When it comes to bookkeeping, every restaurateur wants to know just one thing: are we making money?
A restaurant income statement will tell you exactly that. Also known as a Profit/Loss Statement, the income statement provides an at-a-glance view of your income, outgoings, and overall profitability.
Income statements can cover a long period, such as a fiscal year. You can also prepare them for shorter periods, such as a month or even a week, and keep a tight grip of your finances. Whatever way you approach them, you’ll need accurate data to make these documents work for you.
Restaurant income statements: What data do you need?
Restaurant income statements require up-to-date and accurate information. Here are the things you need:
Effectively, this is the total of all the money that’s been received in the till. Normally, you’ll break this figure down into subcategories such as:
· Soft drinks
· Other sales
Don’t include tips paid directly to staff even if the gratuity is processed as a card payment. However, if you add a service charge, you should include this as income.
Cost of Goods Sold (COGS)
In a restaurant income statement, COGS relates to your food and drink costs. Some of the line items here will match the line items in the sales column, such as:
· Soft drinks
To keep track of your costs, you may choose to break some of these categories down further. So, instead of food, you could list:
If these categories are useful.
Calculating COGS isn’t always easy. You start each period with stock, and you end with different stock left over.
The way to get an accurate figure is to do an inventory at the beginning and end of the period. Take the value of the first inventory and add any stock purchases, and then subtract the value of the closing inventory.
Here, you’ll include the amount paid to every employee. That’s chefs and other kitchen staff, servers, bussers, cleaners and anyone else who earns a salary.
You want your restaurant income statement to give a meaningful picture of your cash flow. That’s why labor costs should reflect the gross amount paid, including taxes and benefits.
Remember, don’t include tips on your income statement, even if you are including tip credit in salary calculations. Tips are paid directly from the customer to the server. They don’t count as restaurant income or expenses.
These are the costs associated with the premises itself, such as:
· Local taxes
· Cost of permits/licenses
Because these costs aren’t linked to restaurant sales, they won’t change much from one period to the next.
This is, effectively, the miscellaneous column. Here, you’ll record all expenses that don’t fit elsewhere, for example:
· Disposable containers
· Other expenses
At this point, your restaurant income statement should include details of all cash outgoings. There is just one thing left to consider, and that’s depreciation.
An income statement doesn’t include capital expenditure, such as the purchase of new equipment. So why should you include the depreciation of those assets?
Well, here’s an example. Imagine you buy a new oven for $10,000. That oven is an asset, so theoretically you could sell it the next day for the same price, which means that the $10,000 is still in the business.
Now, imagine that it’s five years later and you sell the oven, but you only get $7,000 for it. Where did the other $3,000 go? It’s been lost via depreciation, at an average rate of $600 per year. That’s an expense that eats into your profits, so you should reflect this loss on your income statement.
Restaurant income statements: Key Performance Indicators
A restaurant income statement is a living document that tells you whether you’re on course for success or heading for choppy waters. Here are a few of the key metrics you can calculate from figures on your income statement:
Prime costs refer to costs directly related to sales. It’s a matter of simple addition:
PC = COGS + Labor
Prime costs are your most controllable expenses, so it’s where you look when you need to improve profitability. This can mean either looking for better deals from suppliers or reducing hours for your staff.
If you buy a steak for $5, cook it, and then sell it for $10, your cost-to-sales ratio is 50 percent.
You can perform this calculation for all items on the menu by comparing COGS to sales with this formula
Cost-to-Sales = (COGS X 100) ÷ Total Sales
The general rule of thumb for food is a cost-to-sales ratio of around 30 percent. If your cost-to-sales ratio is significantly higher than this, you probably won’t see a profit unless you have a very high volume of sales.
You can work out the cost-to-sales ratios for other items as well. Beer would normally sell at a ratio of around 25 percent for bottles or 15 percent for draft, while wine is often closer to 40 percent.
Ultimately, there is no universally correct cost-to-sales ratio for any restaurant. What matters is that your customers are happy with the prices and your accountant is happy with your profits.
This works in much the same way as cost-to-sales, except here you are focusing on labor costs:
Labor-to-Sales = (Labor costs X 100) ÷ Total Sales
A healthy labor-to-sales ratio is around 30 percent, although again this depends on your business model.
The most important figure on the income statement, gross profit/loss simply a matter of adding everything together:
P/L = Total Sales – Total costs
Hopefully, this will show an overall profit for the period, which shows that you’re on the right track.
Gross profit will fluctuate according to volume, which makes it hard to tell if you’re on the right track. Looking at margins can give you a better picture of the sustainability of your restaurant.
To work out the profit margin, use this formula:
Margin = (Profit*100) ÷ Total Sales
For example, if your sales for one week were $1000 and your profit was $400, then your margin is 40 percent.
This figure can be used predictively to tell you how your business works at scale. If next week’s sales are $10,000, you know that 40 percent of that will be profit.
This is the absolute minimum you must earn in order to cover your costs. Using the figures on a restaurant income statement, you can work out your breakeven point using two calculations.
First, calculate the contribution margin as follows:
Contribution margin = (Total sales – total variable costs) ÷ Total Sales
This should give you a number between 0 and 1. Now, divide your total occupancy costs by the contribution margin:
Breakeven point = Fixed costs ÷ contribution margin
So, if your fixed costs are $10,000 and your contribution margin is 0.4, then your breakeven point is $14,000. This is the amount you have to earn if you want to stay afloat.
What does a healthy restaurant income statement look like?
The first sign of a healthy income statement is the bottom line, which should show a net profit.
If it doesn’t, don’t panic. The figures on the statement should tell you exactly where you’re going wrong:
High cost-to-sales ratio
Your menu prices aren’t a realistic reflection of your costs. Try to negotiate a better deal from suppliers if possible, without making any sacrifices in relation to food quality. Failing that, you will need to review your menu prices.
High labor-to-sales ratio
You have too many staff claiming salaries. Try to eliminate inefficiencies, such as having too many servers during quiet periods. Also, be careful about overtime payments – when someone works over 40 hours per week, they are entitled to an additional 50 percent salary.
High breakeven point
A daunting breakeven point suggests that your fixed costs are too high. It’s tough to negotiate these costs, and in the long run you may have to look for premises with a more affordable lease.
Low total sales
Of course, you can’t turn a profit without customers. You can invest in marketing to attract extra table and increase volumes. However, make sure you have the fundamentals right first. If you’re running your restaurant on very low margins, then you will need a lot of extra customers before you break even.
Is your restaurant making money?
The only way to know for sure is to keep an eye on your accounts. To do that, you’ll need to create regular income statements and watch all of the relevant performance indicators. Update your statement regularly. Don’t let any nasty surprises sneak up on you.
If you need help, get in touch with Founder’s CPA. Our free consultation will help you get off to the right start.