Make Your P&L More User-Friendly: Tips for Making the Most of Your Income Statement|
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Tips for making the most of your income statement:
A surprising number of restaurant owners and managers avoid looking at their P&L (also known as an income statement) regularly. But even the most numbers-averse restaurateur can learn to love — or at least not fear — their P&L. It is, after all, one of the best tools for making informed decisions and heading off trouble.
While a P&L doesn’t present an entirely complete picture, it is a good indicator of cash flow on a day-to-day basis. It can tell you whether you’re going up or going down and whether you’re meeting your break-evens.
If you’re not already on friendly terms with your P&L statement, here are four tips for making it more user-friendly, relevant and actionable:
- Segment controllable vs noncontrollable costs and format your P&L accordingly.
- Create “flash” P&Ls for managers of various operations centers.
- Use a 4-4-5 accounting calendar for more accurate analysis and projections.
- Establish a regular cadence for P&L reviews in combination with other financial reports.
Get acquainted with the “buttons and levers.”
Atlanta restaurateur Ryan Pernice is a notable exception to the above mentioned “numbers averse” restaurateur stereotype. A graduate of Cornell University’s School of Hotel Administration, he is a self-professed lover of financial data. His preferred P&L format is very detailed and granular, and he looks at it often.
Pernice relies heavily on P&Ls to manage his three restaurants more effectively and communicate trends and issues during regularly scheduled management meetings. While he enjoys getting deep in the financial weeds — his P&L is 200+ lines long — he recommends a pruned down P&L for most restaurant owners.
Your P&L should be scannable and easy to read. If you’re not comfortable working with financial statements, your accountant can help you simplify your P&L to highlight data points that are meaningful to you.
What is meaningful? A good P&L should help owners “know what the buttons and levers are” within each restaurant and within each operations area, says Pernice. “If somebody comes to me and says, I need you to lower beverage costs, I know exactly where to start.”
Segment controllable vs. noncontrollable costs.
To some extent, the definition of controllable and noncontrollable depends on the person reading the P&L. Generally speaking, a controllable cost is something that a manager can affect. The bar manager can affect her glassware costs. The kitchen manager can affect his labor costs. The restaurant owner can control marketing costs. Noncontrollable costs are entirely outside the purview of managers, and not easily influenced by owners, at least in the short term (rent and taxes, for example).
Consider the formatting your P&L so that the top half details prime costs for the restaurant overall and the bottom half splits controllable to noncontrollable items by operations area.
Deliver insights in a flash.
Expanding on the idea of controllable and noncontrollable costs, flash P&Ls — targeted, scannable income statements delivered daily or weekly — are most effective when they convey information aligned with the user’s roles and responsibilities within the restaurant.
For example, prime costs (cost of goods sold + labor) can be broken into subcategories by operations areas: front of the house, back of the house, and bar.
“None of the computations in the restaurant domain are really that challenging,” says Pernice. “You’re basically dividing one number by another number. Learn how the math works, and you’ll have all you need.”
Supplement your P&L.
To maximize the usability of your P&Ls, consider adding a supplementary statement of cash flow (SCF). Combined with a P&L, the SCF details the cash flowing into and out of the restaurant by period. A statement of cash flow helps managers ensure that sufficient cash is available to cover peaks and valleys associated with operating activities such as food and beverage purchases and payroll. The statement of cash flow supplements the P&L by providing a historical detail of the sources and expenditures of cash over a particular period.
An SCF makes cash budgeting possible by providing historical benchmarks against which to estimate future cash disbursements and receipts and prepare accordingly to maintain positive cash flow during fluctuations in inventory, labor or other operating expenses.
A break-even analysis is another valuable operations and planning tool — and a useful supplement to the P&L. It shows the quantitative relationship between costs, sales volume, and profits. Break-even points help managers set goals (by units or dollars) to meet costs and attain profitability.
A break-even equation always contains three variables:
- Cost (Fixed and Variable)
- Net Income/Profit
These variables can be arranged to answer a myriad of operations-related questions such as, How much alcohol do I have to sell to break even on my weeknight bar labor? Break-even computations make your P&L even more actionable by providing at-a-glance benchmarks for various P&L line items.
Establish a 4-4-5 calendar for better accuracy.
A 4–4–5 P&L divides the year into four quarters composed of two 4-week periods and one 5-week period. As such, the end date of the period is always the same day of the week. If the bulk of your sales happen over the weekend, this matters. Also known as “13 4-week accounting,” this accounting cycle features 13 accounting periods consisting of 4 weeks (or 28-day months) instead of the typical 12 calendar months. The 13th month allows for more accurate year-over-year comparisons. For example, the week that includes New Year’s Eve always falls in the same period year-over-year.
Visit your P&L often.
Now that you’ve created a user-friendly P&L that meets your needs, make time to look at it often. How often? We recommend this cadence:
Keep these to a minimum.
- Daily cash report (summary of sales for the day)
- Sales of specific menu items
- Monitor hot items
- Restaurant sales per hour
These reports should be available daily through the POS system, versus having to create the report using your accounting team or management team.
Daily reports may not be meaningful depending on the size of your restaurant, so decide whether focusing on weekly reports is more useful. Weekly monitoring of profit and loss reports can help you identify trends and make course corrections before they snowball. Find the right mix of high-level information and supporting details around sales, purchases and labor. Suggested weekly reports and metrics include:
- Sales, purchases, labor, prime costs, G&A, and net income (loss)
- Hours scheduled, hours worked, and overtime for tracking your labor costs
- Inventory management
- Menu cost analysis
- Financial statements with comparisons to the prior month, prior year and variance
- Financial statements with rolling three-period analysis
- Review KPIs
- Income tax projections with your CPA
- Strategic business plan review
- Strategic plan review and update
- Merchant fee agreements
- Lease agreements
- CAM reconciliations
Remember, the point of having a regularly updated P&L is to avoid surprises, be more strategic about operations, and make better decisions. To learn more about using financial reporting to run a more efficient and profitable restaurant, contact: Jessica Hussain CPA, Partner of Retail, Franchise & Hospitality for Aprio at (770) 353-3051 or Jessica.Hussain@aprio.com.