Most restaurant owners get a P&L every month and either file it without reading it or scan it for the bottom line. Both approaches miss the point. A P&L is not a report card -- it is a diagnostic tool. Here is how to read it like one.
The structure of a restaurant P&L
A properly formatted restaurant P&L follows a consistent structure. Revenue at the top, then cost of goods sold (food and beverage cost), then gross profit, then operating expenses (labor, occupancy, utilities, marketing, repairs, administrative), then EBITDA (earnings before interest, taxes, depreciation, and amortization), then net income at the bottom.
The Uniform System of Accounts for Restaurants published by the National Restaurant Association is the industry standard for how restaurant financials should be organized. If your P&L does not follow this structure, ask your accountant to reformat it -- a P&L that does not separate food cost from labor cost is not useful for managing a restaurant.
The lines that matter most
Food cost percentage is your cost of goods sold divided by food revenue. This should be between 28 and 32 percent for most independent restaurants. If it is above 35 percent, you have a problem: either your menu prices are too low, your portion sizes are too large, your waste is too high, or you are being stolen from.
Labor cost percentage is total labor (wages, payroll taxes, benefits) divided by total revenue. This should be between 28 and 35 percent. Labor above 38 percent at typical independent restaurant revenue levels makes profitability nearly impossible. The article on restaurant labor cost covers the specific levers for bringing this number down.
Prime cost is food cost plus labor cost. This is the single most important number on your P&L. At 60 percent or below, you have room to cover occupancy and other expenses and still generate a profit. At 65 percent or above, you are almost certainly losing money or breaking even at best.
Occupancy cost is rent plus CAM charges plus property taxes plus any other lease-related expenses. This should be 8 to 12 percent of revenue. If it is above 15 percent, your rent is likely the primary constraint on your profitability -- and no amount of cost-cutting elsewhere will fix it.
The lines most owners misread
Depreciation is a non-cash expense that reduces your reported net income but does not represent money leaving your bank account. A restaurant can show a net loss on paper due to depreciation while still generating positive cash flow. Conversely, a restaurant can show a small net profit while burning through cash if it has significant debt payments (which are not on the P&L -- they are on the cash flow statement).
Owner compensation is frequently understated on independent restaurant P&Ls. If you are paying yourself below market rate for the hours you work, your P&L looks more profitable than it actually is. A restaurant that shows a 5 percent net margin but requires 70 hours per week from the owner at $30,000 per year in salary is not actually profitable -- it is paying the owner below minimum wage.
How to use your P&L as a diagnostic tool
The most useful thing you can do with a monthly P&L is compare it to the same month last year and to your budget. Year-over-year comparison tells you whether your business is improving or declining. Budget-to-actual comparison tells you where your assumptions were wrong.
If you do not have a budget, build one. A restaurant budget is simply a projection of what each P&L line should be at your expected sales volume. When actual results diverge from budget, that divergence tells you exactly where to focus your attention.
For a deeper look at the specific numbers that predict restaurant financial distress before it becomes a crisis, the 12 numbers every restaurant owner should track article covers the full diagnostic framework. And if your P&L is showing signs of trouble, the Situation Check quiz gives you a fast read on whether the problems are fixable.