P&L 101
Understanding your business starts with the numbers.
A key part of running a sustainable restaurant operation is understanding the ins and outs of your financial operations. Before you open your doors, a proforma helps you predict your revenue and once you open, your Profit & Loss (P&L) Statement is your compass for the financial health of your business on a daily, weekly, and monthly basis. Regularly reviewing and understanding your P&L will help you better control fixed and variable costs month-over-month and year-over-year.
We pulled in our Director of Finance + Analytics, Jalees Khalid, who works with our clients on all things finance, to share a Restaurant P&L 101. Read on for a download on how to read your P&L and tips for running more efficient operations.
Let’s Get Started
Hi Y’all,
I’m Jalees, the Director of Finance + Analytics at Oyster Sunday, and I’m based down in New Orleans. I work with our clients in a few different capacities, always with the goal of helping them better understand their finances and make informed decisions about their business. Whether building a proforma, burn rate model or reviewing a client’s P&L, I’m always thinking about how I can make financial documents (which can be very intimidating) as digestible and tangible as possible.
Whether you’re thinking of opening a restaurant, currently operating one, or are a key member of the team, I hope this Restaurant P&L 101 helps break down this key financial document and gives you executable strategies you can implement to better understand and control your business.
If you’re interested in learning more about how we support our clients with their financial and operational needs or have specific questions, please contact us—we’d love to meet you. Get in touch.
What’s in a Profit & Loss
(P&L) Statement?
Most of you reading probably know this already, but P&L stands for profit and loss. Simply put, what is being made, and what is being spent money-wise. A restaurant P&L typically has 4 sections: Revenue, Cost of Goods Sold, Labor, and Operating Expenses. Let’s go through each of these sections.
Revenue
Revenue lists all the different ways a business makes money. When someone asks what your “top line revenue” is, they are asking for the total of this section, before any expenses. If you’re a restaurant, you’re probably making money primarily by selling food and beverages, but we understand there may be other alternative revenue streams. All of these are listed in the Revenue section of your P&L. Revenue is typically broken out one of three ways:
1) The type of order – Ex: dine-in, to-go, catering, private dining
2) The meal period – Ex: breakfast, lunch, dinner
3) Category of items sold – Ex: food, liquor, beer, wine, retail
Identifying these categories is key for properly measuring and tracking your restaurant’s financial health. If you’re unsure which to use, I suggest method three (3). It will help you see a clear relationship with your cost of goods sold. Speaking of which…
Cost Of Goods Sold (COGS)
COGS are the direct costs associated with what you’re selling. The costs you calculate are your direct food and beverage costs. Food costs can vary drastically with inflation, seasonality, and availability, so it’s critical to review your COGS frequently and ensure your menu mix (and pricing) reflects your COGS.
As you build out your COGS, I recommend using the following categories (you can also combine all the beverages into one blended cost):
✔️ Food
✔️ Liquor
✔️ Wine
✔️ Beer
✔️ Non-alcoholic beverages
✔️ Retail
Labor
Your team is likely the heartbeat of your restaurant—they’re what makes it come to life every day, and a key cost of your business. Simply put, labor is the cost to pay your team who works in your restaurant. In addition to actual wages, you’ll need to factor in payroll taxes, fees, and any employee benefits such as health insurance. Our team strongly believes investing in healthcare for your team, in any way you’re able, is critical, along with including it in your P&L to understand the full span of your labor costs.
We are very passionate about employee benefits. So passionate that we’re (re)launching OS BENEFiTS this August. If you’re interested in learning more, we’ll be sharing updates via our email newsletter and Instagram, and we’d also love to be in touch directly. Contact us. →
All in, labor usually ranges between
30-40% of revenue.
Math Break!
COGS + Labor = Prime Cost
Your prime cost is a metric used to monitor the parts of your operation that you can more easily control. You can choose higher quality meat for your steak entrée, which would increase your food COGS. You can buy a case break of wine that your distributor has an excess of, gaining a discount and lowering your wine COGS. You can decide to go leaner on staffing, lowering your labor costs. Overall, your prime cost should be 60-65% of revenue. Anything higher and it becomes extremely hard to be profitable.
Operating Expenses
Operating expenses are everything else you spend money on to make your restaurant run. Think of this as your administration cost. Some businesses choose to break these expenses out into multiple categories. You might see a P&L that has “Controllable” and “Non-Controllable” expenses, or “General & Admin” and “Operating” expenses. No matter how you slice it, these expenses are pretty fixed because they’re the cost of doing business (utilities and credit card fees are what they are) or because they’re long-term contracts like your lease, which dictates your rent.
Operating expenses should be between
25-35% of revenue.
The Bottom Line
At the bottom of your P&L you’ll see a line that either says “Net Profit” or “Net Income”. This is the most important figure for your restaurant’s long-term health. If this number is positive, that means you are earning more money than you are spending. If the number is negative, your total spending is higher than your revenue.
Math break part 2!
Revenue - (COGS + Labor + Operating Expenses) =
The Bottom Line.
In any restaurant, there are good months and bad months. Some months, your bottom line may be negative. That’s okay! However, on an annual basis, having a negative Net Profit is not sustainable. A negative Net Profit means that you will either need to dip into cash reserves, seek additional investment, or borrow money to continue operating. It’s important to analyze your P&L at least once a month to spot trends early enough to course correct and minimize the impact on your profitability! Keep reading for some strategies for analyzing your P&L.
Great, Now What?
Now that we understand the key functions and categories of a P&L (yay!), let’s talk about how you can use this information to guide strategic business decisions.
REVENUE
If top-line revenue varies unexpectedly, below are questions to consider:
✔️ Are covers declining? Is the restaurant busy during popular hours?
✔️ Has the average check amount decreased? What part of the check (i.e. food, beverage, etc.)?
✔️ Are certain categories of sales lower? Alcohol sales? Dessert sales?
✔️ When are the slow periods in a week, in a year? What can we do to incentivize customers to dine during these times?
✔️ What are additional revenue opportunities? Private Dining (PDR)? Catering? Merchandise?
Strategies To Adjust Variable Cost
We understand that there are numerous fixed costs to running a business, so when you’re looking to reduce spending you should look at your variable costs like labor, COGS, and some specific operating expenses.
LABOR
What can you do if labor costs are too high?
✔️ Compare sales to labor to understand where labor costs are disproportionately high.
✔️ Incentivize customers to visit during these slower hours
✔️ Consider adjusting your hours of operation
✔️ Consider adjusting your service style: Switch to counter service during slower periods. Remove high-contact guest experiences, such as tableside food preparation.
✔️ Consider rolling out a service charge/staff wellness charge (we recommend consulting legal counsel to ensure this is legal in your city/state). The percentage you decide to charge will vary based on your specific business needs.
✔️ Cross-train employees to create efficiencies on your team, starting with onboarding and training.
✔️ Implement employee retention initiatives, such as benefits, growth opportunities, or continued education. OS BENEFiTS was created with employee retention in mind.
COST OF GOODS SOLD
Here are some questions to ask yourself and your team should you see your COGS increasing:
✔️ How can you lower your food costs? Consider both menu substitutions and vendor reevaluation.
✔️ What goals have been set for both food and beverage costs? Setting goals and monitoring will naturally move you in the right direction.
✔️ Are inventory reporting tools accurate? If not, you can’t trust your data.
✔️ How seasonal is the menu?
✔️ What initiatives are there to reduce waste?
✔️ Does your wine program have a purchasing strategy based on your guests ordering habits?
✔️ Can you combine purchasing with other local independent restaurants to get better terms? This is called group purchasing.
OPERATING EXPENSES
How can I reduce my overhead? This is a tough one because most of these costs are relatively fixed. Here are some variable costs to consider:
✔️ Build a budget for kitchen, dining, and bar supplies. This is a great way to control costs and have your team actively involved in the financial health of the business. Just the act of creating a budget and using it to monitor spending will reduce excess purchasing of supplies.
✔️ Audit your current tableware and to-go materials to get a better understanding of how much inventory you need on hand.
✔️ Revisit your tech stack to see if you can bundle services for a cheaper subscription rate.
✔️ Consider equipment maintenance contracts to help insulate you from large repair bills.
That’s a wrap!
On a daily basis, we help our clients find creative solutions that directly impact the financials of their businesses. If you are hoping to dive deeper into your P&L, we’d love to hear from you.
Our team at OS knows that chefs, operators, and owners have a lot to juggle on a daily basis, which is why we love to support our clients in finding creative solutions that impact their bottom line and ensure the financial stability of their businesses. If you have specific financial questions, don’t hesitate to reach out to Jalees at jalees@oystersunday.com, if you have general questions or would like to learn more about our services, you can contact us at hello@oystersunday.com, and if you thought this was helpful, spread the knowledge and forward it to a friend in the industry.
About Jalees Khalid
Oyster Sunday
Director of Finance & Analytics
Jalees helps businesses translate their data into strategy by turning financial models into decision-making tools for clients in hospitality, retail, and CPG. Prior to joining Oyster Sunday, Jalees was the Director of Marketing + Sales at InnoGenomics Technologies, a start-up molecular biology R&D company based in New Orleans. He also co-founded Ansanm, a boutique consulting company that was sold in 2022. Jalees began his career in consulting as an associate at Caerus Management, where he managed client engagements, provided market research, developed revenue forecasts, and conducted data analysis to support businesses in hospitality, healthcare, biotech, and education.
