How to Read a Restaurant Profit and Loss (P&L) Statement

How to Read a Restaurant Profit and Loss (P&L) Statement
Vahag Aydinyan

By Vahag Aydinyan

Running a restaurant is not just about serving great food; it’s also about managing finances. With 50% of restaurant owners reporting inventory costs as the top concern last year, you must leverage reporting tools to see how much profit your restaurant is making and where your money is going. 

The most important of those reporting tools is the profit and loss statement, commonly called the “P&L.”

Simply put, the P&L shows how much restaurants earned and spent for a specific period, like a month or a year. It helps you see if your restaurant is making a profit or a loss, allowing you to understand your company’s performance and achieve your business goals.

Components of a restaurant P&L statement

Your P&L contains a lot of helpful data, including:

  • Revenue

  • Cost of goods sold (COGS)

  • Operating expenses

  • Prime cost

  • Gross Profit

  • Gross Profit Margin

  • Net Profit/Loss

Knowing the numbers and their implications for your business sets you on the path to sustainable financial success. Let’s explore the seven main components of restaurant P&L statements.

Metric

Description

Calculation

Example

Revenue

  • Total income from food, beverages, and other sources

  • Helps identify which parts of your restaurant are most profitable

  • Improves restaurant revenue management

The sum of all sales for each product and income source

$80,000 (Food Sales) + $30,000 (Beverage Sales) + $10,000 (Other Income)

Monthly Revenue  = $120,000

Cost of Goods Sold (COGS)

Beginning Inventory + Purchases − Ending Inventory = COGS

$5,000 (Beginning Inventory) + $35,000 (Purchases) - $6,000 (Ending Inventory) 

COGS = $34,000

Operating Expenses

The sum of all restaurant costs spent for a specific period

$25,000 (Labor Costs) + $10,000 (Rent) + $5,000 (Utilities) + $5,000 (Marketing) + $5,000 (Insurance)

Total Operating Expenses = $50,000

Prime Cost

  • The sum of COGS and labor costs

  • Indicates operational efficiency

  • Ideally at 60% or lower

Food Cost + Beverage Cost + Labor Cost = Prime Cost 

$20,000 (Food Cost)  + $10,000 (Beverage Cost) + $25,000 (Labor Cost) 

Prime Cost = $55,000

Gross Profit

  • Profit after deducting COGS from total sales

  • Preliminary profit indicator

Revenue − COGS = Gross Profit 

$120,000 (Revenue) + $34,000 (COGS) Gross Profit = $86,000

Gross Profit Margin

  • Shows how efficiently sales are converted into profit

  • Ideal margin for restaurants is around 70%

(Gross Profit / Revenue) × 100 = Gross Profit Margin 

$86,000 (Gross Profit) / $120,000 (Revenue) 

Gross Profit Margin = 71.67% 

Net Profit/Loss

  • Actual profit after all expenses are deducted

  • Key indicator of sustainability and ability to reinvest in the business

Revenue − (COGS + Operating Expenses) = Net Profit/Loss 

$120,000 (Revenue) - ($34,000 (COGS) + $50,000 (Operating Expenses)) 

Net Profit = $36,000

Why should owners know how to read a restaurant profit and loss statement?

The average profit margin of full-service restaurants ranges between 3% and 5%, while their fast-food and casual counterparts’ margins fall between 6% and 9%. 

These numbers might seem low, but only because the restaurant industry has many costs to cover, including ingredients, labor, rent, utilities, marketing, and other expenses. These costs can add up quickly, leaving a smaller portion of revenue as profit. 

By knowing where their money is going, they can find ways to cut costs and improve their profit margins. 

Make better financial decisions

If you notice that your food costs are higher than expected, you can take action to reduce waste or find a cheaper supplier. 

For instance, if your restaurant P&L statement shows that your food costs are 40% of your revenue, which is higher than the industry average of 30%, you can start by analyzing your menu and identifying high-cost, low-profit items. This way, you can control your expenses and increase your profit margins.

Another example is knowing which menu items are most profitable. If you see that certain dishes have high food costs but low sales, remove them from the menu. On the other hand, if a dish has low costs and high sales, you might promote it more using the right restaurant marketing strategies.

Knowing how to read this report can help you decide whether you’re ready to expand or receive significant investments. 

For instance, when creating a restaurant business plan, you need a projected P&L statement if you plan to grow your business or attract investors. This statement shows potential investors your expected revenues and expenses, helping to convince them that your restaurant is a good investment. 

Owners of restaurants can only plan this kind of growth if they understand their financial data deeply. 

Boost profits on food and other items

As you review your restaurant P&L regularly, you can see which areas of your business are performing well and which could be improved. 

For example, if labor costs are consistently high, you might consider optimizing staff schedules or using labor-saving equipment to reduce expenses and increase your net profit. 

Meanwhile, if your P&L statement shows that your labor costs are higher than the industry average, you can use this information to identify areas where you can cut costs, like reducing overtime or hiring part-time staff during peak hours.

Reviewing and optimizing staff schedules can make a big difference. If you can cut just 10 hours of overtime a week at $15 an hour, you can save $7,800 a year. 

With labor-saving equipment, like automated dishwashers, you can reduce the need for additional staff during peak hours. Although this investment might cost $5,000 initially, it can save you $10,000 in labor costs over the year, resulting in a net saving of $5,000.

Manage cash flow effectively

By tracking peak sales periods, you can have enough cash on hand to cover expenses and avoid disruptions.

“Remember that knowing your cash flow isn’t just for your edification,” Sally Lauckner, the editor-in-chief of the Fundera Ledger, noted. “It’s a critical metric for small business lenders if you’re going to be seeking financing.”

If cash flow is tight during winter, you can plan by setting aside funds during more profitable periods. This strategic approach can pave the way for your restaurant's success, ensuring you have enough money to pay for essential expenses like labor, rent, and utilities during the slow months. 

Best practices when reading P&Ls

A restaurant's P&L statement can be confusing, especially for new restaurant owners. However, with the right tools and processes, it can become much easier. Let’s take a look at these four tips to follow when reading P&Ls:

Read your P&L with other restaurant data

To get a complete picture of your restaurant’s financial health, you need more than just your P&L statement. Don’t just focus on individual numbers. Instead, consider how different components interact with each other. 

For instance, if your restaurant labor costs are high, check how they relate to your sales and operating hours. You may need to adjust your staff schedules to align better with peak dining times. 

Also, consider seasonal trends and how they impact your restaurant’s performance.

By adopting this comprehensive approach, you can understand how different aspects of your restaurant are performing.

Help your team understand restaurant P&L implications

Educating your team on managing costs can foster a culture of financial responsibility within your restaurant. For example, training your kitchen staff on portion control can reduce food waste, and teaching your servers to upsell high-margin items can boost sales. 

When your team understands how their actions impact the restaurant’s profitability, they’re more likely to contribute to cost-saving efforts and efficient operations.

Use the right tools for your restaurant

Having the right software can make a big difference in how effectively you can manage your restaurant’s finances. 

For example, a restaurant management app with automatic P&L generation features can help you save time and avoid mistakes in your reports. As a result, you get accurate and timely data without the hassle of manual calculations.

Some tools also provide expense categorization, allowing you to track and manage your operating expenses easily. By sorting your expenses, you can see where your money is going and identify areas for cost reduction.

Stay in the know

Sometimes, managing a restaurant’s finances can be challenging, even with the best tools. Make it a habit to read up on industry news and follow financial professionals who specialize in the restaurant industry. 

For instance, the Restaurant Business focuses on providing restaurant owners with the latest insights. Reputable news outlets like CNBC and The Conversation also have specific categories for restaurant news.

As you expand your knowledge and network, you'll gain fresh perspectives and solutions to your issues.

Calculate and improve your restaurant’s profit

Understanding your restaurant’s P&L statement can help you make informed business decisions. The data it provides shows you how your restaurant is performing financially and where you can make improvements.

With 7shifts, you can take this understanding to the next level. With real-time reporting, automated P&L generation, and detailed expense categorization, our platform makes it easier than ever to stay on top of your restaurant operations.

Start your free trial with 7shifts today and see how our comprehensive tools can help you boost your restaurant’s profitability and efficiency. 

Don't just manage your restaurant; master it!

FAQs

How do you measure profit and revenue in restaurants?

Measuring profitability in a restaurant involves looking at two key metrics that show how well your business is performing financially: 

  • Gross Profit Margin is the percentage of revenue left after subtracting the cost of goods sold (COGS). To calculate it, subtract COGS from total revenue, divide by total revenue, and multiply by 100.

  • Net Profit Margin is the percentage of revenue left after all expenses, including operating expenses, labor costs, and taxes, have been deducted. To calculate it, subtract all expenses from total revenue, divide the result by total revenue, and multiply by 100.

Monitoring these restaurant metrics lets you identify cost issues, which can then help you find solutions for them. 

Gross and net profit margins also provide a clear picture of your restaurant’s financial health over time. It helps you identify trends, such as seasonal dips in profitability, so you can plan accordingly.

What is the most essential part of a restaurant P&L statement?

The most important part of a restaurant P&L statement is the net profit or loss section. This component shows the final measure of your restaurant's financial performance after accounting for all revenue and expenses. 

Your net profit/loss tells you whether your restaurant is making money or losing it, which is vital for understanding your business's viability.

How often should I review my restaurant’s P&L statement?

Review your restaurant P&L statement monthly to stay on top of your restaurant’s financial performance and make timely adjustments when necessary. Monthly reviews strike a balance between having enough data to see meaningful trends while giving yourself time to proactively address issues before they become significant problems.

 

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Vahag Aydinyan
Vahag Aydinyan

Hello! I am Vahag, Content Marketing Manager at 7shifts. I am writing about content marketing, marketing trends, tips on restaurant marketing and more.