The Income Statement: The Single Greatest Key to Success

It has been said that the restaurant business is a business of pennies. I believe that is true, and there has never been a more important time to track each and every penny coming into your operation. I can read an income statement quickly and, without even seeing your operation, I can tell you if someone is stealing money; someone is giving away beer, alcohol or food, and even if product is “walking” out the back door. No matter how much experience you have, you can miss what may look like a small detail on the income statement, but it can be the difference between profit or loss. 

My next two columns will tell you how to correctly produce your income statement, and then how you can use it to improve your operation. 

Cost of Goods (COGS)

About 90 percent of the clients that come to me (both experienced and novice) have calculated their COGS incorrectly. They are showing extremely low costs and cannot understand why they are losing money. 

Example: A restaurant has a food cost target of 30 percent, a beer cost target of 25 percent and a liquor cost target of 20 percent. Rather than calculate the costs against the individual sales of those items,  they do the calculations based on the total revenue. Let’s look at the examples to understand the difference this can make. 

Labor Cost

Labor cost is calculated against gross sales. Typically, when I review owners’ income statements, they are calculating only management and hourly payrolls against sales. Again, doing it this way shows an artificially low labor cost. An example is that an owner calculates labor cost at 21 percent of total sales because only payroll is being included.

However, to get the true labor cost, the following should also be included: payroll tax, benefits, workers compensation, contract labor, federal and state unemployment taxes, etc. Once this is all added in, we find that the labor cost is not 21 percent but 42 percent. 

Operating Costs

To put us all on the same page, operating costs are the day-to-day expenses incurred by all businesses. These typically are all the items that fall into the section on the income statement after key COGS (food cost, beverage cost, labor cost). This will include marketing, equipment, utilities, rent and insurance. All of these costs should be consistent with each month’s income statement, and when there’s an unexpected increase or decrease, the cause must be investigated.

 One area that I look at closely in this area is marketing. If the operation is spending $5,000 per month on marketing, then I want to know the return on this investment. This forces my clients to come up with marketing programs that are trackable.  

Focus on Profitability

I just did this same example with one of my clients’ income statements. They have been in the restaurant business for more than 30 years. When we realigned their income statement, set appropriate goals and then put in a strategy to achieve those goals, their profit margin went from 8 percent to 14 percent. They have created a weekly income statement overview and, by reviewing and reacting to the correct information, I believe they will end the year with profits reaching 16 percent, double the best they have ever done. 

They did it, other clients have done it, and you can, too.