When the COVID 19 crisis passes, and it will pass, a Managers' understanding of a restaurant Income Statement and the behavior that influences it will be critical to making a full recovery.
Your financials tell a story. A story about the financial health of your restaurant. What comes in, what goes out, what you own, what you owe, and the sources of cash are all explained in your financial reports. Understanding your restaurant’s financial reports are critical in creating actionable tasks for you and your team. This is especially critical given the challenges presented by the current COVID 19 crisis. Below we will discuss the Income Statement, so you understand how your actions and the actions of your team drive these critical numbers.
Let's start with a short quiz...
The Income Statement is also known as the __________________.
An example of a direct operating expense is___________________.
Profit is the SAME as Cash...True or False?
The income statement measures___________________.
Gross Profit = Income - _________________.
The Income Statement, also known as the Profit and Loss, is the one report that managers can impact greatly. The Income Statement measures a restaurants profitability by taking a restaurants income (or sales) from food, beverage and perhaps merchandise and subtracting cost of goods sold (COGS) to arrive at your gross profit. Next you deduct direct operating expenses, like linens, repairs, small wares, advertising, trash, labor and occupancy. What you have left, if anything, is profit. Income - COGS = Gross Profit - Operating Expenses = Profit or Net Ordinary Income (N.O.I.). Profit is NOT the same as cash...but we'll go into that another time.
The Income Statement is the one financial document that is a direct reflection of the performance of a restaurant manager and their team. Most managers are responsible for the majority of revenue and expenses reported on the Income Statement. Managers drive sales, control costs and, if they are doing their job correctly, contribute greatly to a restaurants' success and profit.
An Income Statement can be broken down into the following categories; Income, COGS (Cost of Goods Sold), Gross Profit, Direct Operating expenses like Occupancy, Labor, Repairs & Maintenance, General & Administrative, Advertising & Marketing and lastly, Profit or Net Ordinary Income (N.O.I.). Let's take a look at each category and the behaviors that can positively or negatively influence them.
Income
Income is the most important number on any financial statement. Focusing on driving income is the primary job of every manager. Sales of your menu's food, beverage and, in some cases merchandise like t-shirts and gift cards, all contribute to your restaurant’s income. Without sufficient income you will fall behind on your bills, won't have the cash to meet your payroll obligations and your business will quickly run out of cash. Assuming you have a great location, maintaining a facility that is clean and welcoming, working with your chef to develop a menu that is relevant and appealing, fielding a team of people who can deliver an efficient level of service and provide hospitality that exceeds the guest expectation all work together to put guests in seats and drive sales.
Two factors that greatly impact income are the Employee Experience and the Guest Experience. The Employee Experience what all of your staff experience as members of your team. It includes everything that impacts their ability to feel welcome and do their jobs to the best of their ability. An intentional Employee Experience sets a tone of professionalism, service and hospitality.
The Guest Experience consists of the various "stages" and "touch points" a guest experiences when they interact with your brand and your team. The very instant a guest pulls into your parking lot, calls on the phone, visits your website or walks in the door, they are having an experience with your brand. Make it a positive experience, and they will tell friends how wonderful your restaurant is and become a loyal regular customer. However, a positive, memorable guest experiences doesn't happen by chance. Your team needs to know your goals with regard to your guest experience. In addition, they also need, and deserve, the training, development and tools that will help them help you realize your vision.
Cost of Goods Sold ( COGS )
COGS, by definition, are the costs associated with creating your menu items. COGS usually represent one of the largest expenses you will have. Often, restaurants will have COGS that are 25-30% of total income. That's a big number and one that deserves your attention, daily. Behaviors that impact COGS are purchasing, menu price and % of sales for a particular menu item. For example, if you sell a large amount of a high cost/low profit item, you will see a negative impact on your COGS rather than if you sold a large amount of a low cost/high profit item. The goal here is to build a menu that focuses on low cost/high profit items and displaying and promoting those menu items effectively. Other approaches to effectively controlling COGS include regularly bidding out your menu to different vendors and to order efficiently to minimize waste. Teach your teams to check in all deliveries, to check items' "use by date", check produce, meats and fish for freshness and quality.
Get your team involved. Teach them the importance of portioning, proper rotation and inventory. Teach the importance of following recipes and train to reduce mistakes. Show them your P & L and explain how their actions can reduce COGS. Remember, you don't take percentages to the bank. Considerable attention to gross profit of your menu items is critically important.
Gross Profit
Gross Profit is calculated by subtracting COGS from top line income. It takes into account only the cost of goods required to build your product, in this case, your menu items. The key metric from calculating gross profit is your food and beverage cost. The higher your gross profit, the lower your COGS. Along with labor, COGS are one of your biggest expenses. Portion control, menu pricing strategy, waste and vendor relationships all contribute to maximizing gross profit and reducing COGS.
Occupancy
Rent and NNN (NNN is your restaurants share of the building owners Insurance, Taxes and Maintenance) are "set" expenses that a managers actions don’t dramatically impact. Typically, occupancy cost does not change outside of annual rent increases or occasional lease negotiation. Today's high rents are often more than 10% of a restaurant’s expenses. Rents are on the rise and eat up more and more of a restaurant’s profits. Still, it is important for managers to understand how occupancy costs can impact profitability and the importance of reducing other expenses.
Direct Labor
Labor cost is more than the hourly wage you pay your team. Other factors that drive labor costs are state and federal payroll taxes and workers compensation. These fees can add significantly to the cost of labor. For example, if you pay an employee $15 per hour, the real cost including the fees and expenses listed above could increase the hourly cost of that employee to over $17 per hour. How do you keep your labor costs in line? First, stagger the time your staff starts their shifts. There is no need to have your entire team of servers and cooks arrive hours prior to your lunch rush. A typical restaurant will see business increase and decrease multiple times throughout the day. The number of team members you have scheduled should do the same. Second be quick to cut staff as soon as you realize you are not going to hit your sales target for the day. Third, reduce employee turnover and the resulting training expenses that go along with repeated hiring. Evaluate your hiring practices to ensure you have the right people on your team and an Employee Experience that makes you an "employer of choice." Do you have clearly defined job descriptions? Are your job descriptions paired with the necessary character and competencies required in a candidate? Develop systems to support your staff and assist them in working as efficiently as possible. Ensure all team members are contributing equally and that your team can rely on each other.
Repairs and Maintenance
Repairs and Maintenance are expenses that can creep up on you. When your staff begins to think that your repairman is on salary, it might be time to consider replacing some equipment. Regularly monitor how much you are spending on equipment repairs against the cost of new equipment. Generally speaking, if you are spending $2000 per year to maintain an old sandwich unit, it's time to replace it. New equipment is more reliable, more efficient and will save on utilities. Lastly, be sure to have a routine maintenance plan in place. Keeping up on cleaning equipment condenser coils can save you big!
General and Administrative
General and Administrative costs include expenses such as professional fees, office supplies, executive management salaries, insurance and bank fees. Although some of these expenses are hard for you to control, it is important to have an understanding of expenses that impact profitability. It serves to deepen your understanding of restaurant finances and provides a base line from which you can begin to budget for these costs.
Advertising and Marketing
Your restaurants Advertising and Marketing expenses include media and print advertising, menu printing, graphic design fees, web development fees, promotional events and discounts. Discounts has the potential to become a major expense in this category unless it is carefully monitored and tracked correctly. Make sure your POS separates promotional discounts from guest recovery discounts. The two are very different and clarity can provide insights on potential service and hospitality flaws.
Profit
Profit, or Net Ordinary Income, is what is left over after you subtract your COGS and Direct Operating expenses from top line Income. What I feel is most important to understand, is how small this number can be for many restaurants. Some restaurants operate at 3 - 5 % profit while some may operate at 15 - 18%. Using the first example, after expenses, a restaurant that generates $1 million in income will have $30,000 - $50,000 remaining at the end of the year. The point I want to make here is that every expense, no matter how small, matters. Shave a point off of your COGS, reduce turnover thereby reducing labor cost and trim the cost of repairs and maintenance by implementing preventative maintenance plan and you could potentially add 3% to the bottom line. That is another $30,000!
Still, never loose sight of the one number that makes the largest contribution to your profit, your income. Genuine hospitality combined with an intentional Employee and Guest experience and an exciting menu will create an atmosphere that will fill seats. People never forget how you make them feel!
As I mentioned in the beginning of this article, this is a basic, and rather brief overview of the various parts of an Income Statement. It does, however, provide an important foundation from which you can expand your knowledge and practice behaviors that deliver results. Use your restaurants Income Statement as your “call to action.” What story is it telling you? Where are the opportunities? What are you and your team doing well? Connect the dots for your team and explain “why” these numbers matter. Help them understand how their actions can positively or negatively impact the Income Statement. Compare month over month reports and work to improve profitability. What we measure almost always improves. Enjoy the challenge.
Credit: Harvard Business Review; Guide to Finance Basics for Managers
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