Understanding Restaurant Finances & Financial Statements in 2024

As an operator, you must have a firm grasp on your revenue, expenses, and profitability if you want to be part of the 20% of businesses that find long-term success in the industry. This involves not only knowing your current financial status but also being able to forecast future trends and make informed decisions based on accurate data.

Components of a restaurant’s financial report

The food and beverage sales report, prime costs report, inventory report, profit and loss (P&L) statement, and cash flow statement are all critical components of a restaurant's financial management. By analyzing these reports, you can optimize pricing, control restaurant costs, reduce waste, and improve overall profitability. 

Let’s take a look at the five components you should monitor in your establishment’s financial report.

• Food & beverage sales report

• Restaurant prime costs report

• Restaurant inventory reports

• Restaurant P&L statement

• Cash flow statement

1. Food & beverage sales report

A food and beverage sales report breaks down revenue from different menu items, giving you an idea of the best-selling dishes and optimizing your menu accordingly. It helps you see which ingredients are being used frequently so you can maintain the right amount of stock on hand, reducing waste and spoilage.

Because the sales report shows the revenue generated by each menu item, you can set your pricing appropriately to maintain healthy profit margins. You can do this by comparing your sales to the actual costs of ingredients and labor. This way, you can decide whether you need to raise your prices or not.

For example, your restaurant offers a crispy fried chicken dish that’s popular among dine-in customers. However, when this dish is delivered, it often arrives soggy and unappealing because the steam from the chicken gets trapped in the packaging.

With your food and beverage sales report, you notice that the delivery sales for this dish are lower compared to other main courses, and the feedback indicates the quality doesn't hold up during transit. This not only affects the quality of the food but also impacts customer satisfaction and could lead to a decrease in repeat business. 

“Your best sellers should be front and center, with a timely emphasis on comfort food,” AJ Beltis, a content manager at HubSpot and a former blogger at Toast, writes. “You could also use this time to try out a rotating daily menu for consistently new offerings and optimal freshness.”

In this case, you could re-engineer your menu by either changing the packaging to something more breathable to maintain the chicken's crispiness or temporarily removing the item from your delivery menu. This way, you maintain your restaurant’s reputation for quality food. 

2. Restaurant prime costs report

Prime costs are the main expenses involved in running your restaurant, such as those for food and labor. Generating a prime cost report weekly helps you keep a close eye on your major expenses and make adjustments as needed.

To calculate your restaurant's prime costs, you need to add your cost of goods sold (CoGS) and labor costs.

Formula: 

Prime Costs = CoGS + Total Labor Costs

Let’s say your restaurant has the following financial data for the month of June:

• Total Sales: $10,000

• Cost of Goods Sold (CoGS): $4,000

• Total Labor Costs: $3,000

Prime Costs = $4,000 + $3,000

Prime Costs = $7,000

The prime cost ratio can then be calculated as:

Prime Cost Ratio = Prime Costs / Total Sales

Prime Cost Ratio = $70,000 / $100,000 Prime Cost Ratio = 0.70 or 70%

This means that the restaurant's prime costs account for 70% of its total sales. A good benchmark is to keep your prime costs 60% or lower of your total sales.

In the above case, the prime cost ratio is higher than the recommended benchmark, so the restaurant may need to find ways to reduce its costs or increase revenue to improve its profitability.

For instance, conducting daily and weekly inventory checks regularly and keeping accurate records helps you order just what you need. This reduces the chances of food spoilage and waste and, ultimately, lowers your overall expenses.

Additionally, use restaurant scheduling software to match staff levels to customer demand, avoiding overstaffing during slow periods. Having the right schedule ensures you aren’t paying employees to stand around when business is slow.

Labor costs can quickly eat into your profits if not managed carefully. By analyzing peak hours and slower times, you can schedule staff more efficiently, making sure that you have enough employees to handle busy periods without overstaffing during quieter times. This balance helps in maintaining optimal labor costs.

Finally, get the best prices for your ingredients and supplies by negotiating with vendors. Building strong relationships with your suppliers can lead to better deals and discounts.

Review your supplier contracts regularly and look for opportunities to renegotiate terms. Competitive pricing on ingredients and supplies can significantly lower your CoGS, improving your restaurant's profit margins. Don't hesitate to shop around and compare prices from different suppliers to ensure you're getting the best deal.

3. Restaurant inventory reports

A restaurant inventory report gives a glimpse into your finances by tracking how much you spend on goods, which in turn helps calculate profit and loss. Its main goals are to minimize waste, control costs, and improve operational efficiency.

When you manage your inventory well, you reduce the chances of food going bad before it’s used. This not only saves money but also ensures you’re not wasting resources.

Let's say your restaurant goes through 50 pounds of chicken per week. If you don't track your inventory closely, you may end up ordering 60 pounds of chicken to be safe. However, if demand is a bit slower one week, you may end up with 10 pounds of chicken going bad before you can use it.

On the other hand, if you have a good inventory tracking system, you know exactly how much chicken you need to order each week. You order the 50 pounds you know you'll use rather than over-ordering, preventing the waste of 10 pounds of chicken.

Assuming the chicken costs $3 per pound, that 10 pounds of waste equals $30 in lost money. Over the course of a year, that adds up to $1,560 in unnecessary costs just from overestimating your chicken needs.

You can also put up policies to specifically reduce waste, such as using food scraps for compost. 

“It’s more realistic to take small steps in every corner of the kitchen to set the expectation that everyone is responsible for reducing excess food,” Justin Guinn of Toast suggests.

Investing the time and resources to create an efficient inventory management process can help you maximize your profitability and maintain your restaurant's success.

Metrics tracked in a restaurant inventory report

Total inventory value, turnover rate, waste and spoilage, and days of inventory are four key metrics to track in a restaurant inventory report. These provide insights into the expenses related to your ingredients and supplies.

• Total inventory value: The cost of all items currently in stock, giving a snapshot of how much money is tied up in inventory

• Inventory turnover rate: How quickly inventory is used and replaced, which indicates whether there’s efficient use of inventory or not

• Waste and spoilage: The cost of unused or spoiled items, helping identify areas to reduce waste, save money, and improve overall profit margins

• Days of inventory on hand: How many days will your current inventory last based on average daily usage so you can plan orders and manage cash flow

A deep understanding of your inventory data through a restaurant inventory report can help you take steps to reduce unnecessary spending and keep your business running smoothly.

4. Restaurant P&L statement

A restaurant P&L statement has four key components: sales, CoGS (Cost of Goods Sold), labor, and operating expenses. With these factors, you can track revenue trends and make strategic adjustments to overall operations.

You can generate P&L statements weekly, monthly, or quarterly. By comparing different periods, you can see trends in revenue and expenses. This information helps you decide where to cut costs, how to price menu items, and where to invest more money.

Metrics tracked in a restaurant P&L statement

A P&L statement tracks metrics like total sales and gross and net profit margins to help you understand your restaurant's financial health. Analyzing these metrics allows you to make informed decisions to improve profitability. 

Total sales

Total sales is the total revenue from all sales, from food and beverages to other sources like catering or merchandise. This is the top-line number that represents how much money the restaurant is bringing in.

Gross profit margin

Gross profit margin is the percentage of revenue left after CoGS (Cost of Goods Sold) shows you how efficiently your restaurant turns sales into profit.

Formula: 

Gross Profit = Sales - CoGS

Gross Profit Margin = (Gross Profit / Sales) × 100

For instance, if your restaurant has a total sales of $100,000, with CoGS at $60,000, you calculate the gross profit margin by:

Gross Profit = = $100,000 - $60,000 = $40,000

Gross Profit Margin = ($40,000 / $100,000) x 100 = 40%

In this example, after accounting for the cost of the food and beverages sold, 40% of the total sales revenue is left as gross profit. This falls short of the ideal gross profit margin for restaurants, which is 50% for financially successful establishments.

In this scenario, you should look for ways to reduce your CoGS, such as negotiating better prices with suppliers or finding more cost-effective ingredients. Additionally, closely monitoring your labor costs can help you spot areas to optimize, especially when it comes to scheduling staff during peak and slow seasons.

The net profit margin is the final profit after all expenses have been deducted. This is the bottom line and indicates the overall financial health of your restaurant.

Formula:

Net Profit = Total Sales - CoGS - Labor Costs - Operating Expenses

Net Profit Margin = (Net Profit / Sales) × 100

Continuing on the example above, with the addition of $20,000 for labor costs and $10,000 for operating expenses, the net profit margin would be:

Net Profit = $100,000 - $60,000 - $20,000 - $10,000 = $10,000

Net Profit Margin = ($10,000 / $100,000) x 100 = 10%

A net profit margin of 10% is generally considered a healthy margin for a restaurant. Industry benchmarks suggest that a net profit margin of 5% to 15% is typical for well-run restaurants.

A low net profit margin indicates that menu adjustments are needed to either cut costs or increase prices. Meanwhile, a higher margin above 15% may signal an opportunity to invest in growth, such as expanding the restaurant, upgrading equipment, or enhancing the customer experience. 

5. Cash flow statement

A restaurant cash flow statement makes sure that you have enough money to pay your bills and handle unexpected expenses. Sales, liquidated assets, and financing sources are three types of cash inflows you should track.

On the other hand, cash outflows, like operating costs, asset purchases, and loan payments should also be monitored.

Having a positive cash flow lets you invest in things like new equipment, marketing, or even opening a new location. On the other hand, if your cash flow is negative, you will need to hold off on big investments until your finances improve.

The importance of a financial spreadsheet to a restaurant business

One of the best tools for managing your restaurant is a financial spreadsheet. This document allows you to gather all your data in one place, including your income, expenses, and cash flow.

One of the key benefits of using a financial spreadsheet is that it helps you with budgeting and forecasting. By tracking your expenses and revenue, you can plan for future months, especially when it comes to managing cash flow. With it, you can have enough money to cover your costs and invest in growth opportunities.

Another advantage is that a financial spreadsheet allows you to monitor key financial metrics like gross profit margin and net profit. These numbers help you evaluate your restaurant's financial health and identify areas for improvement. 

Basic restaurant financial spreadsheets you’ll need

Using a spreadsheet also simplifies the restaurant accounting process and generating financial statements. You can easily monitor your food and labor costs as well as profit margin, budget, and sales. By consolidating this information, you can see the overall financial health of your restaurant at a glance.

Food cost calculator

Inflation has led to increased revenue but higher food costs, with 60% of restaurant owners reporting that all or most of their suppliers raised their prices. Using a food cost calculator can help keep your operations afloat and avoid overspending.

This tool is completely customizable and allows you to input your specific inventory costs and revenue from all food, beverage, and other goods. You can also add projected purchases for the month to plan for future expenses.

Using a food cost percentage template is a great way to make the most of your profit margins. For example, if you notice that certain ingredients' costs are rising, you can look for cheaper alternatives or negotiate better prices with your suppliers. This proactive approach to managing food costs can help you spend your capital wisely.

Labor cost calculator

98% of operators stated higher labor costs as an issue for their restaurants. A labor cost calculator can help you monitor your staffing expenses and identify opportunities to optimize your workforce costs.

With a labor cost spreadsheet, you just fill in projected and actual daily sales and wages to automatically calculate daily labor percentages and monthly total. Then, you can use the data to spot trends and make necessary scheduling adjustments.

For instance, if you notice high labor costs on slow sales days, you could consider reducing staff or shifting hours to make the most of your workforce. Monitoring and adjusting labor expenses ensures a better balance between staffing and revenue, improving your restaurant's financial health.

For new and expanding businesses, using restaurant management software can save you significant amounts of money. With 7shifts, you can build staff schedules in minutes, integrate with your POS to forecast labor needs, and monitor sales and labor performance over time. 

By digitizing your restaurant's labor management, you can save thousands of dollars each month and make your operations more efficient.

Profit margin calculator

A restaurant profit margin calculator lets you track where your profits are coming from and where they are going, helping you identify areas for improvement to increase your profit margin. You just type in your total revenue, CoGS, labor costs, and operational expenses, like rent, utilities, maintenance, and marketing, and you automatically gain a deeper understanding of your restaurant’s finances.

When using a profit margin spreadsheet, make sure you're using accurate data. The more detailed and up-to-date your financial information, the better you can analyze your restaurant's profitability. 

Restaurant P&L statement template

Using a template for a P&L statement template for P&L statement, also known as an income statement, saves you the trouble of creating one from scratch while still having enough customizability for your restaurant. A well-designed template structures your data in a clear, organized manner, saving time and effort by making it easy to generate reports.

Restaurant budget template

Setting a restaurant budget is essential for managing cash flow and expenses. A budget template lets you allocate funds for different operational costs, from food and labor to marketing and utilities. 

By forecasting your income and expenditures, you can make informed decisions about investments and identify areas where you can cut costs. 

Restaurant sales dashboard

A restaurant sales dashboard stores all your weekly data in one place. It helps you compare projections, schedules, and actual sales, providing a clear picture of your restaurant's performance. This template is essential to understand how much the restaurant is making and to keep your restaurant finances in check.

Mastering restaurant finances for long-term success

Understanding and analyzing key financial reports can help you make informed decisions to boost profitability and efficiency. Financial spreadsheets can simplify this process and allow for better funds management.

Additionally, use restaurant management software to automate repetitive tasks, like team scheduling, which significantly affects your labor costs. 7shifts frees up your time so you can focus on delivering an exceptional dining experience for your customers while staying in control of your restaurant’s finances.

FAQ

What should restaurants look for when analyzing their income statement?

When analyzing their income statement, restaurant owners should compare their total revenue to their expenses. They need to check if their sales cover the cost of goods sold (CoGS) and operating expenses. 

For example, if a restaurant earns $10,000 in a month but spends $8,000 on food, rent, and wages, their profit is only $2,000. It's crucial to identify any unusual spikes in expenses or drops in revenue. If the cost of ingredients suddenly increases, it might be time to find new suppliers or adjust menu prices to maintain profitability.

How often should a restaurant review its income statement?

A restaurant should review its income statement at least once a month. Regular monthly reviews help identify trends and make timely adjustments to stay on track financially. 

Let’s say a restaurant owner notices that profits are consistently lower during certain months. They can then plan promotions or special events to attract more customers during those slow periods. 

Monthly reviews also allow restaurants to catch and address issues like rising food costs or increased labor expenses before they become significant problems.

Why is it important to reconcile financial statements regularly?

Reconciling financial statements regularly makes sure that the recorded transactions match the actual financial activities of the restaurant. This practice helps catch errors, discrepancies, or fraudulent activities early on. 

If the bank statement shows a higher balance than the restaurant’s records, there might be unaccounted expenses or errors in recording transactions. Regular reconciliation can identify these issues, allowing the restaurant to correct them promptly and maintain accurate financial records.