Restaurant Financial Statements 101 (2024)

Great chefs make magic in the kitchen, but successful restaurant owners make a different kindof magic on the bottom line. To manage a profitable business, they must create and closelyreview key financial statements that reveal whether they’re on the right track or needto make course corrections. Take heart: Most of the successful ones aren’t accountantsor MBAs.

What Are Restaurant Financial Statements?

Restaurant financial statements are summaries of a restaurant’s current financialperformance. There are three main types of statements to use, regardless of restaurant sizeand business volume: Profit and loss (P&L) statements (also known as income statements),balance sheets, and cash flow statements. Together, these reports give a full view of arestaurant’s financial health.

Key Takeaways

• Common financial statements are essential to managing restaurants and making plans toexpand.
• Cloud-based software with prebuilt reports makes it easier to create financialstatements and understand performance.
• Restaurant operators should look for financial software that’s easy to use,simplifying tasks such as recording transactions and closing the books.

Restaurant Financial Statements Explained

Publicly held restaurants in the United States, those owned by shareholders, are required tofile quarterly and annual financial statements with the Securities and Exchange Commission.For internal purposes, some produce statements monthly or even weekly, to keep a close eyeon the numbers and, if needed, make operational changes to achieve financial objectives.Privately held restaurants use these statements too, when preparing income taxes,communicating with shareholders, or simply tracking businessperformance.

Why Are Restaurant Financial Statements Important?

Together, the P&L statement, balance sheet, and cash flow statement help owners andinvestors understand a restaurant’s performance. They also contain clues on how tomanage the business, flaggingpotential financial problems and guiding corrective actions.

For example, a restaurant might use its P&L statement to understand seasonal sales,comparing June sales to those of the previous year. Did sales drop as the weather warmed? Ifso, the restaurant may expand its menu to include more salads, sandwiches, and other colditems. If sales are higher thanks to a surge in patio dining, the restaurant may add waitstaff.

No one type of statement has all the answers a restaurant needs. All three types are neededto gain a full understanding of its financial condition.

Restaurant Profit and Loss (P&L) Statement (or Income Statement)

A P&L statement, formally known as an income statement, is the most widely used financialstatement in the restaurant business. Owners, operations managers, and corporate financialteams rely on the P&L to track sales and costs, stay on budget, and achieve profits.

What is a P&L?

A reveals the bottom line, which equals sales minus the cost of goods sold (food andbeverages) and operating expenses. It covers a single fiscal period, whether weekly,monthly, quarterly, or annually. Profit, or net income, appears at the end of a P&Lstatement, on the bottom line.

For example, if a restaurant budgeted for labor at 30% of sales but the P&L statementreveals labor at 32%, management may decide to trim labor costs to help protect profitmargins. It’s important to realize that many costs relate to sales and thus willfluctuate. Most restaurants will budget labor as a percentage of sales, not a fixed dollaramount. This way, as sales increase, the operator knows it can also increase its spending tooptimize sales.

On average, costs amount to more than 90% of total restaurant revenue, according to aProjectionHub analysis of nearly 500,000 US establishments in 2019. That comes to an averageprofit margin of 3% to 5%.

How to Set Up a Restaurant P&L

In creating a P&L and other financial statements, restaurants use accountingsoftware, avoiding the tedious task of grinding through spreadsheets. In adoptingfinancial applications, some restaurants are moving from manual processes; others areswitching software brands. Regardless, they all create P&L statements by taking thefollowing steps:

1. Record sales/revenues.

Enter sales of food and beverages during a given period, reflecting various payment methods,whether cash receipts or those from credit cards and gift cards. Sales information is foundin a restaurant’s point-of-sale system, the modern version of cash registers. ManyP&L statements show in-house dining, catering, and delivery as separate sources ofrevenue.

2. Record prime costs.

Prime costs are the cost of goods sold(again, food and beverages) plus the cost of labor (wages for cooks, wait staff, bartenders,and others). On average, food and labor costs account for about 60% of sales.

3. Record fixed costs.

In a restaurant, fixed costs typically include rent, insurance, electricity, gas, pestcontrol, operating permits, ongoing maintenance, and more. These costs are more consistentthan labor and inventory costs but stillneed to be contained.

4. Calculate profit or loss.

The P&L’s bottom line reveals how much a restaurant cleared in profit, or how muchit lost, after costs are subtracted from sales. Because most restaurants operate on verythin profit margins—clearing a 10% margin means they’re doingwell—watching sales versus costs is crucial. It’s common for managers to reviewthese numbers several times a day.

Say a restaurant generated $1 million in annual revenue and paid $950,000 in variousexpenses. The simple P&L formula would look like this:

Restaurant Balance Sheet

Unlike the P&L, which covers day-to-day sales, costs, and budgeting, the balance sheetfocuses more on a restaurant’s long-term health. It’s used almost exclusively bya restaurant’s finance team, not its managers or operations executives.

What is a Balance Sheet?

A balance sheet shows everything a restaurant owns(assets), everything it owes (liabilities), and what’s left when you subtract thelatter from the former (owner’s equity).

Assets – liabilities = owner’s equity

Unlike a P&L statement, the balance sheet doesn’t cover a period oftime—it’s a snapshot taken the day it’s published. It’s also a kindof x-ray, revealing the business’s health as measured in liquidity, operating efficiency, and potential returnon investment. Because it doesn’t include revenue or cash flow, the balance sheetshould be analyzed together with the P&L and cash flow statements.

How to Create a Restaurant Balance Sheet

The balance sheet includes assets (such as kitchen equipment, bar, tables, and chairs) andinventory (food and beverages); liabilities (accounts payable, lines of credit, and leasedproperty or equipment); and equity (what’s left when liabilities are subtracted fromassets, sometimes called net assets.

Here’s how to set up a balance sheet:

1. Record assets.

List all current assets, such as cash and accounts receivables, andinventory; all fixed or long-term assets such as property, equipment, and long-terminvestments; and any other assets such as deferred tax income. Added together, these equal arestaurant’s total assets.

2. Record liabilities.

Account for all current liabilities, for example, accounts payable, short-term loans, and incometaxes owed; and all long-term liabilities, such as long-term debt and deferred income tax.

3. Record owner’s equity.

List the ownership’s investment and any retained earnings, that is, what’s leftafter balancing sales and liabilities. This amount is known as shareholder’s equity if the business is anLLC or corporation, not a sole proprietorship.

Calculate financial ratios

A balance sheet also lets restaurants see common financial ratios, for example, debt ratio(total assets versus total liabilities), working capital (current assets versus currentliabilities), and debt-to-equity ratio (total liabilities versus owner’s equity).These ratios give additional insight into business performance.

Restaurant Cash Flow Statement

Cash flow is the lifeblood of the restaurant business. Cash flow statements show whether arestaurant has enough cash to fund current operations and planned growth.

What is a Cash Flow Statement?

A cash flow statementrecords all cash and cash equivalents earned and spent in each period. It reveals liquidity,changes in assets, liabilities, and equity, and it helps restaurants understand operatingperformance.

In other words, it shows money flowing into and out of a restaurant. This includes cash (bothphysical money and credit and gift card charges) as well as payments to keep things running,such as those for food and beverages, labor, and dining room maintenance. It also includesany financing or debt that adds or subtracts cash. For instance, taking on more debt willincrease cash flow in the short term, while paying down debt too fast could leave arestaurant cash poor.

If receipts exceed payments, the result is positive cash flow. If payments are greater thanthe money coming in, the cash flow is negative—a red flag.

How to Create a Cash Flow Statement

There are two ways to calculate cash flow: the direct method, showing revenue and expenses ascash is received and disbursed; and the indirect method, showing the same things as theyaccrue.

To keep things simple, let’s focus on the direct method, described in the steps below:

1. Record operating activities.

Enter expected cash from point of sale, plus payments for inventory, wages, interest on itemspurchased, and administration and upkeep. Most of this information will come from theP&L statement.

2. Record investing activities.

Note receipts from incoming capital, typically coming from investors, and outgoing capital topay for new equipment or build new locations.

3. Record financing activities.

Account for debt and equity transactions (found on the balance sheet): receipts from theissuance of stock or shareholder distributions, money borrowed, and cash paid for repurchaseof stock (treasury stock), repayment of loans, and dividends.

4. Calculate cash flow.

To determine cash flow,subtract payments from receipts. Here’s the basic formula:

Opening balance + or – cash from all activities, includingrestaurant operations, financing, and investing

7 Steps to Choose the Right Restaurant Accounting Software

Price is certainly a factor, but it’s certainly not the only one. Restaurantaccounting software should be friendly enough for people outside the financial teamto use. It should be easy to access, including via mobile devices. The software must besecure, granting access according to employees’ roles and fortified with strong dataencryption and password policies. It’s also smart to choose software that integrateswith the point-of-sale system, giving managers quicker views of restaurant performance.

Here are seven quick steps to choosing the right accountingsoftware for yourrestaurant’s specific needs:

1. Determine your establishment’s specific software needs: Askyourself what accountingsoftware features you’d like, including inventory management, payroll, andinvoicing. Figure out if the software will integrate with your current systems like POSsystems, marketing technology, reservation tools, online ordering software, and more.
2. Set your software budget: Consider both setup and ongoing costs in yourrestaurant accounting software budget. Employees will also need time to be trained,which can cut into time actually performing their jobs.
3. Assess all the options available: Read reviews, follow advice ofindustry experts, and ask your network for their thoughts. You’ll want to makesure the basics are covered in any software you choose like tax compliance, financialreporting, and inventory management. Consider how the accounting software canscale as your business grows and if you’ll need specific customizations.
4. Give your top options a test drive: Request product demos and bringyour staff along. Since they’ll be the everyday users, have them get involved toask questions and assess the functionality.
5. Don’t forget support and training: A great restaurant accountingsystem means nothing if you don’t have the support and training to make it workfor your business. Consider the availability of the support and training teams in yourchoice to ensure that your team can use the software to the fullest.
6. Make security a top priority: Any tool housing your business’financial data should have exceptional security and compliance standards in place.Inquire as to how the software protects your financial information and adheres to industryregulations.
7. Choose and Implement the Software: Make a pros and cons sheet andinclude your team in the decision-making process. Consider your restaurant’sfuture needs along with what you require right now. Once you’ve selected asoftware, create an implementation plan that includes staff training and progressmonitoring.

Choosing the right accounting software for your restaurant is not a decision to make on awhim. Once implemented, it can cost both time and money to switch solutions and migrate allyour data. Done right, the decision involves a comprehensive assessment of an individualbusiness’ needs and a comparative analysis of all the competitors on the market. Byfollowing these steps, restaurant owners can choose the software that best aligns with theiroperational needs, scales as their business grows, and contributes to the overall operationalefficiency of their establishment.

Manage Financial Statements and Business Growth with NetSuite

NetSuite Accounting Software makes it easy forrestaurants to manage their finances. It’s user-friendly, simplifying activities suchas recording transactions, managing payables and receivables, collecting taxes, and closingthe books. It also expedites the creation of key financial statements, allowing restaurantowners, executives, managers, and shareholders to delve deeply into profits and losses,assets and liabilities, and cash flow. With these and other capabilities, NetSuite helpsrestaurants make better financial decisions and grow their businesses.

Restaurant Financial Statements FAQs

Which financial statements should a restaurant use?

A restaurant should use a profit and loss (P&L) statement, a balance sheet, and a cashflow statement. All three are important in gaining a complete view of business performance.

Which financial statement is most important to a restaurant?

Restaurants use the P&L statement more frequently than the balance sheet and cash flowstatement. The P&L gives updates—preferably in real time—on sales, costs,and profits and losses. It lets a restaurant know if it’s on budget, hitting financialtargets, and on track to grow.

What’s the difference between profit and cash flow?

Profit is the amount of income remaining after a restaurant pays all of its expenses. Cashflow is the flow of money in and out of a restaurant. Sales and accounts receivable pullmoney in; operating, overhead, and other expenses pull it out.