Ah yes… the burning question: What is a P&L (profit and loss statement) in restaurant management and why does it matter so dang much? Buckle up, because this article gives you the real skinny on P&L’s, why they matter, and most importantly – how a P&L can provide you with the information you need to maximize your hard-earned profits.
You will learn how to read a restaurant P&L, how to make a P&L for a restaurant and other food and beverage businesses, and what your restaurant P&L percentages should look like. I’ll also show you real restaurant P&L examples so you can see these principles in action.
It’s one thing to define a P&L and all its information (snooze fest) – but it’s way more impactful to understand how to use each piece of information to your advantage (game changer!) – and that’s what this article is all about. So, let’s dig in!
What is a P&L in Restaurant Business Management?
A profit and loss statement (P&L or PNL for short) is a snapshot of a restaurant’s business performance during a specific period of time. A restaurant P&L helps operators, managers, and owners in every kind of food-industry operation understand the health of their business by tracking and summarizing revenues, operating costs, and administrative & general expenses. It also reveals the answers to some seriously important questions that every business should ask, like:
- Is our business growing?
- How did we perform against budget as compared to last year?
- How is our new menu influencing both sales and costs?
- How much did opening three hours earlier for breakfast influence our sales and our labor costs?
With a profit and loss (P&L) tool in hand, you are well on your way to maximizing your restaurant’s profitability. How is this possible, you might ask? Because simply having a view of your business’ financial performance allows you to make solid decisions so that you can ensure maximum profitability and protect your cash flow. Even better if your reporting is in “real-time”. Let’s break it down:
The Importance of P&L for Restaurant Management
There is nothing more important than understanding how your business is performing financially. If you don’t know your numbers, you can’t make good, sound decisions. You also can’t improve specific areas to maximize your profitability. (Mainly because you won’t know what areas to improve, or how.) So, it’s critical to measure the performance of your business so that you aren’t leaving hard-earned money on the table.
In the food world, we operate under the slimmest profit margins imaginable. If you don’t track what you earn and what you spend, you cannot optimize your profits for maximum gain. Yes, we love this industry and we’re in it because we’re passionate about it. But at the end of the day, you still want to make the most money possible, right? That starts with knowing how your business is performing in real-time, and a restaurant P&L is the primary tool for gaining that knowledge.
Oh, you have a bookkeeper, so you don’t need a P&L? Nope. If your bookkeeper or accountant is providing you with numbers three to six weeks after a given period closes, that information is not good enough. If you don’t know how your business is performing in real-time, you will not be able to manage your business in real-time. And without real-time decisions, you are bleeding profits.
They are called profit and loss (P&L) statements, but when done right these are not pieces of paper: they are a living thing. A P&L tool that you manage daily (or at the very least weekly) is the difference between financial success or flying blind with your fingers crossed, all while hoping that your numbers will work—somehow. If you are serious about financial success and driving profitability, using a P&L tool as part of your everyday core priorities is the roadmap to success.
The Key Elements of a Restaurant P&L Statement
Each of your profit and loss statements (P&Ls) will be broken down into three main categories:
- Income
- Expenses
- Net Profit or Loss
But wait! There’s more! (Yes, this is where it gets fun.)
You need to take each of these top-line categories and dive deeper into what each one means—and how they individually contribute to your business’s overall profitability. That’s where the magic happens.
Let’s take a walk through a restaurant P&L step-by-step so that you can see all the ways you will be able to make a positive impact on your business performance. Once you learn to reveal and recognize the different levers you can adjust, you will be in the best position to make changes that will drive profitability.
How to Read a Restaurant P&L: A Step-by-Step Guide
The big moment has arrived! Let’s start at the top, and work our way down.
Income (or Revenue)
This is the money that’s coming in!
This section answers a key question: Where do our sales come from?
It seems obvious, but it’s more complicated than you think. And a P&L is the only way to bring that complexity into the daylight.
Depending on the type of food and beverage business or restaurant you have, some income streams may be more profitable than others. You may choose to look at your sales as a whole, or in segments. The way you categorize those segments will be driven by the type of business you run, but the categories might look like “Daypart” (e.g., segments such as breakfast/lunch/dinner) or “Channel” (with segments such as dine-in/catering/third-party delivery).
The most important thing to know is that your sales or revenue matters more than anything else. If you don’t have sales, you don’t have anything. (Really! If there is no money coming in, you can’t pay for anything, so you can’t run your business. It’s as simple as that—and in a passion-driven industry like food, that fact can get easily lost.)
So, understanding this area of your business—and what’s growing (or not)—is deeply important to the effective management of your profitability.
Expenses
This is money going OUT. Needless to say, you want to minimize this.
To begin to understand your expenses, let’s talk about one of the most important expense categories of your business: your COGS (Cost of Goods Sold). COGS are the raw material costs of your menu items. Basically, this means all the ingredient costs that go into making one menu item, or one mixed drink, or... you get the idea.
The higher your COGS, the higher your menu prices, typically.
Just as you did with Income (or Revenue), you’ll want to break down your COGS into categories to understand how the cost of major ingredient groups affects your profit. For example, a pizzeria may look at all meat and poultry costs grouped together in one bucket while a steakhouse may give beef its own category so they can analyze costs more closely.
However you design your COGS categories, what’s important to understand about these costs is that they are an incredible tool for maximizing profitability. If your cheese category suddenly spikes up in cost, you can drill down into why. Now you know that you need to stop featuring cheese-based items in your specials rotation until the pricing returns to normal.
So many different ingredients will change in cost week-to-week. That’s why understanding your COGS in an ingredient or category level can help you make good decisions—especially when you translate that COGS dollar costs into your COGS%, which I will get into in a moment. When an ingredient is scaling cheaper, you can promote those types of dishes heavily. When an ingredient is scaling higher, you can dial back your promotion for those menu items, or ditch them altogether, or swap out that ingredient (or that gouge-happy vendor) until the price moves closer to reasonable.
As a long-time food-industry consultant, I cannot tell you how many times my team has found food businesses with unprofitable menu items lurking on their menu. And it’s usually because they don’t use their COGS% to manage their categories. At the very minimum you can use COGS% to understand whether your profit margins are being maintained. Used at their best, they can help you keep your profits at the maximum possible level, week by week by week.
So, how do you calculate your COGS% in a P&L? Let’s start with an overview of basic P&L terminology & formulas:
Basic P&L Terms:
Revenue - COGS = Gross Profit
COGS + Labor = Prime Costs
Revenue – Prime Costs = Unit-level Operating Income
Unit-level Operating Income - Operating Expenses = Controllable Profit
Controllable Profit - Occupancy = Net Income (Profit or Loss)
Here is the basic COGS formula:
COGS is BEGINNING INVENTORY + Purchases – ENDING INVENTORY = COGS.
*Some companies choose only to use purchases as COGS which works too.
Income ($) – COGS ($) – Labor ($) = Unit-level Operating Income ($)
That’s your dollar figure. Useful, but we’re not there yet. Now, take those categories (whether it is by meal type or ingredient or whatever you are tracking) and look at the percentage they are taking up of your whole—so, if it’s lunch you are tracking, what is its share of your total sales, and what is its share of your total costs? That looks like this:
Income (%) – COGS (%) – Labor (%) = Unit-level Operating Income (%)
See that COGS percentage? THIS IS THE KEY NUMBER. Yes, all caps and bold!
That’s how important it is.
It directly impacts your profit. So, looking at it as an overall percentage at the bare minimum will tell you if you are good to go, or if you have some work to do. Hopefully, now you can see why knowing your numbers in real-time makes a huge difference. You can’t make real-time adjustments to COGS when you get your numbers 3-6 weeks later.
If this % number is higher than what you need it to be, you need to raise your prices, lower your ingredient costs, or re-engineer your recipes. Keep doing it until that % meets your target COGS budget.
So, what’s the ideal COGS% for a fresh food restaurant business in 2023?
This is a truly hard question to answer because every single business is different, and every menu and offering is different. For a fresh food business, a target range between 26-32% is very realistic.
And yes, it’s 32%, tops. No joke. More than this and you are definitely leaving money on the table. For no reason.
If your COGS% is higher than that, there are a few areas you can focus in on to apply improvement tactics. These “COGS Outliers” include the following (and if you are unfamiliar with any of these, stay tuned... you’ll see many of these topics in later articles!):
- Purchases review – Have your ingredient costs gone up? Time for a new vendor? Time to change menu items?
- Inventory review – Do you have the right systems on hand to ensure you aren’t wasting food (or that food isn’t “walking out the door?”)
- PARS set up & review – This is one of the oldies but goodies. PARS means “Periodic Automatic Replacement,” which is a very intimidating way to describe a system that tells your team how much of which ingredient they need to always have on hand to minimize waste and maximize freshness while ensuring they don’t run out. If set up correctly, it makes ordering a breeze and will seriously help manage your COGS.
- Recipe review – Do your recipes need re-engineering (basically, are you spending too much in ingredient costs to put an item on the menu?) Either update the recipe, raise the price, or eliminate it until you can afford to have it on the menu. Do you need help understanding how to view your menu as a system designed for profit? Check out our Mise Mode guide on How to Design the Perfect Menu System.
- Staff knowledge and training – This is a big one. If your team doesn’t know what to look for or how to manage COGS within their responsibilities, you are going to have a hard time. Portioning tools, clear recipe cards, and good training materials will all go a long way to minimizing waste and achieving your target.
- Ordering review – Are your ordering lists accurate? Is there no waste to be found with ingredients purchased from the wrong vendors, at the wrong prices, or for no good reason? Big corporations block items from being ordered with vendors so that teams don’t make mistakes. Pay attention to that cue and make sure your ordering system is buttoned up.
- Prep lists – Is your team organized and provided clear instructions on what to prep every shift? There is a ton of opportunity here to manage your COGS.
- Line checks / portioning audits – Yep, this is the “check and balance” part of every kitchen operation. You have to audit to ensure portions are correct all the time. Every service period, every day. One cook may LOVE to give extra chicken on your signature club sandwich, but every time that happens, its unplanned money going out the door.
- Waste logs – If you don’t track it, how do you know what’s happening? This is a big opportunity in the food world. Waste logs can help you identify weaknesses in the system when you know how much you are throwing away. (With the obvious goal of getting to the most minimal possible waste!)
- Next-Level COGS MGMT – Want to get serious? We will soon release the Mise Mode Theoretical COGS MGMT Tool. (Sign up for our newsletter if you want the latest news on cool, upcoming tools!) We are creating this tool to help food businesses like yours easily drill down into your COGS management for next-level mastery. You won’t be able to use it unless you have accurate recipes recorded because it uses those recipes to analyze your COGS opportunities. So, if you want to go deeper, get your recipes recorded accurately now (or use our Master Recipe MGMT Tool to organize and document your recipes) so that you can dive way deeper into your COGS.
Okay, that was a long journey. But we’re not done with your expenses yet. Or with COGS, for that matter.
So, after ingredients, what’s your other major expense? You guessed it—labor!
Yes, labor: the wages (and benefits) you pay to your staff, from your prep cooks to your servers and managers.
Generally, your labor costs should fall between 25-40%, depending on the type of restaurant or food business you operate. (Fast casual being on the lower end, fine dining on the higher end, at least when it comes to serving and kitchen staff.)
Labor will almost always be a big expense, but it’s also controllable to a degree. Review your labor as a % of your costs and compare that to your sales regularly, to make sure you aren’t wasting your most important resource: your people!
Income ($) – COGS ($) – Labor ($) = Unit-level Operating Profit ($)
Income (%) – COGS (%) – Labor (%) = Unit-level Operating Profit (%)
Once again, I’ll frame that labor percentage with the bold and the caps: THIS IS THE KEY NUMBER.
With rising minimum wages, it’s more important than ever to avoid overstaffing. Schedule according to your forecasted sales, and continually identify which employees might go into overtime to avoid unnecessarily paying time and a half or (depending on your region) double pay.
On the flip side (yes, there is always a flip side!), running a business with a skeleton crew by cutting hours and paying low wages will negatively impact both your customer service and your overall employee morale. If you have retention issues, your labor ratio is almost certainly a key driver.
Finding forecasted sales are a bit outside the scope of this guide. But don’t worry, we’ve got you covered. If you don’t know how to find your forecasted sales or need to understand more about how to schedule your team effectively, send me a note because we are about to release Mise Mode’s Labor Scheduling tool. It’s a fast, simple, easy-to-use and—most importantly—effective way to write your schedules and ensure you stay on budget.
Operating Expenses & Occupancy
Once your Prime Costs (COGS and labor) are deducted from your Income, you are left with either a net gain or a loss – often called “Unit-level Operating Profit.”
Let’s check out the basic P&L terms and formula again:
Basic P&L Terms:
Revenue - COGS = Gross Profit
COGS + Labor = Prime Costs
Revenue – Prime Costs = Unit-level Operating Income
Unit-level Operating Income - Operating Expenses = Controllable Profit
Controllable Profit - Occupancy = Net Income (Profit or Loss)
So, what makes up Operating Expenses and Occupancy?
Expense categories like rent, maintenance, utilities, equipment, marketing & social media management, and those emergency plumbing visits all come after Prime Costs are factored in. So, you can see how deeply important it is to manage your Prime Costs as effectively as possible so that you have enough money left over to cover the other costs of running your business AND still leave profit on the table once all is factored in.
We could go into the line-item details of every expense that falls below the Prime Costs line, but honestly, it rarely matters if your COGS & labor aren’t managed effectively.
So, focus on the big buckets first, and once you have those under control, then it’s time to look at the other expenses to see where you can save and find optimal costs to support maximum profitability.
Here’s a quick look at the other Expenses that fall below the Prime Costs line on a P&L:
Other Expense Categories:
Repairs & Maintenance
- Building Repairs
- HVAC R&M
- Plumbing Repairs
- Electrical Repairs
- Equipment Repairs
- Refrigeration Repairs
- Grease Trap Repairs
- Mechanical Maintenance Contracts
- Equipment Maintenance Contracts
Controllable Expenses
Supplies
- Restaurant Operation Supplies
- Office Supplies
- Smallware Supplies
- Maintenance Supplies
Other Controllable Expenses
- Misc Expenses
- Exterminating
- Uniforms
- Trash Removal
- Chemicals
Non-Controllable Expenses
Utilities
- Electric
- Water/Sewage
- Telephone
- Internet
General & Administrative
- General Liability Insurance
- Service Contracts
- Printing & Collateral
- Online Reservations
- 3rd Party Delivery App Fees
- Cash (Over) / Short
- IT Systems
- Music
- Equipment Leases
- Postage
- Travel - Transportation
- Freight
Occupancy
- Base Rent
- Lease Amortization Expense
- Percentage Rent
- Real Estate Tax
- CAM Charges (Common Area Maintenance)
Shift by shift, day-by-day, keeping a keen eye on your incoming revenue and outgoing costs will be invaluable in maximizing your restaurant or food business’s profitability year after year. And that’s how you stay in business for the long term!
How Do You Make a P&L for a Restaurant?
And that brings us back to the main question we are trying to answer here. If you have Excel and a little spare time, you can make a basic P&L file. (Don’t have Excel? Google Sheets has you covered.) If you’re not well-versed in spreadsheets or you don’t have time (I know! Who has time?!), stay tuned.
In your restaurant P&L, you need to track your Income, COGS & Labor. With those, you can track your Prime Costs and determine your Unit-level Operating Income.
First, set up your sales by category/segment, just like we discussed above. If you’re short on time, don’t worry about that: for now, you can pile it all into one bucket. Any restaurant P&L is better than no restaurant P&L. But if you can make the time, remember that the more specific you are with tracking your Income and Expenses, the more effective you will be in managing (and improving) your overall financial performance.
As you know by now, the costs that really matter are your Prime Costs: COGS and labor. If you can manage those against your Income, you are most of the way there. Everything else under the Prime Costs line (rent, utilities, linen, insurance, marketing, etc...) can be managed once you have these two key categories under control.
If you’re like most business owners and managers, of course you don’t have time to develop a custom Excel template that has auto-populating fields and embedded formulas that will give you accurate, real-time numbers in a flash.
So, we made one for you. You can find it here.
Enter your basic information, and the file will auto populate into a Weekly and Monthly roll-up. Now, you are ready to begin the transformative journey of actively managing your financial performance in real time!
With your Restaurant Prime Costs P&L tool, you will be able to answer burning questions like:
- Is my restaurant spending too much on labor?
- Is my restaurant spending too much on eggs?
- Is an employee stealing from me?
- Should we open for brunch on weekends?
- Should we close for brunch on weekdays?
Keeping a close eye on your restaurant profit and loss is the only way to understand your business’s financial performance. And understanding your financial performance is the only way to ensure you can achieve your goals. (And stay in business full stop.) If you’ve read through this article, you now know:
- How to read a restaurant P&L
- The keys to understanding a restaurant P&L
- How to make a P&L for a restaurant
- How to get your restaurant P&L percentages (%)
In short, you have all the tools you need, along with the answer to the one burning question that I get again and again: What is a P&L for a restaurant?
The answer in a few words? A restaurant P&L is the key to making your food business profitable.
FAQs
What should I look for in a P&L report?
In a P&L report, you want to see a clear structure of:
Revenue - COGS - Labor = Unit-level Operating Income
Unit-level Operating Income - Operating Expenses = Controllable Profit
Controllable Profit - Occupancy = Net Income (Profit or Loss)
As mentioned in the above Expenses section, there are a ton more Expenses that come out below the Unit-level Operating Income line on a P&L BUT (and this is a big BUT) the areas to focus on a P&L report that will give the biggest bang for your buck are the Prime Costs (COGS & labor) when related to your Income.
For Income: The more specific your reporting is, the easier it will be to find opportunities to improve your numbers. For instance, if you sell both breakfast and lunch items, but you only have one Income/Revenue Category on your P&L statement, you are missing an opportunity to analyze how your breakfast sales are performing vs. your lunch sales.
Same goes for Expenses: Having your COGS lumped into one number is a great start, but further separating the categories will help you identify the areas that need attention. That’s when you can clearly see “Oh hey, my dairy costs went up significantly this week,” or “Whoa, egg prices are way down! Let’s get some egg dishes on the menu, stat!”
So, while you can definitely benefit from knowing an overall Income/Revenue number, or an overall Expenses number, investing in the deeper work of organizing your reporting by expense streams (Categories, Dayparts, etc.) and having this information available “in real-time” will make it so much easier to find the details you need to make good decisions. And that will help you achieve your financial goals.
What is the formula for restaurant profit?
It’s this:
Revenue - COGS - Labor = Unit-level Operating Income
Unit-level Operating Income - Operating Expenses = Controllable Profit
Controllable Profit - Occupancy = Net Income / Loss (Profit)
Remember, if you don’t have sales, you don’t have anything!
Your costs are too high? Don’t worry, if the sales are there, you can still get to profitability. Yes, even if you are currently losing money!
Just keep your sales consistent and focus on customer service while you use your restaurant P&L to investigate why you aren’t profitable. The formula for restaurant profit may be simple, but those who run consistently profitable businesses are the ones with the discipline to prioritize understanding their financials on a regular basis. That is what helps them to make informed decisions and optimize their menu and operations for maximum profitability.
What is the first thing you see on a P&L sheet?
The first thing you see on a P&L sheet should be the time period, clearly spelled out. So, whether it’s by week, month, quarter, or year, you should know exactly what time period you are looking at before you begin to evaluate the Income, Expenses and Net Profit/Loss, etc... details.
Why is the P&L statement the most important thing for a hospitality manager or business owner to understand?
Like I said at the beginning of this article, in the food world, we operate under the slimmest profit margins imaginable. If you don’t track what you earn and what you spend, you cannot optimize your profits for maximum gain. At the end of the day, you want to hit your targets and make the most money possible.
It all starts with knowing how your business is performing in real-time. And a restaurant P&L statement is the primary tool used to get that knowledge. When you understand your real-time performance, you can make good business decisions and focus on areas that will help you accomplish your financial goals.
Bottom line? You can’t impact your numbers unless you know your numbers! So, use your restaurant P&L statement to bring those numbers into the light. (And if you don’t have one, don’t worry – we’ve got you covered.)
