Importance of P&L Reports to a Restaurant Business - Understanding COGS
Have you ever wondered the key to running a successful restaurant business? If you’re thinking about the Barometer Inventory Management System, you wouldn’t be wrong. But in this article, we’re referring to the P&L (Profit and Loss) report or an income statement of a business. A P&L report is a financial document that details a business’ total revenue and expenses over a specific period of time. Calculating the profitability of most food service establishments comes down to basic fundamental business components: increasing sales or margins (revenue) and reducing costs or expenses.
A P&L report should be made and reviewed every month in order to give a proper understanding of the current financial state of the business. A restaurant profit and loss statement contains 5 main components:
Includes the products from all of your revenue streams and how much money each specific product has brought in.
COGS (Cost of Goods Sold)
Is the total cost of your food and beverage consumption for a given time period.
From head chefs to bussers, salaries and hourly wages for all employees make up the labour cost.
Includes everything involved in daily operations, such as supplies, repairs, and marketing. It can also include occupancy expenses, such as rent, insurance, utilities, taxes, and waste removal.
Is the income left after subtracting COGS, labour cost and operating cost from sales. If the number is positive, the business has reported a profit, else a loss.
Now, one of the most important calculations in a P&L report is the COGS. It is here that a restaurant can absolutely control the expenditures it incurs on a monthly basis. The formula for computing COGS is as follows:
COGS = Beginning Inventory Amount + Purchase Amount - Ending Inventory Amount
Understanding COGS is essential. Above all, it directly determines a restaurant’s profitability. A better way to understand your cost of goods sold is to split them up. For instance, line items for your COGS can be Food COGS and Liquor COGS. The idea is to separate them because all of them have different costs. Having them individually can help the restaurant owner set budgets for each line item.
Let us take an example:
For a restaurant earning 1 crore rupees in annual revenue, assuming that a restaurant spends 30 lakh rupees on COGS, an increase of 1% in COGS or Food Cost results in a direct loss of 1 lakh rupees in revenue annually. The Gross Profit is inversely proportional to the value of COGS. In this case, the Gross Profit decreases to 69 lakh rupees if the COGS increases by 1%. Hence, the operations manager has to make sure that the COGS remain within the range of 25 to 30% to obtain a favourable Net Profit for the restaurant. Restaurateurs face a major hurdle of keeping the COGS in check and hence follow well established practices such as:
Finding lower cost materials
Try and avail bulk discounts
Automate parts of the business
Stop making products that don’t sell
Consider manufacturing on demand
For a restaurant to be successful, all financials must be tracked down to the last rupee. This is where budgeting plays a huge role. Being proactive could avoid future problems. Annual budgets are always dynamic in nature and so one has to make sure that one conducts due diligence on historical financials and sales forecasting. Boosting sales is essential, but so is reducing the restaurant’s COGS. Whether it’s negotiating hard with suppliers, reducing waste, or automating your processes, look to reduce costs in every way possible.
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