A restaurant profit and loss you can read

A restaurant profit and loss statement, the P and L, is the report that shows what a venue sold, what it spent and what was left over for a period. It is the most important financial document a restaurant produces, and for many owners and managers it is also the most intimidating. It arrives from the accountant weeks after the month ended, full of categories and codes, and is often filed rather than read.

That is a shame, because a P and L read properly is a map of where the money goes. It shows which costs have grown faster than sales, which lines are quietly eating the margin, and whether the month's busy trade turned into profit or simply into more cost. Read every month, it becomes the best early warning a venue has that something is going wrong.

This guide walks down an illustrative restaurant profit and loss line by line. It explains what each section means, how to read costs as a share of sales, how fixed and variable costs behave, how month end accounts are put together, and the four lines where restaurants most often lose money without noticing. It ends with a short routine for reading the P and L every month in about half an hour.

A profit and loss statement sets out, for a period such as a month, the venue's sales, its costs grouped into categories, and the profit or loss after each group of costs. It answers one question: did the venue make money in this period, and where did the money go?

The general idea of an income statement, as accountants call it, is the same for every business. A restaurant's version has categories that reflect how restaurants work: food and drink, labour, occupancy, operating costs and so on.

It is different from a cash flow statement, which shows money in and out of the bank, and a balance sheet, which shows what the business owns and owes at a point in time. Profit and cash are not the same, as our guide to cash flow explains.

Most restaurant P and Ls follow a similar shape, from top to bottom:

Your accountant's version may group things differently, but the logic is the same.

The top line is sales, usually excluding tax and often split into food, drink and other income. Read it first, because every other line is judged against it. Compare it with the same month last year and with the budget. Then look at the split: is drink growing or shrinking as a share? Did food sales rise because of more covers or higher spend per cover?

Sales on the P and L should match what the till recorded, after refunds and discounts. If they do not, find out why before reading further.

Cost of goods sold is the cost of the food and drink used to make the month's sales. It is usually calculated as opening stock, plus purchases, minus closing stock. It depends on accurate stock counts at the start and end of the month.

Read it as a percentage of sales, separately for food and drink if the P and L allows. A rise in the percentage means each unit of sales is costing more to produce: higher supplier prices, more waste, larger portions, more comps, theft or a stock count error.

Gross profit, sales minus cost of goods, shows what is left to pay for everything else.

Labour includes wages, salaries, overtime, employer taxes and contributions, holiday pay and benefits. On some P and Ls these are on separate lines; on others they are combined. Make sure you know what is included, because a labour line that leaves out on-costs understates the true cost.

Read it as a percentage of sales, and compare with the same month last year. Our guide to labour cost in a restaurant, counted properly covers what belongs in the figure.

Cost of goods and labour together are prime cost, usually the largest share of a restaurant's costs.

Restaurant operating costs are the costs of running the venue beyond food, drink and labour: energy, repairs and maintenance, cleaning, laundry, waste collection, smallwares, card and platform fees, software, marketing, insurance, licences and professional fees. Each is usually small compared with prime cost, but together they are a large share of sales.

Read each as a percentage of sales, and look for lines that have grown faster than sales. A line that was 1 per cent of sales last year and is 2 per cent this year has doubled its claim on the margin.

Occupancy costs are the costs of the building: rent, service charges, business rates or property taxes where they apply, and sometimes building insurance. They are usually fixed for long periods, set by the lease.

Because they are fixed, occupancy costs are a larger share of sales in quiet months and a smaller share in busy ones. That is one reason restaurant profit margin swings with the seasons.

Operating profit is what remains after cost of goods, labour, operating costs and occupancy. It shows what the restaurant earns from running the business. Below it come depreciation, the accounting charge for equipment and fit-out wearing out, interest on any loans, and tax. What is left is net profit.

Our guide to restaurant profit margin, honestly calculated covers the different margins and what each tells you.

The single most useful habit when reading a P and L is to look at every line as a percentage of sales, as well as in money. Money tells you how much was spent; percentages tell you whether the cost is growing or shrinking relative to the business. A cost that rose in money but fell as a percentage is growing more slowly than sales, which is usually fine. A cost that rose as a percentage is taking a larger share of every unit of sales.

Many accountants will add a percentage column if asked. If not, add one yourself.

Fixed and variable costs behave differently, and the P and L shows both. Variable costs, such as food and drink and much of hourly labour, rise and fall with sales. Fixed costs, such as rent, salaries, insurance and many subscriptions, stay roughly the same whatever the trade.

In a busy month, fixed costs are spread over more sales, so their share falls and profit rises quickly. In a quiet month, the opposite happens. Knowing which lines are fixed and which are variable explains why profit moves more than sales do. The general ideas of fixed costs and variable costs apply directly.

Month end accounts are the process of closing the books for the month so the P and L can be produced. It usually involves recording all sales, recording all supplier invoices received, counting and valuing stock, recording payroll and accruing for costs that relate to the month but have not yet been invoiced, such as utilities.

The quality of the P and L depends on the month end. A stock count that is missed, invoices that arrive late and are put in the wrong month, or accruals that are forgotten can all distort the figures. A month that looks unusually good or bad is often a month end problem rather than a trading one.

Work with your accountant on a simple month end routine, and keep it the same every month.

The first line where restaurants lose money quietly is food and drink cost. Small leaks add up: waste from over-preparation, portions that creep larger, comps that are not recorded, supplier prices that rise without the menu changing, stock that disappears. None is dramatic, and each can add a point or two to the cost of goods.

Watch the food and drink percentage every month, and look behind any rise. Compare actual cost with what the recipes say the cost should be; the gap shows how much is leaking. Our guide to actual versus theoretical food cost covers how to find it.

The second line is labour. Overtime, agency staff, shifts that start too early or finish too late, and rotas that do not flex with trade all push labour up without anyone deciding to spend more. A quiet month with last month's rota is a common culprit.

Watch the labour percentage, and read it by service where you can. Our guide to labour cost percentage, by service not by month covers how to find the services that cost most.

The third line is fees: card processing, booking platforms, delivery platforms and other commissions. They are a percentage of sales or a fee per transaction, so they grow with trade, and they are often spread across several lines or netted off sales, which makes them easy to overlook.

Add them up. Card fees, platform commissions and booking fees together can be a meaningful share of sales. Review the rates once a year, and consider whether any channel's fees are worth what it brings. Our guide to cover fees covers one of the largest.

The fourth line is repairs, maintenance and smallwares: broken equipment, call-out charges, replacement plates and glasses, cutlery that disappears. These costs arrive irregularly, so some months look fine and others look terrible, and the true annual cost is rarely added up.

Track them over a full year. A venue that replaces hundreds of glasses a year, or pays for repeated call-outs on the same fridge, may save more by replacing the item or changing the routine than by any change to the menu.

Many P and Ls show the budget beside the actual figures, with the difference for each line. That column is one of the most useful on the page, because it shows where the month departed from the plan. A line that is well over budget needs an explanation; a line that is well under may be good news or a sign that a cost has been recorded in the wrong month.

If your P and L does not show the budget, add it. A budget built from last year's figures, adjusted for known changes, is enough. The point is not to hit every line exactly but to notice when the business is drifting from what you expected.

Comps, discounts and voids rarely appear as their own lines on a P and L. Discounts usually reduce the sales figure; comps may be hidden in the cost of goods, because the food was used but not sold; voids may disappear altogether. Yet together they can be a noticeable share of sales.

Track them separately from the P and L, from the till. A month with unusually high comps may explain a rise in the cost of goods; a rise in discounts may explain why sales grew less than covers. Look at who gave them and why, because patterns often point to a training need or a recurring problem in service.

Many venues receive their P and L several weeks after the month has ended, by which time the next month is half over. A late P and L is still useful for understanding trends, but it is too slow to act on quickly. That is why weekly measures such as prime cost matter: they give an early view while the accountant prepares the full picture.

Ask your accountant how quickly the P and L can be produced, and what you can do to speed it up, such as sending invoices promptly and completing the stock count on time.

In a group, ask for a P and L for each venue as well as the group as a whole. A combined figure can hide one venue's success and another's loss. Central costs, such as head office, shared marketing or a central kitchen, should be shown separately or allocated fairly, so each venue's own result is clear.

Compare venues line by line as percentages of sales, but allow for differences in rent, format and location, which can make an excellent venue look weaker than a merely average one with a cheaper lease.

Here is an illustrative month for a restaurant, line by line. The figures are examples.

Reading it as percentages shows at once where the money goes, and next month's figures can be compared line by line.

Read the P and L every month in about half an hour:

Share the result with the chef and the manager, because they control most of the lines.

servearound does not produce your profit and loss, but it holds the top of it. Payment analytics shows what was collected by day and hour, how it was tendered, what made up the total, how deep the discounts ran and what was voided and comped, so the sales line on the P and L can be checked against the service, and discounts and comps can be seen before they reach the accounts. With the Analytics module, the menu report shows each dish's gross margin once its cost is set, which helps explain movements in the cost of goods.

servearound is priced per venue, per month, with no per-cover or per-order fees, which keeps that line on the P and L predictable. See Analytics.

Every month, in about half an hour, and weekly for prime cost in between.

Because many costs are fixed. When sales change, fixed costs are spread over more or fewer sales.

Food and drink leaks, labour that does not flex with trade, fees, and repairs and smallwares.

Check the month end first: a missed stock count or invoices in the wrong month often explain it.

Compare with the same month last year as well, because trade is seasonal.

No, though one helps produce it. Reading it is a management habit, not an accounting one.

Sales, then the cost of goods and labour, because together they make up most of the costs and move most from month to month.

Check whether a cost from another month has been recorded in this one, such as an annual bill or a late invoice, before assuming something has gone wrong in the venue.

Yes, at least the lines they control, such as the cost of goods and kitchen labour. Chefs who see the numbers make better decisions about ordering, waste and the menu.

A restaurant profit and loss shows sales, costs and what is left, line by line, from sales and cost of goods through labour, operating costs and occupancy to operating and net profit. Read every line as a percentage of sales, compare with the same month last year, and remember how fixed and variable costs make profit move faster than sales.

Make month end accounts reliable, watch the four lines where restaurants lose money quietly, food and drink, labour, fees, and repairs and smallwares, and read the P and L every month in half an hour. It is the best early warning a venue has for its restaurant profit margin, and it is far more useful read than filed.