Profit & Loss Statement

A basic profit and loss statement reports the following for a specified period of time:   Sales   Expenses   Profits/losses

Basic Components of PL Statement  Sales  Cost of Goods Sold (CGS)  Gross Profit  Payroll  Prime Cost  Controllable expenses  Controllable expenses  Operating Profit  Operating Profit  Non-Controllable Expenses  Net Profit Before Taxes

P&L Components Defined   Sales: This is the total of all revenue generated by sales of food, beverages (or bar sales), and retail products if applicable.   The sales line is the number that directs the flow of all other numbers.   Maximizing top line sales, while optimizing expenses, gives you the best opportunity to derive a reasonable bottom line profit.

P&L Components cont.  Cost of Goods Sold (CGS): Represents the direct cost associated with the sale of food and beverage. To determine the true cost of goods, a physical inventory or count must be made to calculate the dollar value of all food and beverage product on hand.  The total food and beverage are entered into the CGS formula:  CGS = (beginning inventory) + (purchases) – (ending inventory)  It is important to note that the CGS numbers will pertain to the sales of the corresponding category. For example, food cost dollars are divided into food sales, beverage cost dollars are divided into beverage sales.

P & L Components Cont.  Gross Profit: The gross profit number denotes the direct profit associated with the sale of food and beverages.  Gross Profit = Total Sales- Total CGS

P&L Components cont.  Prime Cost: Prime cost is the sum of the restaurant’s food, beverage, and labor costs.  Many owners consider this number to be their profitability barometer; or at least a major benchmark number on their P&L.  Because prime cost bundles an operation’s two highest cost categories, it represents the key indicator as to whether the business will be profitable for the reporting period.  Prime Cost is a direct reflection as to how well food, beverage and labor costs have been controlled on a daily basis throughout the reporting period.  Prime costs should run no higher than 65% in a full service restaurant, and 60% in a quick service operation (these percentages represent generally accepted figures).

P & L Components Cont.   Payroll: Along with food cost, payroll expenses will represent the 1st or 2nd highest expense an owner will incur.   Other labor related expenses include payroll taxes, workman’s compensation and group insurance benefits.   Controllable Expenses: Controllable expenses are costs incurred in operating a restaurant. Although these costs are necessary to operate the business, they can be somewhat controlled by management and personnel, or by means of following a budget.   Non-Controllable Expenses: These expenses are normally related to the occupancy of the building.   These expenses include rent, property taxes, insurance, interest, and depreciation.

P & L Components Cont.   Operating Profit: This is another key indicator of profitability, mainly because it measures how well the management and staff are able to control costs and expenses (food, beverage, labor and controllable expenses combined).   This line might also be referred to as controllable profits or net restaurant contribution.   In a full-service establishment, an operating profit that represents 18-21% of total sales might indicate a reasonable net income depending on the rent structure.   A quick service restaurant might look for a higher percentage, perhaps 23-25%.

P & L Components Cont.  Net Profit Before Taxes: The “bottom line” number represents the amount of income earned (or lost) by the business before paying taxes.  Net profit or net income is computed by subtracting non-controllable expenses from operating profits.