The Profit & Loss Recipe

There’s little better than enjoying each and every savory bite of a made-to-perfection entrée at your favorite restaurant. But have you ever really sat and thought about how many ingredients go into creating that amazing dish? Looking at the dish, it doesn’t look that complicated. Like every entrée, it’s pretty straight forward. There’s a protein, a starch and some vegetables. Steak and potatoes, right? Well if you’re in the biz, or have a strong desire to be, then you know just how complicated it is to create something so pleasing that looks so simple. Because steak and potatoes isn’t just steak and potatoes when it’s an 8oz hand-cut filet with a hazelnut-espresso rub served with quattro formaggi gratinati, cippolini onions, oyster mushrooms, sweet baby carrots, plum compote and 20-year aged “Malvasia” madera demi-glace! There are many recipes that go into creating each component of this steak and potato dish. To get the perfect flavor and an emotional reaction to each bite, each recipe for each component must be followed perfectly and precisely. No corners can be cut. No guess-timations made. Every step must be executed perfectly in order for the dish to become memorable. No great chef or restaurateur will waiver from the standards that require every step, in every recipe for each component of this simple steak and potatoes dish be followed to the letter every time. After all, this unwavering executional standard is what brings in the rave reviews and repeat diners. It’s what causes one person to boast to another about how great the dish is, and how they haven’t dined until they try it. It’s what builds reputations.

For those of you in the business reading this, you are all nodding your heads in agreement. You would say that this is the foundation upon which all great restaurants are built. I would agree with you – I would, however, change the word foundation to the word pillar.

It would be fantastic if our businesses were simply built upon one solid foundation, but in reality they are built upon a couple of pillars. The one that is often over-looked and treated as an afterthought is our Profit & Loss Statement (Income Statement). It is a pillar that is often allowed to deteriorate because, in some operators’ minds, it does not affect the business today. Many operators only see the P&L as a look into the past rather than a tool to predict the future and plan for tomorrow. In truth, it has a similarly complicated recipe as our steak and potato dish. It has many ingredients. It has many steps – all of which need to be followed to a tee in order to receive the same excited reaction.

Like our steak and potato entrée has three primary components, so too do our P&Ls. There are Costs of Good Sold (COGS), Labor Costs, and Operating Expenses. The basic understanding of each is that if you hit 30% in each category, then you will have 10% left over as profit. But how do you hit 30% in each category? You follow precise recipes. Each category is broken down into very specific formulas (recipes) for success. For example, in COGS, hitting 30% means understanding how much of that 30% is food cost, how much is beverage cost, and how much needs to be allocated for waste. Then break it down further, how much of your food cost is in proteins? How much is in dry goods? How much is in dairy, fresh veggies … even freight? A purchasing tool will help organize all of your purchasing information and report to you on a weekly basis where the money is going once it leaves your bank account. Also, getting your hands on a pricing tool will help you understand which dishes cost more to create than others and allow you to adjust your menu pricing as the cost of commodities dip and spike in the market.

Similar to the recipe for COGS, Labor Costs have a specific recipe for success too. Hitting 30% Labor becomes easier when you know the target percentages for each component of Labor. Labor costs have multiple components, such as management salaries (static labor), back-of-house labor (BOH), front-of-house labor (FOH), payroll liabilities, insurance (worker’s comp), benefits, payroll processing, employee meal credits, etc. Each part has a specific target percentage of total revenue that needs to be realized in order to hit the 30% Labor cost figure. Utilizing a proactive tool for scheduling will help keep your hourly labor numbers in line with your forecasted revenues. That, combined with not over paying management salaries for the amount of revenue your restaurant brings in, is a good start to following the recipe for Labor Cost management.

As for a recipe to follow to ensure 30% (or less) in Operating Expenses, a few of the high points would be: 1) Ensuring total occupancy costs (rent, NNN, utilities, etc.) do not exceed 8-10% of total revenue; 2) holding marketing and advertising to 3% or less of total revenue; and 3) keeping maintenance and replacement costs to 2% or less on average.

Like an amazing entrée, an amazing P&L statement won’t appear out of thin air. It requires knowing what the recipes to each component are, and the sternness to hold firm to the decision-making that requires those recipes to be followed. Also like an amazing entrée, once your company becomes known for having consistent and profitable financial statements, word will spread of the quality of your financial results. It will be what causes one person to boast to another about how great the investment in the growth of your business could be, and how they haven’t experienced a restaurant industry investment until they’ve tried you. An amazing P&L statement will be what builds your reputation and what leaves them wanting to come back for more.

If you would like more information on Restaurant Consulting Services provided by Caprock, please feel free to email Zach Hopkins at

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