Unlocking the Secrets in Your Profit and Loss
Tanya McCaffery:
Welcome to our Vast Foundational Series, Episode One: Unlocking the Secrets in Your Profit and Loss.
I’m Tanya McCaffery. I’m the Founder and CEO of Vast, and our mission is to strengthen businesses by turning financial clarity and control into decisive, disciplined action.
Today’s webinar focuses on our first core principle: Know Your Numbers. We’re going to dig into the profit and loss statement, or the P&L, for your business so that you can use it as a tool to guide your operations and decision-making.
Your numbers tell a story, and your financial statement package should include both your P&L and your balance sheet so that you can make informed decisions. Today we’ll walk through that first report, the P&L, so you can gain insight into how to analyze it, what to look for, and what to watch out for.
In my opinion, every line on the P&L is fair game for analysis and improvement. The more clarity you have in your numbers, the more you can dig in and actually affect meaningful change.
What Is a Profit and Loss Statement?
So what exactly is a P&L, or profit and loss statement?
You may hear it referred to as an income statement, a profit and loss, or simply a P&L. We’ll use P&L here for short.
Think of it as your restaurant’s scorecard. It tracks results monthly, quarterly, and yearly. It includes all of your revenues, all of your expenses, and ultimately shows you your net income.
Today we’ll talk about net profit, which is often referred to as EBITDA. That stands for earnings before interest, taxes, depreciation, and amortization. For our purposes today, we’ll refer to this simply as net profit, which reflects the earnings from your core operations before those additional items.
The Best Format for a Restaurant P&L
What is the best format for a P&L?
Many companies use accounting systems such as QuickBooks Online, NetSuite, or Restaurant365, which all include built-in financial statement formats. Some systems even offer industry-specific reports for restaurants.
However, the best format is ultimately the one you will consistently use and analyze.
At Vast, we use what we call a standard restaurant chart of accounts. A chart of accounts is essentially the backbone of your financial statements. It provides the structure for all the accounts used on both your balance sheet and your P&L.
We use a standardized structure so we can benchmark against industry data and peer restaurants. Consistency is key because if accounts are categorized differently, it becomes difficult to compare results side by side.
If you want a copy of our standard restaurant chart of accounts, you can visit vastcfo.com, navigate to the blog section, and download the template to use in your business.
Understanding the Key Buckets in a Restaurant P&L
When reviewing a P&L, consistency allows us to benchmark against peers and identify trends.
Sometimes you may find that one cost category is slightly higher than industry averages while another is lower. That’s okay. The key is ensuring all the buckets work together to achieve your desired level of profitability.
You cannot afford to be high in every category.
Sales: Gross Sales vs Net Sales
At the top of your P&L are gross sales.
Gross sales represent all revenue from customers across everything you sell, including food, beverages, liquor, wine, beer, and events. These numbers typically flow directly from your point-of-sale system.
From gross sales, we deduct discounts and allowances.
These include employee meals, comps, returned or remade dishes, friends and family discounts, influencer promotions, and marketing promotions.
Promotions such as buy-one-get-one offers or coupons are typically recorded as discounts within the POS system.
However, some discounts are embedded directly into menu pricing, such as happy hour pricing. In those cases, the discount may not appear as a separate line item, which can impact your reporting.
Once discounts are deducted from gross sales, you arrive at net sales.
When benchmarking restaurant performance, it is important to compare costs against gross sales rather than net sales. Whether you sell an item at full price or give it away, it still costs the same amount to produce and takes the same amount of time to prepare.
Prime Costs: Cost of Goods Sold and Labor
Below sales on the P&L are your prime costs. In restaurants, prime costs include two categories: cost of goods sold and labor.
These together make up the largest expense group on the P&L.
For cost of goods sold, a typical target range is between 28 percent and 32 percent. Some restaurants fall outside this range depending on menu design, ingredient costs, and pricing strategy.
Accurate inventory management is critical to calculating cost of goods sold correctly. Restaurants should conduct inventory counts at the end of each month and maintain strong processes around accounts payable and vendor invoices.
This ensures that the cost recorded on the P&L reflects the cost of items actually sold during the month rather than simply what was purchased.
Labor is the other component of prime costs. At the higher end, labor typically ranges between 30 percent and 35 percent of sales. Some restaurants, especially quick-service or high-volume urban locations, may run significantly lower.
Labor percentages should include payroll burden, which consists of employer payroll taxes, employee benefits such as health insurance and retirement plans, and payroll processing fees.
Breaking Down Revenue and Cost of Goods Sold
A basic P&L might show total revenue, total cost of goods sold, and total labor. However, a more detailed approach provides greater insight.
Revenue should be broken down by category, such as food, beer, wine, liquor, non-alcoholic beverages, and retail. Cost of goods sold should mirror those same categories.
Margins vary significantly across these categories. Liquor may have costs as low as 12 percent, while retail merchandise could run closer to 50 percent.
Breaking out these categories allows restaurants to better understand their product mix and ensure each category falls within expected cost ranges.
Typical ranges include:
Food: approximately 28 to 35 percent
Beer: approximately 12 to 25 percent
Wine: approximately 20 to 25 percent depending on pour size
Liquor: approximately 12 to 20 percent
Non-alcoholic beverages: slightly higher margins
Retail merchandise: approximately 45 to 50 percent
Breaking Down Labor
Labor can also be broken down into more detailed categories.
Labor before burden represents the wages actually paid to employees. Restaurants often separate labor into front-of-house, back-of-house, and management.
Typical targets include:
Front-of-house labor: approximately 8 to 10 percent
Back-of-house labor: approximately 10 to 13 percent
Management labor: approximately 8 to 12 percent
Management labor is typically fixed, meaning it does not fluctuate significantly with sales. For this reason, management structure should be carefully evaluated relative to projected sales.
Payroll taxes and benefits usually add an additional 9 to 15 percent to payroll costs. In tipped environments, front-of-house payroll taxes can be higher because employers must pay their portion of Social Security and Medicare taxes on reported tips.
Prime Margin
After subtracting cost of goods sold and labor from sales, you arrive at your prime margin.
Prime margin reflects profitability after your two largest variable expenses. It serves as an important checkpoint within the P&L before evaluating the remaining operating expenses.
Direct Operating Expenses
The first expense category below prime margin is direct operating expenses.
These include merchant processing fees, restaurant supplies, and equipment leases.
Merchant fees represent the cost of processing credit card transactions. Restaurants should aim to keep these fees below 3 percent where possible.
Restaurant supplies include cleaning supplies, smallwares, uniforms, china, glassware, silverware, to-go containers, chemicals, and linen service.
Equipment leases may include point-of-sale hardware, dish machines, kitchen equipment, or vehicles.
Controllable Expenses
Several additional categories fall under controllable operating expenses.
Marketing expenses typically range between 3 and 5 percent of sales. The focus should be on ensuring a clear return on investment.
Utilities can vary depending on factors such as building size, energy sources, and whether water or sewer costs are included in rent.
General and administrative expenses include insurance, accounting services, taxes and licenses, office supplies, dues and subscriptions, and professional services. These can range between 3 and 10 percent depending on the structure of the business.
Repairs and maintenance typically range between 3 and 4 percent. This category can be divided into facility repairs and equipment repairs. Monitoring equipment repair costs can help determine when replacing equipment may be more cost-effective than continuing to repair it.
Occupancy Costs
Occupancy costs represent another major expense category.
Ideally, rent and occupancy costs should fall between 5 percent and 7 percent of gross sales. Some operators consider up to 10 percent acceptable, but higher occupancy costs place additional pressure on the rest of the P&L.
Occupancy includes base rent as well as CAM charges, or common area maintenance fees.
Restaurant owners should carefully review lease agreements, monitor rent escalation clauses, and review annual CAM reconciliations to ensure charges are accurate.
Achieving a 10 Percent Profit Margin
A 10 percent profit margin is achievable for many restaurants, but it requires balance across all expense categories.
No single category can run consistently at the top of its range. Operators must adjust expenses across multiple areas to maintain profitability.
Understanding how each category interacts with the others is key to building a financially healthy restaurant.
Using the Restaurant Profitability Calculator
On our website, we offer a restaurant profitability calculator that allows operators to plug their numbers into the standard chart of accounts and see how adjusting different expense categories affects overall profitability.
This tool helps visualize how small improvements across multiple areas can combine to produce stronger financial results.
Closing and Strategy Session Offer
If you would like help making sense of your numbers, I offer a free strategy session for businesses that want to better understand their financial statements.
I would be happy to review your financials and provide recommendations on how to strengthen your restaurant’s performance.
You can reach me at Tanya@vastcfo.com.
Thank you so much for your time, and I wish you the very best in your restaurant success.