Understanding Restaurant Financials & Data

When you first began to plan for your restaurant, you were playing a few guessing games. You were guessing how many seats would be in your restaurant. You were guessing how much you would charge for each dish. You were guessing how many customers you would serve per week. You were guessing how much your sales would be.

If you’ve stopped guessing: congratulations! It means you have a strong basis in understanding restaurant financials and you’re now ready to generate financial reports based on real numbers.

Your financial data is the backbone of your restaurant’s health. You will need to keep a constant finger on the pulse of your restaurant’s finances so you can:

• Take early measures to address low profits
• Know how to plan for future investment when you’re successful

If you don’t know whether your restaurant is truly succeeding or failing on a daily basis, you’re not fulfilling your role as a restaurant owner.

In this section, we will show you how to analyze your core financial statements, including:

• Food and beverage sales report
• Prime cost report
• Restaurant inventory report
• Profit and loss statement
• Cash flow statement

You’ll walk away from this section knowing how often each report should be generated, its key components, how to create each report, and how to analyze each statement for maximum visibility and overall understanding of restaurant financials.

Food & Beverage Sales Report

Your food and beverage sales reports are the most standard reports you will generate on a daily, weekly, and monthly basis. While your sales reports are only part of your restaurant’s story, you’ll need them to move forward with generating every other type of financial report.

Sales reports come standard with any cloud-based point of sale system. Your POS sales reports tell you:

• Daily, monthly, weekly sales activity
• Sales by employee
• Sales by menu item

Food and beverage sales reports are the easiest reports to generate, but they should never be viewed in isolation. They need to be compared with your costs so you can begin to make sound decisions. Therefore understanding restaurant financials will ensure you also make sound decisions about the future of your business.

For example, if you notice a menu item is selling poorly, you’ll need to compare sales of that item to its inventory cost; if the cost to produce the item is relatively low, there may be some promos you can push to move the item rather than removing it altogether.

Restaurant Prime Costs Report

Your prime costs will roll up into your profit and loss statement (see below); if you’re generating a P&L only once per month, however, you should at least be generating a weekly restaurant prime costs report. Your prime cost is the total of cost of sales plus all payroll-related costs, including management salaries, hourly staff, and payroll taxes and benefits.

Prime costs are the majority of the costs that are controllable by management in the short term, and controlling these costs is the best and most direct way to increase your net profit.

To calculate your restaurant prime costs report you will need to use your POS to generate:

• Weekly labor cost report
• Weekly cost of goods sold report
• Weekly sales report

Here’s the formula for knowing your prime costs:

Cost of goods sold (CoGS) + Total labor cost = Prime cost

Now calculate the percentage of your prime costs against your total sales. Your prime cost ratio should land at 60% or below; if you are exceeding this ratio, you’re spending too much on inventory and labor. It’s time to cut down.

Remember: Your labor costs should include taxes, benefits and insurance. You should also be calculating your prime costs using your gross sales (sales before discounts, not including sales tax).

Restaurant Inventory Reports

Your restaurant inventory reports should accomplish three major goals:

• Track the number of goods in your restaurant
• Track the latest unit cost of each item
• Calculate the total cost of your current inventory

For some restaurateurs, the best tracking method is a spreadsheet; for others, it’s their point of sale system or other inventory management technology. Each method comes with their own set of features, but as long as you have a centralized space to generate reports, you have an adequate system for tracking inventory.

Weekly inventory is your minimum frequency for generating reports. When you’re ordering goods on a weekly basis, it makes sense to conduct inventory on the same schedule.

Here’s how to generate restaurant inventory reports.

Step 1: Set up your inventory tracking fields in your master list.

In your spreadsheet or inventory management app, set up or make sure you can easily fill in the following fields:

• Time period (ex. weekly: November 19–26)
• Food category (ex. meat & poultry, dairy, produce)
• Item name, to live within their respective food category
• Unit of measure (ex. lb., oz.)
• Unit cost: the cost for one unit of measure of the ingredient
• Quantity in stock: the current number of units for each ingredient in your restaurant
• Inventory value: the number you get when you multiply your unit cost by your quantity in stock
• Reorder level: the number of units that indicate a need to reorder the item
• Total inventory value

Step 2: Insert each ingredient into your inventory master list.

Go through all your recipes and insert each ingredient into your master list, under their respective food categories. Go through your list again and input the unit of measure for each ingredient, based on how they will be ordered through your suppliers.

Step 3: Record unit cost of each food item.

After you’ve received your orders, update your inventory master list with the exact unit cost of each item. Your unit cost will fluctuate as prices rise or you start to receive discounts as you develop better relationships with your suppliers – and you want to make sure you’re not recording outdated numbers.

Step 4: Count and record inventory.

If you’ve organized your storage areas properly, each ingredient is visible and therefore easy to count. One person should start by running down your master list, counting each ingredient, and recording it in a draft list. The second person follows with their own count in a second draft list. Use the order of your master list to determine the order of your count.

Remember: do not estimate quantities! You want to count each item according to their unit of measure to generate an accurate list. This means opening packages in some cases, like if you are counting eggs by the dozen, then you want to know if you have a half or a quarter dozen floating around your inventory levels. You don’t want to round up or down, as those discrepancies will skew your financials over time.

Step 5: Compare your numbers.

After each staff member has counted inventory, they should compare their counts to make sure they are the same. Numbers that match should be recorded in your master inventory list. Numbers that have discrepancies should be re-counted, and then entered into the master list only after they’ve been reconciled.

Step 6: Multiply your number of units by your unit cost for each item.

The answer should show up in the “total cost” column.

Step 7: Calculate your average daily inventory cost.

Divide your total inventory cost for the purchasing period by the number of days in the purchasing period. (Your profit and loss statement should reflect the total inventory cost for the period.) For example, if the inventory cost was $14,000 and the purchasing period is 7 days, the average daily inventory cost is $2,000 per day.

Step 8: Estimate how long your inventory on hand will last.

Divide the cost of your current inventory by your average daily cost of food. You should have less than a weeks’ worth of inventory on hand to minimize waste.

After a while, you will begin to notice trends in your inventory counts: you always order too many chicken breasts that end up spoiling, or you’re frequently putting a rush order on bread because you run out after Sunday brunch. Remember to set aside some time to note trends and possible efficiencies for more accurate ordering.

Restaurant P&L Statement

A restaurant profit and loss statement (also known as an income statement, statement of earnings, or statement of operations) is a management tool used to review the total revenue and expenses of a business in a given period of time. At its most basic level, a P&L reflects costs that are subtracted from sales. The result is a number that gives you a rough idea of a restaurant’s financial health. It is also one of the most important statements when understanding restaurant financials overall.

A profit (positive result) may mean that a restaurant is doing well financially, and future strategic decisions derived from the P&L should be geared toward making the restaurant even more profitable.

A loss (negative result) means that it’s time to tweak (or overhaul) your business strategy and decide where you can cut costs or increase revenue.

You can generate your restaurant P&L statement on a weekly, monthly, or quarterly basis. For new restaurants without access to a bookkeeper, a monthly frequency is generally recommended. If you can, however, you may find it helpful to generate a weekly P&L so you have more of a real-time snapshot of the overall health of your business as you’re growing.

It’s important to distinguish profit and loss “operating activities” from the “financial activities” of receiving funds and paying bills. For example, if you cater an event on Monday, the sales will show in that month’s P&L as an operating activity, but the payment for that catering will be included on your statement of cash flows and balance sheet for the month that payment is received.

Similarly, a case of tomatoes delivered today would be included in this month’s P&L, but the payment four weeks from now would be included on your next month’s statement of cash flows and balance sheet. And, while your cash position is a great indicator of financial health, it does not necessarily tell you how well you are managing your operation.

There are a number of financial activities that will impact your bank balance but never hit your P&L: sales taxes collected and remitted, waiter gratuities collected and paid, and loans taken and repaid, for example. Don’t rely on your P&L to show you your cash position. Conversely, don’t assume your cash position reflects your P&L health.

The Parts of a Complete Profit and Loss Statement

Getting the most out of your restaurant P&L statement starts with understanding all of its parts. Here are some of the most important items within your P&L, how they relate to each other, and how they can add context to the understanding of your business.

Gross margin

A gross margin is the financial result of operating activities, usually expressed on an income statement as [sales – cost = profit]. Operating activities are generally defined as “core business activities”.

The “big three” core business activities for a restaurant are:

• selling food and beverage (revenue)
• producing food and beverage (cost of goods sold or CoGS)
• labor – employing sales (front of house) and production staff (back of house)

The combination of CoGS and labor is generally referred to as “prime cost”, since these are the primary expenses involved in producing revenue. Think of these as costs that are essential to selling goods (you couldn’t sell the wine without the wine and the person to sell the wine, for instance).

Each menu item has its own profit margin as expressed by:

[menu price] – [CoGS] = [gross margin] (or gross profit)

Prime costs and controllable profit

Prime cost is the total of cost of sales plus all payroll-related costs, including management salaries, hourly staff, and payroll taxes and benefits. Prime costs are the majority of the costs that are controllable by management in the short term, and controlling these costs is the best and most direct way to increase your net profit.

The closer a cost is tied to sales (such as CoGS and hourly labor), the more control your management has on the final number on the P&L. Management is able to influence controllable costs and profit to a much greater degree than non-controllable and fixed expenses like rent, taxes, interest, and insurance.

There are some operating expenses that are generally grouped into categories such as direct operating expenses, marketing, and utilities. Operating expenses tend to be the most flexible, but there are a number of expenses that don’t bend to management influence.

For example, if your dishwasher breaks, you have to fix it. If you break a tray of glasses, you must replace them. You have to pay your utility bills to keep the lights on. You can introduce new policies to prevent future breakage and reduce energy consumption, but you will continue to incur these costs regardless of sales or customers.

Cost of goods sold (CoGS)

“Cost of goods sold” is the raw material costs of your menu items – the actual cost of food and beverage used to produce your food and beverage sales.

[Beginning inventory of F&B] + [Purchases] – [Ending inventory] = CoGS for the period

Or:

The cost of food and beverage you start with: [Beginning inventory]

+

The cost of food and beverage you bought: [Purchases]

–

The cost of food and beverage left: [Ending inventory]

=

The cost of food and beverage used: [CoGS]

• Beginning inventory is the amount of food and beverage you have in stock on the first date for the date range you’re reporting on.
• Purchases during that same period are all food and beverage invoices added to your inventory.
• Ending inventory is the food and beverage items you still have at the end of the same period.
• Normally, CoGS is expressed as a ratio of a percentage of cost-to-sales. These ratios are usually categorized as follows:

Revenue / Cost	Standard ratio range (%)
Food cost / Food sales	25-40%
Beverage (non-alcoholic) cost / Beverage (non-alcoholic) sales*	10-30%
Wine cost / Wine sales	30-50%
Draft beer cost / Draft beer sales	20-40%
Bottled (canned) beer cost / Bottled (canned) beer sales**	30-35%
Liquor cost / Liquor sales	10-20%
Bar mix and consumables cost / Liquor sales***	5-25%

• *Food and non-alcoholic beverage are sometimes combined, but this is less common.
• **Draft and bottled beer is sometimes combined, but this is not recommended. The serving, storing, and pouring methodology for each is different, as are the costs.
• ***Bar consumables are sometimes combined with non-alcoholic beverage or liquor; use your own discretion to determine with your accountant if this is right for your restaurant.

Generally accepted ratios vary from market to market and concept to concept. Your percentage of costs will be largely determined by how much you sell something for versus how much it costs to produce.

The cost percentage will be generally determined by the bestsellers on your menu, rather than the menu as a whole. As a general rule, your combined CoGS and labor costs should not exceed 65% of your gross revenue – but if your business is in an expensive market, you should aim for a lower percentage.

Theoretical cost

While your theoretical cost is not part of your P&L, it’s important to compare your theoretical CoGS to your actual CoGS on your P&L statement. “Theoretical cost” is your ideal spend – but the cost of the food and beverage you actually used is not always equal to what you should have used based on your recipes. Raw material costs can change, and then there’s waste, inconsistent portioning, and shrinkage (the polite term for employee theft) – these can all create differences in theoretical versus actual costs. Your accountant will produce your actual cost using your inventory and invoices as inputs.

Part of managing and analyzing restaurant costs is to consistently compare what should have happened (theoretical CoGS) with what actually happened (actual CoGS) – and then work on narrowing the gap.

Expense report

While your expense report is separate from your P&L, you’ll want to refer to it if you notice any discrepancies in your expenses on your P&L. Your expense report is your line-by-line breakdown of all invoices, the total of which are reflected in your P&L. Your accountant should provide a detailed expense report that you can refer to if you notice you’ve spent way more on, say, music and entertainment from one month to another.

How to Read and Analyze a Profit and Loss Statement

P&Ls are generally organized and analyzed from left to right using a three-column approach: actual this month, budget this month, and actual last month.

Each column of numbers should be followed by an appropriate cost-to-sales ratio in the form of a percentage. CoGS and labor ratios will generally line up with their respective sales categories, while most expenses will be expressed over sales.

Accounting line items are organized from top to bottom, from most controllable to least controllable. Generally, the section headers are:

• Sales
• CoGS
• Labor
• Operational expenses
• Promotional expenses and marketing
• Repairs and maintenance
• Occupancy (rent, insurance, etc.)
• Corporate overhead (management fees, franchise royalties, etc.)

If you’re running a large, complex operation, you will have many more line items within each section. If you’re running a simple coffee kiosk, you’ll only have a few line items.

Now that you have data, you’ll need to know how to best leverage it for your business. Here is your step-by-step guide to analyzing and understanding your P&L.

1. First things first: check the math.

Seriously – mistakes are always made, and you can waste a lot of time analyzing numbers that turn out to be errors. Double-check and then triple-check that the math on your P&L is correct before you begin to sift through data.

2. Reading from left to right, examine each line item for variances.

Variances are the differences between what actually happened this month versus last month (actual last month), and what you had planned to do (this month’s budget). Look for big differences (positive and negative) between the previous month and your plan/budget.

If you don’t want to do the math, ask your accountant to add two columns to calculate the variance:

[this month] – [last month] and [this month] – [budget]

The variance columns should also show the rate (or percentage) change between this month over last month. Remember not to get tripped up by large percentage variances versus large budget differences. Look for large budget dollar amount differences first, then move to the difference in percentage for context and perspective.

3. Ask questions.

As you read from left to right and down the statement, you’ll begin to get a sense of the narrative of your restaurant. Ask yourself some of these questions to begin to flesh it out:

• What did you accomplish this month?
• How does it compare to last month?
• How does it compare to what you had budgeted?
• Did you make a profit or lose money?

If you see a positive result at the end, great job. If you see a negative result: don’t panic. When you’re just starting out, it may be normal to experience the growing pains of overstaffing or adjusting to the rhythms of your customer traffic.

4. Reverse the questions

Ask more questions to begin to connect the dots of your operating decisions to your P&L numbers. For example:

• How is your new menu influencing food sales?
• What impact is the new wine by the glass program having on your wine sales and costs?
• How is the decision to open for breakfast influencing sales and labor costs?

Actions have consequences, so try to understand the decisions you’re making and how they are affecting the big picture. When you begin to apply reason to the numbers, you’ll start to understand how you can make some decisions to adjust your operations or scale on things that are working well for your restaurant.

5. Put the small details in perspective.

Focus on the big numbers and don’t sweat the small stuff. Time is valuable: for example, if you and your manager’s collective time is worth $200 per hour and you spend fifteen minutes discussing a $25 variance, you just spent another $50 questioning the $25 you already spent. Unless that discussion will yield significant future savings, focus the discussion on the important stuff and don’t sweat the rest. Instead, dive into the numbers that either appear to be the most perplexing and/or have the biggest impact on the bottom line.

6. Make a stop at the line that says “EBITDA”.

This is your earnings before interest, taxes, depreciation, and amortization. If it’s negative, find out why. Where are your cost overruns and revenue shortfalls? What are you going to do to about it?

7. Finally, look at the bottom line.

After EBITDA, there will be a “bottom line”. This is your “net profit” or “net income”. Is it a positive number? Good. This means you’re paying all of your bills and your staff. If your net profit is greater than 10% of sales, that’s really good. If it’s 15% of sales or greater, great news – you’re well on your way to running a successful business!

If you’re not able to cover your opening capital investments (generally amortized over time) or the interest on loans, you will need to look closely at your revenue and controllable costs. If you’re unable to cover your loans and opening costs, now’s the time to start questioning the viability of your business.

A P&L is like a report card for your restaurant. Large, positive changes in revenue over last month get an A. Minor improvements get a B. Cost overruns over budget get a C or a D, depending on the magnitude. Any increases in expenses that exceed increases in revenue are big red flags.

With the knowledge you gain by measuring your performance, you should be able to answer the following questions:

• How well am I managing the restaurant and my time?
• Can my restaurant be busier?
• Is this the most profit my restaurant is capable of producing?

By allocating your time to your highest priorities, marketing effectively, and managing costs efficiently, you hope to get a little return on investment (ROI) for all your hard work. The results of everything you do as a restaurant owner is measured by one magic formula for net profit: revenue minus expenses. All of your efforts in understanding restaurant financials are captured in the details of the P&L statement.

Restaurant Cash Flow Statement

Cash flow is about survival.

Your cash flow is literally how much cash you have on hand to pay bills, buy equipment, and fix anything that needs fixing in a pinch.

As a new restaurant owner, you will be very interested to know your cash flow on a frequent basis. It’s recommended to generate a restaurant cash flow statement on a weekly basis.

Knowing your total cash flow means you know your cash inflows and your cash outflows.

Cash inflows are:

• cash from customers
• cash from selling assets
• cash from financing sources

So cash inflows are basically your sales plus any liquidated assets to finance your business plus any small business loans. Add these items together to get your cash inflows number.

Cash outflows are:

• cash spent on operating costs
• cash you used to buy assets
• cash you paid to financing sources, like loan payments or dividends to investors

Add these items together to get your cash outflows number.

Your total cash flow for your desired period is your cash inflows minus your cash outflows.

When your cash inflows are more than your cash outflows on your restaurant cash flow statement, that’s great! You have a positive cash flow that you can invest in growing your business.

note: always make sure to consider any positive cash flow against your p&l statement. if you have positive cash flow but need to course correct in the long term, you’ll want to make sure you’re spending any extra cash in a smart way. maybe you should pay down some of that debt you’ve likely accumulated?

Conclusion

Unless you were an accountant in a past life, generating and understanding your restaurant financials & data may not be the most fun part of owning a restaurant – but it’s definitely the most important.

You should be obsessed with these numbers.

You should lose sleep over these numbers.

And every decision you make about your business should be based on these numbers.

When you live and die by your financial spreadsheets, you’re understanding what will help your business succeed. And when you really begin to internalize the patterns that emerge from your restaurant financials, you’ll find you’ve unlocked every possible door to restaurant success.