How to Read a Profit & Loss Statement

A Must-Read Guide for Restaurant Owners

What is a P&L and why should I care?

In order to understand how your restaurant can improve, you need to first have a clear sense of how
your restaurant is currently performing. How much are you spending on labor? How much does
it cost you to create each of your menu items? Which dishes are the best and worst sellers? After
considering your controllable costs like payroll and food costs, is there enough money to cover your
overhead costs?

These are all questions that restaurant owners need to be able to answer if they hope to optimize
their business and improve their bottom line. A P&L, or income statement is used to help answer
these key questions.

Profit and Loss Statement

noun
a financial statement that summarizes the revenue, costs and expenses incurred during a
specific period of time. aka: income statement, P&L statement
• helps restaurant owners understand their net profit or loss
• helps identify areas that are contributing to or hurting the business

This quick guide will introduce the key metrics that make up a restaurant income statement and
show you how to analyze it to gain valuable and actionable insights. Use the income statement tem-
plate included in this packet to follow along, filling it in with your own restaurant’s metrics as you
read.

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 Creating a P&L Statement
Fill in the template provided with your own data. Column C will automatically calculate.

1. Select a Timeframe
The first step in creating a restaurant profit and loss statement is selecting a timeframe. You can create P&L
statements weekly, monthly, quarterly, or annually. It is a good idea to generate these statements regularly
so you always have a clear sense of how various aspects of your business are affecting costs and sales. On
the template, enter your restaurant name and the selected timeframe for your data.

2. Record Sales for the Selected Timeframe

The first section of an income statement is the sales section. The sales section shows you how much mon-
ey your restaurant brought in during the given time period. In the income statement template, you’ll see
sections for food, wine, beer, liquor, and soft drink sales. You can choose to track sales more specifically
by segmenting your food sales into more specific categories or menu groups, or you can simplify your P&L
statement by dividing sales into just food and beverage.

If you have a POS system that offers sales tracking and reporting, you should be able to easily access de-
tailed sales information for your selected timeframe. If you do not have a POS system, use whatever meth-
od is in place for tracking sales.

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3. Enter Cost of Goods Sold (COGS)
COGS is really just another way of saying the cost of the inventory used to create the food and beverage
items sold during your selected time period. If you use standardized recipes for all of your food and drink
items, it should be fairly easy to calculate your cost of goods sold. For instance, if you sell 10 steak dishes
and it costs you $3 dollars to create each dish based on your inventory purchasing costs and the amount of
each ingredient you use to create the dish, then your COGS is $30 (10 x $3).

For the purposes of this P&L statement, you are calculating the same thing for all of your food and beverage
sales. If you’re following along in the template, the cost of food and beverage sales will automatically calcu-
late the cost-to-sales ratio for each item. 

4. Track Labor
Labor includes all salaried and hourly employees, as well as payroll taxes and employee benefits. You should
calculate the amount you spent on each of these labor-related expenses during the time period you select-
ed and enter them individually into the income statement template.

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5. Record Operating Expenses
Operating expenses are the controllable expenses involved in running your day-to-day operations. This
could include things like supplies, repairs and upgrades, marketing and advertising, and music and enter-
tainment.

6. Record Occupancy Costs

Occupancy expenses are the fixed overhead costs related to things like the rent, real estate, and property
insurance. These costs are fixed because you do not have the ability to alter or change them.

7. Calculate Depreciation
Depreciation refers to the decreasing value of an asset, in this case the physical restaurant establishment
and equipment, overtime. Although depreciation is inevitable, it still needs to be accounted for in order
to accurately calculate your net profit or loss. Click here for more information about depreciation and for
assistance calculating your restaurant’s depreciation. 

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 Analyzing a P&L Statement
Based on the data you provided, the template will calculate key data points about your business.

Percent of Sales
If you’ve been filling in your data in the template, you’ll see the that percentage of total sales is being used
to cover labor, occupancy, food and beverage costs, and operational expenses in Column C. The percentag-
es listed here are an important indication of how your business is performing. According to industry stan-
dards, labor and food costs should account for the largest percentage of total sales (typically around 30%
each for both quick-service and full-service restaurants).

Key Takeaway: Every restaurant is different, but if you notice an unusually high amount being allocated to
labor, food and drink, it may be a time to re-evaluate staffing and low-margin menu items.

Gross Profit and Gross Profit Margin

Gross profit is calculated by subtracting the total cost of goods sold from total sales. Gross profit is cal-
culated automatically once you enter sales and COGS values into the income statement template. Next
to the gross profit dollar amount you should see a percentage, which represents your restaurant’s gross
profit margin. Gross profit margin is calculated by dividing your gross profit by  total sales. Pay particular
attention to this metric over time, comparing it to your historical data, to understand how fluctuating food
and beverage costs are impacting margins. Gross profit margin is often the metric restaurants rely on when
deciding where to set menu prices and portion sizes.

Key Takeaway: Track this metric over time and use the data to make decisions about pricing menu items
and setting portion sizes.

Net Profit & Loss

The final metric in the income statement template is the metric you likely care the most about - the bottom
line. Net profit/loss is a key indicator of how your business performed during a specific period of time. This
number will be positive or negative depending on business performance. If this metric is positive, congratu-
lations! Your restaurant is profitable overall. If the number is negative it means that your restaurant’s costs
are greater than your total food and beverage sales. Over an extended period of time, that could mean
trouble.

Key Takeaway: Keep a close eye on net profit/loss and compare it to your own historical data to see how
your restaurant’s bottom line compares to the previous week, month, or year.

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Prime Cost
While it is, of course, important to calculate your restaurant’s net profit or loss, it is not a particularly ac-
tionable metric. It highlights how your restaurant’s bottom line is changing over time, but it doesn’t show
you how to improve. It simply shows you how your restaurant performed in the past. If you’re looking for
ways to cut costs and improve your net profit, your restaurant’s prime cost will be the most helpful metric.

A restaurant’s prime cost is the sum of its labor expenses and its cost of goods sold. Not only does prime
cost make up the bulk of a restaurant’s expenses (typically around 2/3 or 60%), but it also constitutes the
portion of the business that can be manipulated in order to maximize profit. Although making minor chang-
es to labor and food costs during a set period of time may not seem significant, every dollar shaved off of
prime cost is another dollar that can go towards overhead expenses and profit.

Key Takeaway: Use prime cost, the sum of COGS and labor expenses, to determine where to cut costs to
improve net profit.

Good business relies on data. By regularly creating income statements and tracking prime cost
overtime, you will start to recognize trends and areas that need more attention so you can make
the appropriate adjustments.

If your point of sale system is unable to provide some or all of the data required to create a profit
and loss statement, consider researching other POS systems. Toast is an all-in-one restaurant man-
agement platform that gives you real-time visibility into your restaurant’s sales, labor and invento-
ry data.

Get a Demo
of Toast Restaurant Management Platform

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