or if you need to make changes.
3. How to Improve Your Profit Margins
Look closely at each part of your P&L. Could food waste be lowered? Are labor schedules optimized? Are operating expenses reasonable? Sometimes even small changes in these areas can boost your net income significantly.
4. Using Profit Margins to Set Goals
By knowing your current profit margins, you can set realistic financial goals. For example, if your net profit margin is 4%, aiming for 7% by reducing waste or renegotiating rent is a clear target. Regularly monitoring your P&L helps you measure progress toward these goals.
Understanding your profit margins and net income is essential. It's the clearest sign of your restaurant's financial health and a powerful tool for making smart decisions about pricing, expenses, and growth.
Reading and Using Your P&L Effectively
Now that you understand each part of your profit and loss statement, the next step is making it a regular habit. Reviewing your P&L monthly - or even weekly - gives you a clear picture of how your restaurant is performing. Look for trends, compare your current numbers to past months, and don't hesitate to ask questions if something doesn't make sense.
Remember, the numbers on your P&L are more than just data - they're insights into your business's health. Use percentages as well as dollar amounts to get a better sense of performance. For example, tracking your food cost as a percentage of sales makes it easier to spot when costs are creeping up.
If managing your restaurant's finances feels overwhelming, you're not alone. That's why tools like Altametrics exist. Altametrics offers a comprehensive restaurant accounting and financial management platform designed specifically for busy restaurant owners. It helps automate your P&L tracking, provides real-time insights, and simplifies complex financial data - so you can focus on running your restaurant while staying in control of your finances.
Explore Altametrics Restaurant Accounting today by clicking "Schedule a Demo" below and see how you can simplify your processes and focus more on what matters - running your hotel.
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Frequently Asked Questions
Can technology help me manage my restaurant's P&L?
Yes! Tools like Altametrics automate financial tracking, provide real-time insights, and simplify complex data, making it easier to understand and manage your P&L.
What is the difference between gross sales and net sales?
Gross sales include all the money your restaurant earned before any deductions. Net sales are what remains after subtracting discounts, comps, and voids, showing the actual revenue your business keeps.
What does the Cost of Goods Sold (COGS) include?
COGS covers the cost of all ingredients and materials used to prepare the food and drinks sold, such as meat, vegetables, beverages, and packaging.
How can I control labor costs in my restaurant?
Effective labor cost management includes scheduling staff based on sales forecasts, cross-training employees, monitoring overtime, and tracking productivity like sales per labor hour.
