A New Restaurant

Starting a restaurant is only the tip of the iceberg. There are tons of details to keep track of, and issues to deal with. If you want to own a successful restaurant, you must keep your eye on your finances.

I’ve written in the past that if you don’t know what you are doing with the accounting part of the business, you should hir it out to a professional. That doesn’t mean you are off the hook with all things financial. Quite the contrary. If someone else is doing your books for you, it is all the more important that you spend the time to thoroughly understand your restaurants financial position. One way to do that is to make sure you know how to read your restaurants financial statements, and understand what they are telling you.

There is a lot of information that will be available to you. Over time you should learns as much as you can, but for starters there are three basic reports that you should be able to understand:

Income Statement - Tells you good your restaurant is at making money.
Cash Flow Statement - Tells how your restaurant is paying for it’s operations, and shows you future growth potential.
Balance Sheet - This shows you what your restaurant owes, and what it owns.

Income Statement

When people talk about the “bottom line,” they are talking about a businesses net profit. The income statement is where you find the bottom line.

In it’s simplest form, Profit = Income - Expenses. The income statement is a detailed list of that formula. It starts by listing all of the restaurants income. Every way your restaurant has to make money is listed, along with how much was made. This is totaled on the line called Total Income or Total Revenue.

The next section is the Cost of Goods Sold (COGS) or Cost of Sales. This is the direct cost of the things that you sold. If you sell a steak dinner for $15, and the food cost $5 and the labor cost $5, then the cost of selling that steak dinner was $10. Subtracting the cost from the income will give you Gross Profit.

The next section in the income statement is Operating Expenses. This is the cost of running your business. This section is where you account for building lease, maintainence and repairs, insurance, marketing, etc. This is totaled to give you Total Operating Expenses.

When you subtract Total Operating Expenses form Gross Margin you are left with Earnings Before Interest and Taxes (EBIT). When you subtract out interest and taxes you are left with Net Income, which is located on teh bottom line of the income statement.

Again, this is a very quick overview of the Income Statement. Look for future posts that will go over the Cash Flow Statements and the Balance Sheet. After that I will try to get back to looking at each of these areas in a little more detail. There is a lot that you can learn from these if you take the time to figure it out.

You can take a lot of the risk out of starting a restaurant if you do your homework and really understand what you are getting yourself into.