Understanding Restaurant Financial Statements

If you’re planning a restaurant business you need to understand financial statements.

This guide will teach you:

What is a financial statement
What are the four financial statements
How to read financial statements
How to make your own financial statements

Understanding restaurant financial statements is a key step in completing your business plan.

What are financial statements?

Financial statements are reports generated to show the overall financial state of the business. They are a formal record of financial activity. These records are important because they reveal the financial well-being of the business.

The 4 Basic Financial Statements Every Restaurateur Needs to Know:

P&L — The profit and loss statement is also called:

Income Statement
Revenue Statement
Earnings Statement
Operations Statement
Performance Statement

Balance Sheet — The balance sheet is also called:

Statement of Financial Position
Statement of Assets and Liabilities

Cash Flow Statement — The cash flow statement is also referred to as:

Statement of Cash Flows

Changes in Equity Statement — The changes in equity statement is also called:

Statement of Owner's Equity
Statement of Retained Earnings
Statement of Changes in Equity

Reporting Periods

Quarterly Reports

The P&L, Balance Sheet and Cash Flow Statement are completed every three months or four times a year. That’s why they are called “quarterly reports.”

Quarterly financial statements contain financial data for the business during each three month period.

Annual Reports

You will also prepare an annual version of the same reports after your first year. Use data for the whole year as the reporting period.

Eventually you will also create financial statements comparing data from multiple years. This will show the restaurant's financial health over the years.

It will show “good years”, “bad years” and the rate of growth (or loss) over the life of the business.

A Detailed Explanation of Each Financial Statement

Next we’ll look at each financial statement in detail. You’ll learn how to read a financial statement and how to complete your own.

P&L Report

A “P and L” is a profit and loss statement for the restaurant. It uses a very simple formula that tells you how much money you've got left after taking into account all the costs associated with the business.

Though it’s a simple concept, this may be the most important number in your business.

P&L Terminology

The terms used on a P&L are sometimes interchanged so it can be a bit confusing when you first learn. It is important to know what people are talking about.

A P&L can also be referred to as an Income Statement. Sales can also be referred to as Income or Revenue. Costs can also be listed on a P&L as Expenses. And Profits can also be called Net Income.

Keep this in mind and it will all be much simpler. When discussing profit and loss these terms are thrown around interchangeably, although they mean the same thing.

When doing your own P&L it's a good idea to break Sales and Costs into sub-categories that are meaningful to you. For example, Sales grouped by service-type (Dine in, Takeout, Delivery) and Costs divided into food cost, utilities, rent, etc.

Example of Profit and Loss Statement:

The Balance Sheet

A balance sheet shows net worth of the restaurant. You can think of a balance sheet as a set of scales showing Liabilities on one side and Assets on the other. They show the balance, which is where we get the name.

The purpose of the Balance Sheet is to see which way the “scale” is tilted. That is, if you're losing money, making money or breaking even.

Some terms used on a balance sheet are used interchangeably. Keep these terms in mind when learning about balance sheets. Another name for Liabilities is Debt.

An example of debt is a loan. The loan amount will be recorded in the Liabilities column of the balance sheet.

But the result of the loan—a lump sum of cash given to you by the bank — is recorded as an Asset. Equipment with long term value or property purchased by the business is also recorded in the Assets column.

Even if you're still paying them off, those items are your Assets. The remaining amount you owe is a Liability.

In this example, Assets and Liabilities “balance”, because debt is roughly equal to your assets.

To complete a Balance Sheet for your restaurant

List all your Assets in one column
List all your Liabilities in another
Subtract your Liabilities from Assets
What is left over is your restaurant's Net Worth

If Net Worth is a negative number, that means your restaurant owes more than it’s worth. This is what they call “being in the hole”, “upside down” or “in the red”. Ideally, your assets and liabilities balance. Or even better, assets outweigh debts.

However, when you are starting a new restaurant there will likely be a period where your business owes more. This is why a restaurant startup is risky. It takes a large amount of capital for the business to start generating its own income.

Here is an example of a Restaurant Balance Sheet:

In the startup phase, you will be spending a portion of Assets on operating costs that are Expenses. Expenses are services and disposable items that do not retain long term value.

The Cash Flow Statement

A Cash Flow Statement is used to get a handle on money going in and coming out of a business. In other words, it tracks the flow of cash during the period.

The cash flow statement gives readers an impression about the health of the business. It helps you understand the difference between “making money on paper” and actually having usable dollars in your account.

Cash Flow Statement Terms

Cash coming into the business is called inflow and may also be referred to as cash in.
Money going out of the business is outflow or may be called cash out.

Because the cash flow statement is a tool for understanding how cash enters and leaves the business, accounts receivable (sales made on credit) are not counted as cash in, until they are actually paid.

Debts that the restaurant has are only recorded on the cash flow statement when service on the debt is paid. The balance of the total debt is not recorded on the cash flow statement because it does not affect your available cash.

What is Recorded in the Cash Flow Statement?

There are three components of restaurant finances that are examined in the Cash Flow Statement: operational activity, investment activity, and changes in debt/financing.

Operational Activity — Most cash inflow and outflow recorded will be related to core business operations. Cash flow activity related to the core business is operational activity.

Operational cash out examples:
- Payroll
- Advertising
- Buying dish soap
Your restaurant’s sales will be the primary source of operational cash in.
Investment — Cash flow changes in investment come from the buying and selling of assets.
Debt / Financing — Getting a new loan is a cash flow change in Debt / Financing and will change the amount of cash out.

Calculating Cash Flow for a Period

Start with your restaurant's Net Income at the beginning of the period.

Now add cash inflows:

From sales of food, drinks, merchandise, and other services your restaurant provides such as delivery charges and event hosting.
Record investment inflows from sales of any assets.
This is your total cash inflow for the period.

Subtract all operational cash outflows, also called receipts:

Subtract all investment outflows
Subtract all debt outflows
This is your total cash outflow for the period.

Total the values to see how Ending Cash compares to Beginning Cash.

The difference in these two values is the Net Cash Change.

This is the final number that represents the restaurant's cash flow for the period.

Here is an example of a Cash Flow statement:

Changes in Equity Statement (Statement of Owner’s Equity)

The changes in equity statement is a way of measuring the restaurant owner(s) contributions to the business. It also shows an increase or decrease in the value of the restaurant.

How to Record Changes In Equity

The changes in equity statement starts with equity at the start of the period.

The amount of equity the owners have at the beginning of the period is the beginning equity.
The capital amount that had been invested by the beginning of the period is the beginning capital.
Record all additional contributions to the restaurant that the owner(s) made within the period, the dollar amount and what they were for.
Add line item for Net Income also called total profit. This is how much money was made during the period.
Note any Withdraws from the restaurant’s account that the owner made for personal expenses during the period.
Use these values to calculate changes in equity, using the formula.

Changes in Equity Formula

Beginning Capital + Additional Contributions + Net Income - Withdraws = New Equity Amount

The New Equity Amount is the owner’s equity at the end of the period.
The difference between Beginning Capital and the New Equity Amount is the Change in Owner’s Equity.

Example of Changes in Equity Statement:

Summary

Financial statements are key documents that a business uses to keep on track and keep investors informed. Knowing the four basic financial statements is an important first step to owning a restaurant business.

Financial statements will be completed for every quarter as well as annually. The four financial statements are the profit and loss statement, the balance sheet, the cash flow statement and the changes in equity statement.

These reports are an important part of your restaurant business plan. After completing them you’ll have a much better understanding of your restaurant business’s financial health.

This free resource is brought to you by Rezku and is part of our resource library for restaurant owners and managers. Rezku is a leading hospitality management systems developer.

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