Below is a profit and loss statement that achieves the desired result. I’ll present the statement format first and then explain how to use the statement. I will create another article which I’ll link here in the future explaining how you can modify your existing chart of accounts to successfully create this presentation format.
One side note: There is NO legal or authoritative requirement for you to present your own profit and loss statement in a prescribed format! This is your business, it doesn’t belong to the government or the SEC or some other organization, so prepare YOUR financial statement in a way that best helps you be a good business operation. This is my suggested format based on my experience and knowledge.
Fixed Costs (Overhead & Capital)
Total Fixed Costs of Operations 27,418
Net Income Before Income Taxes 4,642
Net Profit $2,128
I know, it appears pretty busy doesn’t it? Well, let’s first look at in a summation format:
Cost of Meals Served 60,584
Gross Profit 32,060
Capital Costs 4,239
Operational Income 4,642
Net Profit $2,128
The value of the detailed format lies in the various triggers of managing a restaurant. All restaurateurs want to know their variable and fixed costs, they want to understand their prime costs and of course the contribution margin food generates and the margin beverages generate. The above format provides this information and more. Let’s take a look at how this report is used in evaluating performance in the restaurant.
Prime Costs Comparison
Notice how the layout of the sales matches line by line the primary cost of the food and beverages? Now we have something to work with. The owner can compare the actual cost of food for the respective three groupings (Dinners, Appetizers and Desserts) against his sales of the same items. This allows him the opportunity to review against the menu items and the corresponding costs for the same items within the main meals.
In addition, notice how beverages are broken out into the three distinct areas of refreshments. Again, this allows the owner to compare, and furthermore by understanding his liquor costs to the volume of sales, he can determine overall performance of his bartender. I wrote an in depth article on the subject of monitoring your alcohol costs. This profit and loss presentation format allows for the respective analysis. So let’s take a look at an example:
Compare the Cost of Food to Food Sales against the Cost of Beverages to Beverage Sales
From the profit and loss statement above, total food costs are $18,726. Total food sales are $67,759. Therefore food costs are 27.64 percent of food sales.
In contrast, beverage costs of $6,156 are 24.74% of beverage sales of $24,885. So based on this information, beverage sales are generating more margin per dollar of sales than food. This should be the norm in the restaurant industry. You should expect the food cost to food sales to run a higher ratio as meat adds quickly to the overall cost. Furthermore, it isn’t a bad thing because a typical customer spends three to five times as much money on food as they do beverages. So the food side is bringing in the volume of dollars to pay the bills.
So is there a particular beverage that really generates the value? Answer: compare the percentage of margin for each beverage and their respective absolute dollar contribution.
This simple analysis grid is a direct result of the data from the profit and loss statement above. The only additional information generated is a result of the core information. The column of dollars generated is merely the difference between the sales and the cost. The contribution percentage takes the dollars generated and divides by the total sales for that respective group. The chart clearly illustrates how the non-alcohol beverages not only have the highest contribution margin percentage, but they also put the most absolute dollars into the cash register. This is important information; it can indicate that maybe this is a family style restaurant whereby there are a lot of underage patrons. Or it could be an indicator that possibly, certain beverages create more value than others as in maybe tea is superior to sodas. The key is this: non-alcohol beverages are the preferred beverage of sale for the serving staff to recommend to the patrons. For each dollar of sales, non-alcohol beverages will add at least 7 cents to the bottom line. So by recommending tea or soda to the customers and switching $2,000 of alcohol based sales to non-alcohol will add no less than $140 to the bottom line.
This is just the beginning of value the above statement format brings to the owner and management team. Let’s explore other valuable analysis to continue improvements in making more profit.
Prime Costs Comparison – Payroll Inclusive
In the restaurant industry there are three prime costs. The first two relate to the food and beverages served. The third is the frontline staff payroll. Be careful here, some so-called authorities describe the entire payroll including management as a prime cost. This is not true. The management team is more in line with a fixed cost than as a prime cost. They exist whether you serve one meal or 1,000 meals per month. The prime cost component of payroll should include those employees that get the job done in getting the food prepped, served and cleaned up.
In this financial statement presentation, the payroll includes the chef, the cooks, the hostess, the waitresses/waiters, busboys and dishwashers. These staff members are the ones that are directly involved in serving the meals. Therefore they are a prime cost.
One last aspect of this prime cost calculation is the taxes and benefits paid to these staff members. Those costs are included in the aggregate payroll as a function of getting the meals served. Therefore, the taxes and benefits paid are included in the prime cost sub-total. In the restaurant business, both food and labor drive the cost of serving meals. As this cost increases per dollar of sale, there are fewer and fewer contribution dollars via the contribution margin to pay the fixed costs of the restaurant business. So it is important as the owner or manager to control both labor and food to maximize the contribution margin per dollar of sales.
In this particular restaurant, the labor is about $3,600 more than the cost of food and beverages combined. This should lead the reader to realize that this is a more formalized sit down style restaurant with a customer service mindset. Notice how the prep staff is more than 12% of the food sales? That is a key indicator that the meal orders are highly customized in the preparation process. In your fast food industry, the preparation staff costs are typically less than 7% of the total food sales.
Notice that the entire staff payroll is 30.7% of the total sales. In the fast food industry this should generally not exceed 24% (food preparation, assembly, cashiers and cleaning). Actually the fast food industry includes the management payroll in this formula. So based on this, you can determine the style of the restaurant; this one is not fast food (of course the alcohol sales should key you in too).
So why is it important to track the staff payroll? Well, the key is to set up a standard of performance for the restaurant. Ideally, you want a percentage value that allows you to earn the highest contribution margin possible. To do this, you must track the value from month to month. Over time, typically six months or more, you will begin to establish a standard. Use this standard to gauge the overall value of quality and profitability. What I mean by this is based on what you see going on in the restaurant, do you want to have a higher level of service, or can you reduce the level of service and reduce your corresponding cost of payroll?
If you increase the level of service to that of more waiter interaction and service to the table (waiter refills the wine glasses, spends time educating the patron about the food etc.) then to obtain the required contribution margin, you may have to increase the price per meal. Let’s look at an example of this in action:
Using the information above, the profit and loss statement identifies fixed costs for both overhead and capital of $27,418 ($23,179 of overhead & $4,239 in capital). Looking at the gross margin percentage above, the average dollar of sales generates around 34.6 cents ($32,060/$92,644). So we need at least $79,243 of sales ($27,418/.346) to cover those fixed costs.
The owner of the restaurant desires to decrease the number of tables the waiters serve on Fridays and Saturdays and therefore hires an additional waiter to spread out the load of work. This additional waiter will cost him $1,800 more per month in wages and taxes. How much should he increase his sales price on the menu to cover this additional cost? Answer: By adding $1,800 to our total prime costs, the gross margin decreases from $32,060 to $30,260. Therefore our new contribution margin percentage is 32.66%. This means this restaurant will need $83,942 of sales to cover the $27,418 of fixed costs. That is a required increase of $4,700 in sales to cover this additional waiter.
If the restaurant needs to increase sales an additional $4,700 then the average across the board price increase has to be 5.93% or basically 6% (($83,942/$79,243)-1). Notice how much more to charge assuming the same volume of customers to cover this marginal increase in payroll. It makes sense, if you increase the quality of service for the same number of customers, then the sales price per customer must increase too. Assuming people don’t suddenly eat more just because there’s more staff, the price per unit must increase.
There are some subjective issues to address here too. Think about the fact that the only groups of customers receiving this additional service are the folks that eat at the restaurant on Fridays and Saturdays. There is no additional increase of service to the folks on the other nights of the week. As the manager you must take issues like this into consideration when addressing quality of service.
Variable and Fixed Costs
The other valuable attribute of this presentation format is the splitting of variable costs and fixed costs for the restaurant. Notice that after prime costs are determined the other variable costs are included to determine the total cost of meals served. Remember, variable costs relate directly to the volume of sales. So the following four cost groups relate directly to the volume of sales:
- Credit Card Discounts – this is the banking cost to process those debit and credit card transactions. Most retail outlets and restaurants pay about 1 to 2% of the charge as a discount fee to the credit card clearing house.
- Supplies – include condiments, spices, napkins, mild cleaning agents and associated rags, bags, etc. In addition, supplies include doggie bags, to-go cups and containers, doilies, children’s items, liners, menus and lost cutlery.
- Maintenance – mostly related to the cleaning side of the restaurant. This includes air filters, strong abrasives, wash clothes, buckets, mops, floor mat service, power washing, carpet cleaning, detailing services, ventilation cleaning, pest control, fire control, fire suppression system testing and others.
- Taxes – relates mostly to licensing and training requirements mandated by law. Include inspection fees and local revenue taxes on the sales in this group.
In business some owners use the term ‘Controllable’ costs when discussing variable costs. Ideally, you would think all variable costs are controllable, but in reality they are not. They are partially controllable but not fully controllable. So instead, the better way to state this is to use ‘Variable’ as these costs have a very high correlation to sales. As sales increase or decrease, variable costs will tend in the same direction.
To appreciate variable costs, owners must understand what drives them. This presentation format identifies those driving forces and mostly in order of dominant to insignificant in impact on the margin.
Fixed costs are mostly set in stone via contracts and there is very little variance associated with them from time period to time period. A good example is communications. The restaurant’s land line rarely changes from month to month unless there is a sudden increase in long distance use. Typically communications include the internet and entertainment assess as many sports bars use some form of cable packages to show the sports on TV. These packages may change price from month to month depending on use, but pretty much stay within a range. For the owner, reducing fixed costs is extremely difficult if not impossible. But knowing the total fixed cost from one period to the next is instrumental in determining the needed sales volume to cover these fixed costs.
Finally, I assign fix costs into two distinct subgroups. The first is overhead and the second relates to capital costs. The overhead is generally the cash required each month to pay those contracted costs. The capital costs are accrual and cash as the depreciation and amortization are accrual based and the interest is cash based. So often when entrepreneurs talk about the break-even point, they are referring to the cash basis of accounting for fixed costs. In this restaurant’s case, the entire overhead fixed group is cash based and the interest in the capital section is also cash. Simply add the two numbers together and you get the aggregated cash basis break-even point for this restaurant.
This restaurant profit and loss statement presentation format is the best form to use as it provides all the necessary information needed to quickly analyze the performance of the restaurant. Not only are the prime costs separated and organized to match the sales groups, but variable is separated from the fixed costs of operations too. In addition, the reader can quickly determine margin percentages and the required sales volume to break-even for all costs, cash costs or for any one single line item. Finally, the information is presented to correlate with how restaurants provide meals and service. The format can be summed up for faster review or further detailed to reflect sales and costs by profit centers (restaurant, catering, mobile etc.).
Use this presentation format and begin to make big changes in your operations to improve the bottom line. Act on Knowledge.
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