How to read a restaurant P&L

To read a restaurant P&L, start at net sales and work down, reading every line as a percentage of net sales. Look first at the two biggest costs, food and labor, which together make prime cost. Then check the franchise lines (royalty and ad fund), rent, and the operating expenses. What is left is store operating profit. Compare each line with last month, the same month last year and your other stores.

A profit and loss statement, also called a P&L or income statement, shows what a store sold in a period, what it cost to run, and what was left. The order of the lines is not random. It runs from the costs you can change this week to the costs you cannot change for years.

What is on a restaurant P&L?

Most restaurant P&Ls follow the same order, even when the line names differ.

1. Sales, gross and net
2. Cost of goods sold: food, beverage, paper and packaging
3. Labor: hourly wages, manager salaries, payroll taxes and benefits
4. Prime cost: cost of goods plus labor
5. Franchise fees: royalty and ad fund
6. Operating expenses: card fees, delivery commissions, utilities, repairs, supplies
7. Occupancy: rent and common area charges
8. Store operating profit, sometimes called four-wall EBITDA
9. Below the line: depreciation, interest, owner costs and income tax

Your accountant may group things differently. That is fine. What matters is that each month uses the same layout, so you can compare one month with the next.

Start with net sales

Gross sales is everything rung up. Net sales is gross sales minus discounts and comps. Sales tax and tips are not sales at all, and should not be on this line.

Net sales is the number every percentage on the P&L is based on. If one month uses gross and another uses net, the percentages will not compare.

Check one more thing here. Is the period the same length? A month with five Fridays will look better than one with four. Many restaurant groups report in four-week periods, 13 a year, so every period has the same number of each weekday.

Cost of goods sold

Cost of goods sold, or COGS, is what you spent on the food, beverage and packaging you sold. It is not just your purchases for the month. It is beginning inventory, plus purchases, minus ending inventory. If nobody counts inventory at month end, this line is a guess. Our guide on how to calculate food cost percentage shows the full calculation.

Read COGS as a percentage of net sales. A two-point jump in one month is worth a question. Was it a supplier price rise, a menu mix shift, waste, or a missed inventory count?

Labor on the P&L is fully loaded

The labor section of the P&L includes everything it costs to have people working: hourly wages, manager salaries, overtime, payroll taxes, workers' comp, and benefits.

This is not the labor number in your POS. The POS shows hourly labor, which is the wages of hourly staff only. In the example below, hourly wages are 20.0% of sales, while total labor on the P&L is 31.0%. Both are correct. They measure different things. Our guide on restaurant labor cost percentage explains when to use each.

Prime cost: the line that matters most

Prime cost is cost of goods sold plus total labor. It is the biggest block of spending on almost every restaurant P&L, and the part a store can change week to week. Many operators aim for prime cost near 60% of net sales, though the right range depends on the concept and the market.

Here is one month at Switchback Grill in Fort Collins, from the top of the P&L down to prime cost.

Cost of goods is $39,000, or 30.0%. Total labor is $40,300, or 31.0%. Together they come to $79,300, or 61.0% of net sales. If the prior month was 59.8%, that 1.2-point rise costs about $1,560 on $130,000 of sales. Our guide on how to calculate prime cost goes deeper on this line.

Royalty and ad fund lines on a franchise P&L

A franchise P&L has lines an independent restaurant does not. The two most common are the royalty and the ad fund (also called the marketing or advertising fund). Both are usually a percentage of sales. Some brands add technology fees or other recurring charges.

Under the FTC Franchise Rule in the US, a franchisor has to disclose these ongoing fees in its Franchise Disclosure Document, mostly in Item 6. Your franchise agreement sets the actual terms, including which sales the percentage applies to. Check your own agreement, and ask your accountant or advisor if a fee line does not match it. Our guide to franchise royalty fees covers how they generally work.

Keep royalty and ad fund on their own lines. They are not operating expenses you can manage down, and mixing them in hides how the store itself is running.

Here is the rest of the Fort Collins P&L, from prime cost to store profit.

Franchise fees total $10,400, or 8.0% of sales. Rent is 9.0%. Everything else adds up to $16,250, or 12.5%. The store keeps $12,350, or 9.5% of net sales, before depreciation, interest and taxes.

Store operating profit and what sits below it

Store operating profit is what the store earned from running. Some people call it four-wall EBITDA: earnings before interest, taxes, depreciation and amortization, counting only costs inside the store's four walls.

Below it come costs that relate to how the business was financed and owned, not how it ran this month:

• Depreciation and amortization, the build-out and equipment spread over their useful life
• Interest on loans
• Owner salary or management fees, if the owner is not on the payroll above
• Income tax

At Fort Collins, $2,600 of depreciation and $1,300 of interest leave $8,450 of net income before tax, or 6.5% of net sales.

When you compare stores, use store operating profit. One store may have a new loan and another may be paid off. That says nothing about which one is better run. It is also the number to hold up against a franchisor's financial performance figures. Our guide on how to read Item 19 explains what those disclosures do and do not show.

Common mistakes when reading a P&L

• Reading dollars instead of percentages. Food cost going up $2,000 in a month with $20,000 more sales is not a problem.
• Comparing months of different lengths. Use four-week periods or compare with the same month last year.
• Treating purchases as food cost. Without a month-end inventory count, COGS is only what you bought.
• Mixing POS hourly labor with P&L labor. They will never match, and they are not supposed to.
• Looking only at the bottom line. Store profit tells you something moved. The lines above tell you what.
• Waiting for the P&L to act. Most P&Ls arrive two to four weeks after the month ends. By then a food cost problem has run for six weeks.

A simple weekly habit

The P&L is a monthly report. The costs on it move every week. So use the P&L to check the month, and track the big lines weekly in between.

1. Each Monday, take last week's net sales from the POS.
2. Add up food and paper purchases from invoices, and do a quick count of high-cost items.
3. Take labor hours and wages from the schedule and payroll.
4. Work out a rough weekly prime cost as a percentage of net sales.
5. When the monthly P&L arrives, check it against your four weekly numbers. A large gap points to an inventory count, an accrual or a missed invoice.

Our guide to restaurant KPIs lists the other weekly numbers worth tracking next to these.

Franlever connects to your POS and to QuickBooks or Xero, so the weekly numbers and the monthly P&L sit in one place. AI COO compares each store with its own recent weeks and with the middle store in its brand, and sends the owner one specific lever when a line starts to move.

General information for restaurant and franchise operators, not legal, tax, accounting or financial advice. Figures in examples are illustrations, not predictions or promises of results. Laws and platform policies change and differ by location, so check the current rules and talk to a qualified advisor about your situation.