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The Restaurant Roadmap is your guide to building and running a successful restaurant. Each episode explores the full journey of operations—from planning and development to menu design, execution, and growth. Hosts Danny Bendas, Amanda Stokes, and Chef Eric Lauer bring decades of expertise, joined by industry leaders and restaurant professionals who share their insights and stories. Together, they uncover strategies, tools, and lessons that help operators improve performance, strengthen teams, and elevate the guest experience. Whether you’re opening your first location or refining an established brand, The Restaurant Roadmap equips you to navigate every step with confidence.
Danny: Welcome to The Restaurant Roadmap podcast, powered by Synergy Restaurant Consultants, your go-to source for actionable insights and real-world strategies from the industry’s top experts, clients, and special guests. Whether you’re building a new concept or refining an existing one, we’re here to help you create a forward-thinking sustainable brand, elevate guest experience, streamline operations and maximize your bottom line. With decades of hands-on experience, our mission is simple: to deliver practical, proven solutions to the everyday challenges restaurant operators face. Let’s dive in and get to work.
Danny: Hello everyone. Welcome to The Restaurant Roadmap podcast, powered by Synergy Restaurant Consultants. I am very pleased to have with us today, we’re going to have a discussion about P&L’s, how to read them and how important they are. We have our finance guru Clyde Gilfillan with us. Hello, Clyde.
Clyde: Hi there. How’s everybody?
Danny: We are going to spend a lot of time talking about P&L’s and we really wanted to talk about how to read a P&L, how to organize a P&L because it really is a great reference tool. And also, Clyde, I just want to say that—and I’m sure you’ll agree—that there’s oftentimes where people get so absorbed in everything other than taking care of guests, and they kind of lose sight of taking care of the guests. So, this is not about forgetting the guests and just focusing on numbers; this is helping you learn your numbers so that you can better take care of your guests. So, I just wanted to make sure we preface that as we go forwards. So, let’s talk about the importance of a P&L. Give us kind of your high level, why is it critical, and then we’re going to get into how best to organize and manage them and understand them. So, go ahead.
Clyde: I think it’s important to keep in mind two basic foundational bricks, let’s call them. The first is from a philosophical standpoint. The first is that in order to produce a P&L, you need to have accurate bookkeeping. So, you’re only going to get out what you put in, so having a good bookkeeper or doing the books yourself, having a good bookkeeping system, whether that is something like QuickBooks, or whether you’re using a service like maybe RASI or another platform like Restaurant365, it’s important that you have a good, accurate bookkeeping and accounting system, otherwise, what you’ll get is not going to be anything you’ll be able to use for data. The second thing is that, a P&L, we have to understand that a P&L is a scorecard. It doesn’t tell you anything about the future, nor what you’re doing now. It’s just a scorecard. So, based off of those two, what I’m going to call the foundational bricks for the understanding of P&L and how it relates to your business, I think those are the two main starting points.
Danny: Yeah. And I think if I can add a third one, which I’m sure you agree with, also—you have to know, Clyde and I, we have a lot of conversations, and we like to banter back and forth, but it’s always for the good of everybody—so the third one, which is the basis of the P&L, is the Chart of Accounts. So, can you just kind of give an overview of Chart of Accounts’ purpose, creation of and stuff like that.
Clyde: Funny you should ask that because I was speaking with one of our clients this morning about this very thing. But the Chart of Accounts is the list of every single potential category in which you can input some debit or credit. So, that’s the basic definition. It’s important to understand that a Chart of Accounts sets you up in both your balance sheet and your in your profit and loss statement, and then accuracy in categorizing those lines in your Chart of Accounts is very important. And also remember that in any accounting software, you can always add to your Chart of Accounts, but you cannot subtract. In other words, you can’t delete a line because if you do, then your books and balance sheet will no longer be accurate. And if you get audited, that may be an issue also.
So, the Chart of Accounts is very important. Take your time. And if you’re opening a restaurant for the very first time and you’re just starting your bookkeeping and/or accounting software, that’s the first place you want to start. Just like you said, Danny, it’s a foundational brick. You need to take your time to set it up properly.
Danny: Yeah, absolutely. And I just wanted to say, if you email us at info@therestaurantroadmap.com, we’ll be happy to share a basic standard Chart of Accounts for you as a basis for getting it set up. And I think the other critical thing before we get into the P&L and the Chart of Accounts, once you have it established, you have to be very fastidious—whoever is in charge—of making sure that everything gets coded to the correct chart of account all the time, so that’s going to give you the accurate information you want to assess your business. So, let’s move into—and I’m just going to bring up categories and you can explain them, how they work, and why they’re important. So, obviously the first thing, the top of a P&L or the Chart of Accounts is revenue. So, let’s have a conversation. If you want to talk about revenue, how do you organize it? Is there a great way to organize it? What works best? Because it really drives almost everything else below that, right?
Clyde: Revenue, or however you want to describe it in your particular accounting software, is anything that’s inbound, what’s called a credit. So, that could be food sales, beverage sales, it could be merchandise sales, it could be event sales, it could be catering sales, it could be wholesale sales. So, there’s a lot of different things, but generally speaking, it is, whatever it is you’re going to credit into your accounting software. It’s an inbound transaction.
Now, let me also just say one thing. We’re talking about a P&L in an accounting system. We’re not talking about the money that comes into your bank. That’s a completely different conversation. We can have that at a different point, but what we’re talking about now is money that comes into your, more than likely, either A, your POS system or B, into some kind of accounts receivable. You invoice a customer for 20 loaves of bread and they pay you, and then you deposit the money into the bank, but you would book that as revenue.
So, that’s the first thing. It’s any credit you’re going to put into your accounting system or an easy way is this anything that you receive money for. There’s only a few ways to actually do that. First is your POS system, whatever you bring up, and understand that you should use the daily sales report for whatever POS system you have, and you can either have it automatically sent in or you can mainly enter that into your accounting system. If it’s QuickBooks, for example, you might either use a memorized transaction, or you might manually put it in, like, a journal entry. So, you want to do that every single, solitary—every day.
Danny: And hopefully, if you use a software system that automatically integrates with your TLS system, whatever it happens to be, right? And I think the other key thing for revenue, which you made a note here which I think is critical, is creating categories for revenue so that you can manage your business and you can access your business. So, being able to see takeout sales separate from dining room sales can just show you kind of where you’re at in those kinds of categories. So, I think a good rule, and correct me if I’m wrong here, Clyde, is set it up for the information you want that’s important, but don’t drive yourself crazy with 8000 lines because you’re just at the other with more data than you can ever possibly manage.
Clyde: Yeah, the more complicated you make things, the longer it takes to input into the accounting system, the more mistakes you’re more than likely going to make. So, I agree with that. At the same time, you do need to have categorized inbound sales numbers so that you can drill down. And we’ll talk about that, maybe on another podcast, but you need to have that to understand where your money is coming from.
Danny: Yeah. And as a percentage, I think it is important, too, as you’re stating, as we talked about other podcasts, so you can see, you know, what percentage of sales is each of these things generating for you to determine its value, or ways that you can potentially increase that revenue to increase that percentage of sales?
Clyde: Yeah, yeah. A good example of that would be beverage sales. So, if you happen to serve alcohol, for example, you might want to break out your beverage sales into non-alcoholic beverage sales, beer, wine, liquor, maybe even wine by the bottle or wine by the glass. You don’t want to get too carried away. You might have draft beer, bottle beer, don’t get too carried away.
But yes, what you want to do then is to, if you’re going to do that, at the end of the month, you’re going to examine your percentages and see what’s driving it. Because I’m not trying to be really super obvious, but if you sell alcohol, the more alcohol you sell as a percentage of total sales, the more likely that your cost of goods sold is going to go down. Your labor percentages look better, which we’ll talk about, and your profitability is going to be greater.
Danny: Yeah, absolutely. And again, we don’t want to overanalyze. You know, we have this saying, you know, paralysis by analysis. You spend so much time looking at things that you can’t make a decision, therefore nothing good happens. So again, get what you need, get what you want, don’t get carried away, but really help you manage your business and your revenue.
Clyde: Yeah. And maybe, you know, if you are selling alcohol, you know, a good mix is somewhere in this, 70% food, 30% beverage, maybe 75/25, somewhere in there. If you’re not selling that, then you’re more going to be more like 80/20, 85/15. But just understand that those go back to that percentages. Understanding your percentages and where your percentages are coming from help you understand how you’re driving your top [line 00:09:57].
Danny: Absolutely. All right, so let’s move into cost of goods, or COGS as we know them. And why don’t we break down that? What is that comprised of, how does it look like and what sort of averages are we looking for there?
Clyde: Okay, so cost of goods sold is essentially, at first, it’s a dollar amount that you use to produce the sales that we just talked about. And then you can also view that, which most people do, as a ratio. That is the dollar used divided by the total sales, is going to give you a percentage, so we call it food cost percentage, let’s say. Those are just mathematical formulations, but essentially, your cost of goods sold is what you actually used to produce the sales that you had on the top line. So, that’s really kind of how you do that.
Now, there’s two ways of actually looking at that. You can use straight purchases, which I would not recommend, but you can do that. There’s a lot of small operators that do just purchases and then whatever they bought, they just think that’s what they use. But that’s really not the case. What we recommend is taking purchases and then adjust it by an inventory that you take, either once a week or at the minimum, you know, once a month. You would make those adjustments, so basic formulas, beginning inventory plus purchases minus the ending inventory is going to give you a dollar figure in which you now can produce that ratio which [unintelligible 00:11:18] food and/or beverage cost.
Danny: So, yeah, so just to be clear, so the cost of goods is to get to a percentage is divided into the sales of that category, right? So, if you’re accounting for what you pay for food, you’re dividing that cost into food sales to get to a food cost. Same thing with liquor and everything else, right?
Clyde: Correct. You’re not going to divide it into total sales because that’s apples to oranges instead of apples to apples.
Danny: So yeah, again, just to clarify for those that are new to this kind of thing, is the cost to buy food into food sales, or liquor into liquor sales, or beer into beer sales, whatever that happens to be, to get you to that percentage, which rolls up to the total overall cost of goods into overall sales. All right, so any recommendations on averages for food? Beverage?
Clyde: Yeah, so remember the last time it—for those of you who watched the last podcast—we talked about the mathematics of a restaurant. You know, basically a sales, you know, minus your expenses equals your profit. And we can break that down further as we go through that but that equation sort of spreads out, and using cost of goods sold is one of those categories. You want to kind of ideally keep your food costs somewhere between a 28 to 35. Now, there are going to be some restaurant concepts and brands that are going to be higher than 35, such as your high-end steakhouses, things like that, but they’re going to make up for it in labor costs, which we’ll talk about in a few minutes.
There’s also going to be certain brands or concepts like pizza brands or noodle shops, places like that, in which you’re going to have a less than 28%. That’s to your advantage, also. But that’s generally the spread is somewhere between 28 to 35. And the closer you’re at to 30—remember that equation we talked about last time, Danny—the closer you are to 30, the more likely that you’re going to start beginning to produce a profit. And then beverage costs you want somewhere between an 18 to a 25.
When we develop concepts for people and I do the financial modeling force energy, you know, 22 is really kind of our baseline. That’s what we’re looking for. So, if you can get a 30 food cost and a 22 baseline, your blended average is really going to be somewhere in the 28 to 29 region. That’s going to be ideal.
Danny: All right. Let’s talk about gross profits. How do you define gross profits, which is the next portion, and then everything from there down, we’re going to talk about next.
Clyde: Right. So, there’s all kinds of subcategories that you can do. One of these is called gross profit and another one’s called prime cost. And you can move gross profit either after cost of goods sold, if you’d like to on your P&L, or you could take in your cost of goods sold, plus all of your labor costs and payroll and put it underneath that. I like to put it underneath the cost of goods sold because that gives you kind of a baseline on your first major expense account, and that’s cost.
If you’re going to spend somewhere around 29 or 30% of every dollar that’s going to come in on cost of goods sold, then that kind of gives you a baseline of what’s, kind of, left over. Let’s say it’s 70% this example, 100 minus 30 is 70, now you can start figuring out easier for you can start sort of tackling these other expenses a little bit easier. So again, I think you’re looking at somewhere in the 65 to 72 range. 70 I think would be nice. I think that would be good, or 71 somewhere right there. That’s your baseline for gross profit.
Danny: Well, and we’re going to find out here shortly how this little left is when you’re done with this whole thing for all the work that you put in. So, this is where every penny counts, which is why this P&L really gets to be critical to manage it and understand it. So, let’s talk about labor costs. How does labor costs work?
Clyde: Well, labor cost is essentially how much you pay people to produce the goods or services that you’re selling. So, you know, whether it’s baking or a cashier in a fast casual or whether it’s a chef, or maybe it’s a line cook or prep cook, or maybe it’s the general manager, it’s any of the labor that you’re that you are paying people to produce that good or service that you’re selling to the public. And you’re generally wanting to break down labor costs on the P&L between hourly costs and management costs. And the reason why you want to do that is because hourly cost is much more variable to sales than management cost is. You’re literally going to pay a manager at an annual salary and in your accounting system, depending on your payroll periods, you’re going to divide that into 52 or 26 or 24 pay periods, and they’re really not going to change that much. You might change once or twice a year what the manager might get paid.
But the hourly cost is much more important. So, I also like to break down the hourly cost into at least front-of-the-house costs, and then a second category, being back-of-the-house costs. And it’s important that you sort of at least have those three breakdowns: your front-of-the-house labor costs, your back-of-house labor costs, and your manager costs. And those literally are coming from the actual payrolls that you approve and pay people, either through direct deposit or writing checks or however you pay your people. The second part of that is going to be all of the, you know, payroll taxes, benefits and things like that, such as if you have health insurance, or you have to pay FICA and Medicare, and you have to pay unemployment insurance and workers compensation insurance and all those sort of things.
So, those are kind of the three main ways to kind of categorize and break down your labor costs, but understand that the two main drivers are your hourly labor cost, which is essentially how much you’re paying people, and how many hours you schedule, and they clock in and clock out, and then how much you’re paying your manager cost. That’s the biggest category.
Danny: Yeah. And I think having the kitchen or back-of-house separate because the labor per hour cost is usually significantly higher there, so you got to pay attention to that a lot more.
Clyde: Yes. And each state is variable, so you might have a state like mine, in North Carolina, which is where I live, you could take a very substantial tip credit for service personnel. But in a state like California, you’re not allowed to take any tip credit. So, people here might pay a server, maybe $3.25, to $5 an hour because they’re going to gain tips. But in California you have to pay the minimum wage, which right now, I think, for 2026 is $16.90 an hour in California.
So yes, you definitely want to do that. And of course, back-of-the-house costs are variable too. What’s everybody else paying, what’s the going wage in your competitive area, things like that. You want to pay for skill in the skilled areas as well.
Danny: Yeah. And these items, the beginning of your P&L adds up to prime costs. So, I wanted to have a conversation quickly about prime costs. But before we get into that, you know, there’s different ways to manage your accounting periods, and I’m going to ask you to just talk about that for a few minutes, and if you have a recommendation if you’re going to set up a business or you’re making changes going forward. So, give us some feedback on different pros and cons of different accounting periods.
Clyde: Sure, there’s three basic accounting periods. There’s a calendar, which is what the vast majority of people actually use, which is probably that’s the least one I would recommend, but that’s when you start on day one of any month and then it’s the last day of any month, the 28th or the 29th, 30, 31, leap year, whatever. And so, that’s how a lot of people set it up because that’s how we sort of live our lives, through these calendars. And so, people just sort of set up their accounting system that way. That’s not the way I’d recommend doing things because it can skew a lot of things, especially when you’re paying bills, or when you are having payrolls, or—going back to cost of goods sold—you’re only using purchases as your expense, as your cost of goods sold without taking inventory.
Well, you know your end of the month ends, you know, on a Saturday and you just had a huge order come in on that Friday, and now your P&L is going to be skewed by this gigantic order. So, using a calendar system, it’s just people just have a comfort level with that because that’s how we live our lives. The second one is an old school, what’s called an old school, 4-4-5 methodology. So, you would have 12 4-4-5 periods. Like, first period would be a four week period, second one is a four week, and the last one would be the fifth week. And that’s how you’re going to account for your 52 weeks in a fiscal year, depending on your fiscal year. Not too many people use that.
I recommend setting up for your accounting system 13 four-week periods. That’s really the way to do it because you can synchronize your sales week, your labor payroll weeks, your inventories can all sync up together, and it’s going to be—it’s the most accurate methodology for you be able to have really, really good books, in my personal opinion. If you don’t have that right now and you’re more on the calendar system, you can make the change. You know, usually I do that at the beginning of the year, such as now. But understand if you do make that change to a 13 four-week accounting system, all of your comparables are going to be thrown out the window.
Now, your balance sheet will be fine, but if you want to compare this January with last January, you’re not going to be able to do that. So, just understand that when you’re comping, then you need to—you’re not going to have good comps. So, that’s the downfall. But that only happens, you know, basically once.
Danny: Well, but I do think going forward, you can compare the exact same four weeks to the exact four weeks previously, and you can budget for the same four weeks using your current information, you know? And you can decide, you know, what day of the week you want your accounting period to start, you know? So like, if you’re taking inventory, you know, who loves taking inventory on Saturday night or Sunday morning on a calendar, where you can set it up where you take it every Monday morning or Tuesday or whenever you want. So, I would agree there’s a lot of advantages to 13-fours. And if you are going to set up your business new, highly recommend setting that up. Now, just one other quick question—and I’m not dissing on QuickBooks because we know a lot of people use QuickBooks for their bookkeeping—QuickBooks is not very friendly to 13-four accounting, correct?
Clyde: Yeah, you have to make some adjustments in the beginning, but once you do that, you’re okay. And QuickBooks, most people use QuickBooks because A, it’s been around for a long time, and B, it’s pretty low cost. You can go online for very small cost versus some of these others, they’re very expensive. But you know, Danny, you get what you pay for, and with QuickBooks, there’s two things that happen. The first is that most people learn through QuickBooks, through either what I call folklore—so ‘Johnny told me to do it this way’—or you just sort of figure it out on your own.
And the second thing is that most everything for QuickBooks is manual and so you’re depending on the day-to-day-minute-by-minute inputs, and you can make a lot of errors that way. And then you have to go back and do, you know, GLEs or adjusting journal entries and things like that to fix the mistakes that you made. So, it’s easy to get into, but it takes a lot more time. There’s much better solutions out there.
Danny: Yeah. And again, you know, we at Synergy are totally agnostic to software recommendations. And I know that you’re a fan of RASI. I like RASI also. I think Restaurant365 is good. You know, they’re not cheap, but you can customize them. They do a lot of things for you. So, those are decisions you want to make before you get real deep or you’re making some serious change your business going forward.
Clyde: With QuickBooks, you’re not going to get a lot of robust reporting and stuff like that, but with Restaurant365, or RASI slash Back Office, you’re going to get hugely robust reporting and analytical data to make really good decisions, versus just sort of printing a P&L and kind of going from there. You know, on our next podcast, I think we’ll talk about how to analyze that P&L. So, it’s something to think about.
Danny: Yeah, and like you said, you know, garbage in, garbage out and you get what you pay for. And if you can, if it gives you great diagnostics, and it gives you some pretty good control points, I think it’s definitely worth taking a look at. And there’s a lot more out there besides those two. And again, we recommend what we think is best for a particular client and we are totally agnostic. We just want what’s best for you folks out there listening. So, let’s get back to the subject at hand here. Prime costs: pretty critical number, right?
Clyde: Yeah. So, what prime cost does is it takes the two largest, what I would call the two largest spends in your restaurant, one’s going to be cost of goods sold—that’s food cost and beverage cost, and if you have retail, like, t-shirts or things like that—and then also all of your labor costs, and that’s everything all-in, that’s including all of your wages, salaries, payroll taxes, benefits, workers comp, unemployment insurance, all of those things. And you add both of those numbers together, and it’s going to give you A, a dollar figure, and then B, that ratio we were talking about, which is whatever that dollar figure is divided by the—in this case, you’re going to divide by total sales, and that’s going to give you this ratio number. Why is that important? Because if you can control these two big numbers and have a prime cost somewhere in the 55 to at the most 65%, you have a really, really good chance of making some really good money at the bottom line.
But the farther you drift over 65, the more you put yourself in a very difficult decision. You’ll have to make some difficult decisions as well. When you do that, then most people, they look straight to labor and they start cutting people, then start managing their business down. So, it’s important to be able to calculate that number and make sure you never go over 65.
Danny: I know you have a buddy there next to you, right? He wanted to chime in with something, right?
Clyde: Yeah. For all you dog lovers out there, I have two dogs, and every time there’s an Amazon truck that goes out along our street, they just got to say hi to the Amazon truck.
Danny: Yeah. We got to get them to quit shopping. You know, that’s the problem.
Clyde: [laugh]. Well, that’s not the dogs doing that.
Danny: [laugh] Yeah, I know. You know, on our last podcast, it was [unintelligible 00:26:11] and Clyde before we started, we were talking about suggestive selling and upselling, and Amanda’s dog started barking and that led to a discussion about dog menus and how you can get money by selling a burger patty to a dog to raise your average check, so it was very appropriate. So, all right, so that’s a key number to your profitability score and one that you manage closely. [unintelligible 00:26:35] it allows you to manage everything above it to get to a number that’s going to work for everything else below it. So, let’s talk about operating expenses, Clyde, because now we get into the detail. And again, this is where the Chart of Account where you code everything, you can see with all this stuff is, and these are items that you can manage, you know, to a degree, right? So, let’s have a conversation about operating expenses.
Clyde: Right, so going back to kind of summarize a little bit where we’re at. We have our total revenue, or total sales, however you call that. That’s all the inbound, all the credits you’re taking in, inbound cash, inbound credit cards, and inbound checks, however you take it, then you’re going to minus out from here all of your cost of goods sold, whether you use straight purchases or an inventory system, and then you’re going to minus out your labor cost, which is all your payroll costs, fixed and variables, plus your, let’s call it your benefits, which includes those payroll taxes and insurance and workers comp, things like that, okay? So, now you have a number. Let’s say that 65.
From there, on the P&L, there’ll be three sections from here: operating cost, occupancy, and what I’m going to call non-operating expenses [unintelligible 00:27:45], and we’ll get to that just a second. So, what you specifically asked for this was operating expense, and those are the things are not directly associated with, A, the materials that you’re using, the goods sold, the materials you are using to produce the sales and/or the labor that you’re using to produce a service or good. So, such things as credit card fees, repair maintenance, cleaning supplies. If you’re not, let’s say a quick service restaurant, you would have paper supplies in here. A lot of quick services put paper supplies into cost of goods sold because they then base menu pricing off of that. But not—only in the case of it.
But office supplies, professional fees, linen, your marketing, all of those things that are associated, which are almost all variable costs, they’ll go into this operating expense category. And you’re usually looking at, on the low side, if you’re lucky, 10%, but if you’re not so lucky, then you’re looking at probably a 20%, somewhere there. So, the normal range is anywhere around 15 or 16, then you’re setting yourself up for a good chance of making some money.
Danny: Yeah. And I would say—and correct me if I’m wrong—again, from this line up, those are all the things that, generally, if I was a general manager of a restaurant, those are things that I can control to a certain degree, right? So, in everything [unintelligible 00:29:12] here, I really don’t have a lot of control over, and, you know, other expenses, you know, I know it is controllables, right? And then from here [unintelligible 00:29:22], we get into more of what we call non-controllables, you know, which are occupancy costs, which we’re going to talk about next. So, these are things that you’re really, they’re just fixed. You can’t really do much about right?
Clyde: Right. So, with occupancy costs, you’re going to put things like, you know, rent payments, any taxes you pay, insurance, for example, if you have common area maintenance charges, you know, things like that, anything that’s associated with actually physically occupying the building that you’re in, and/or the costs in occupying the business, that’s really what this is. And you want to keep it somewhere right around 8. That’s really what you’re looking at. Now, in today’s world, for a lot of different reasons, that’s skewing from eight to nine to ten because insurance costs have just gone—as probably everybody knows—whether it’s car insurance or house insurance or any of those things, just insurance costs are skyrocketing for a lot of different reasons.
But you still want to try to keep that 8% because if you remember, if we’re going back to this prime cost at about 65 and we’re going with a 15% operating and/or controllable expenses, you know, now, if you so that’s 65 minus your 15, so you have somewhere around, you know, maybe 20% left over, that’s kind of where you’re looking at. So, if you have occupancy costs of about 8 to 10, then you’re going to have a 10 to 12% basically what’s called a gross margin. Not net profit, but gross margin.
Danny: Yeah, and then from there we get into non-operating expenses, right? So, you have interest, depreciation, stuff like that, right?
Clyde: Yeah. So, on a P&L, your depreciation and amortization is going to go into the occupancy cost, but you’re going to subtract that back out. That’s just the way the generally accepted accounting principles are done, so they kind of wash each other. If you have debt service, like, you took out a loan, you might [unintelligible 00:31:13], so your principal payments are going to be put into your operating or controllable expenses, and then you’re non-operating, that’s where you’re going to take your interest expense. So, if you do have a loan, just know that 10 to 12% that I talked about, which is pretty normal, somewhere in there, you know, if you have a loan out, that’s going to eat into—the interest expense is going to eat into that.
And a lot of loans, that’s where most of, at least early on, depending on your term, early on, your interest expense is going to be much higher than your principal payments. Anybody that has a car payment understands that when they first have a car, you know they’re paying mostly interest expense and then at the end of the loan they’re paying down principal. Or a home mortgage works the same way.
Danny: So then, after you take all of that out, what does that leave you in your pocket?
Clyde: You could anywhere from zero [laugh] or a loss—
Danny: Negative?
Clyde: Yeah, you could have a negative. We have clients that are in the negative, and we help them get out of the negative into the positive. We’re actually very good at that. You want to—at a low, I think you want to be no less than about 8% profit, and you can sometimes get up to a 15% profit, and this is for what I would call independent restaurants. Now, change chains are higher because of economies of scale and, you know, other advantages that they have, purchasing power for contracts, for lowering cost of goods sold and those sort of things and labor contracts.
But for the average independent, if you have it somewhere between 8 and 15, I think you’re doing really well because that gives you what I call a margin for error. Not every month are you going to hit this 8 to 15. Some are going to be a little bit better, some are going to be worse. So, you know, understanding seasonality of your business, what drives top line, you really need this margin for error because not every month is going to be great.
Danny: Yeah. And this is where, in our previous podcast, as you know, we talked about cash flow and we talked about budgeting. So, you’re managing your budgeting and your cash flow over the course of the year. So, if you’re in a highly seasonal market, you got to take care of what you can make those busy months to cover the slow right?
Clyde: Yeah, that’s the cash flow versus budgeting, which is more target or goal setting. But you need, everybody needs that, otherwise, with no plan, then you kind of drift. But the cash flow is understanding that, you know, you’re going to be flush some months, and you’re going to be lean other months, so being able to plan that out is very important.
Danny: So, I wanted you to have a conversation about define EBITDA and how EBITDA works and the importance of EBITDA. Some people really base a lot of their business decisions on EBITDA versus net profit, so I wanted to just have that conversation with you here to help everybody understand.
Clyde: Yeah, sure. So, EBITDA stands for Earnings Before Interest, Taxes, Depreciation, Amortization. So, in this particular case, going back to what we talked about before, you would have your sales minus your prime costs. Remember what those two things are. That’s the cost of goods plus all your labor costs include including benefits, and then minus out your operating expenses and minusing out your occupancy cost, just the raw costs and that’s not the [unintelligible 00:34:28] that we talked about.
So, before your interest, which is that interest expense I just talked about, before any taxes you might pay, and then most people are LLCs, so they’re getting Schedule K-1. Very, very few restaurants are C corps. In fact, I would never recommend a restaurant being a C Corp. But if you have an LLC, either an S corp or a regular LLC, you’re going to have those taxes are going to go to personal anyway and then you can have depreciation and amortization. So, EBITDA really is kind of your raw operating gross margin, let’s call it, like I talked about previously. So, net profit is after all of that. So, if you don’t have any debt service, EBITDA and net profit are going to be pretty close, but if you have interest expense, and you’re a C Corp and you’re paying corporate taxes, those sort of things, then your net profit is going to be less than EBITDA.
Danny: Okay. So, if we’re going to wrap this up here, Clyde, we have some basic metrics here that you provided that you want to talk about, so if you just go through some of those basic rules or metrics, if you would, I would greatly appreciate it.
Clyde: Sure, sure. So, let’s go back and summarize what we talked about. So, you want to try to keep your food costs somewhere between 28 and 35 depending on your concept, 30 is ideal in our case, what we recommend when we’re developing concepts for people. Beverage costs somewhere between an 18 and a 25. We’d like a cost of around 22%, so you blend that together and you’re in the 28, 29% range, so we’re in there.
And then you have labor costs. Remember, that’s everything all in, somewhere as low as 28, most are going to be between 30 and 35% for your labor costs. So, you add both of those together that’s your prime cost, which you’re trying to hit somewhere between 55 and 65%. Remember, these are all ratios of actual dollars that you have going out, debits versus actual dollars coming in credit, so these are ratio numbers.
And then you want to have operator controllable expenses somewhere in the 15% range, and then occupancy somewhere between, you know, I wouldn’t have it—you can get as low as 6, but that’s a whole kind of different discussion. It’s really 8 to 10 in your occupancy. Remember, that is a fixed cost. Once you sign that lease and once you take out insurance, then you’re pretty much fixed on what that is. But I keep that to an 8 to 10, so that should give you somewhere in the 10 to 12% range. I think if you’re moving below the 8%, that gives you that very difficult, short margin for error, small margin for error, and then on those lean months you could even see losses. So, you have to be real careful in understanding, before you go into anything, understanding how to read a P&L, how it’s constructed, and understanding what you potentially could do before you sign on that dotted line.
Danny: Yeah, and that’s where we do a lot of financial work with people that want to get into the business, to really give our best judgment on whether we think what they would like to do, what their dream is, ultimately, will it be profitable? And if it can’t be the way they like it, are there adjustments, legitimate adjustments, that can be made to get the revenue up or the cost down, to get more profits that makes it worthwhile to go into the business, right? So, I know you [unintelligible 00:37:47], Clyde, you could do better with your money than a restaurant, so that’s really where, you know, these financial feasibilities that we do are a really significant determinant of whether you go forward or you don’t, and you know, what’s your use of money, and where is it best used, right?
Clyde: Yeah, yeah. I think that just to piggyback on what you were just saying, a lot of the work that I do is financial feasibilities studies. If you have an idea of what you want to do, then you really need to step back and understand what exactly in detail you want to do, and can you make money doing it? If you can, that’s good, but you also want to make sure that you’re above what’s called the hurdle rate. And if you want to use just to, say 500,000—or, let’s say a million dollars, that’s easy—you want to invest a million dollars into a restaurant, well you know you’re you could put it into ten-year treasuries right now and get a little over 4% of your return, so anything that produces something beyond a 4% return that’s good because that’s above what’s known as the hurdle rate.
So, we use a lot of internal metrics, and when we do feasibility studies, we have all these metrics lined up. It’s important to understand, you know, your best and highest use of money before you fall in love with some site and you have to just buy—and then you sign a lease, and then you figure out, oh, my God, what am I going to do and can I make money? The site’s like, one of the last things you do.
Danny: Yeah, nothing worse than starting behind the power curve before you even have a chance to be successful, right? That’s—we try to help eliminate that and save people… I hate to say, save people from themselves, but sometimes that’s really—
Clyde: Yeah, sometimes. Sometimes we have clients that they just have a dream, and you want to help them with the dream, but you also want to protect them from making a bad decision.
Danny: Yeah, exactly. So, getting back to the P&L here, we have some practical steps here. How do you use it? And then we’re going to do another podcast on controlling you know, your costs and your P&L. And again, the preface is, we want to take care of guests, but you have to see where you are in order to make decisions to move forward, to protect your business and your investment.
So, this is not, oh, my labor is 20; I’m just going to slash labor because you’re going to end up slashing your way to the bottom, right? So, some practical steps, Clyde, of how do you use the information we’re providing to help manage your business.
Clyde: Assuming that you have accurate information and your P&L is coming out accurately, the first thing you want to do once you get it—and I must also say, the faster you can get an accurate P&L from the end of the month, the better off you’re going to be. Because if it’s 10 or 15 days after the end of the month, it’s really of no value because you’re already halfway through the next month. So, if you can get something in four or five days, then it’s worth it. So, let’s assume that you have accurate numbers and that you’re getting pretty timely information. Then the first thing you want to do is, you want to start that top line.
You want to check the total sales, see if they make sense. You want to compare them to, you know, the same month last year; you want to compare them to the previous month. So, you want to look at the sales. Are they going up? Are they going down? And you’re looking for patterns and trends.
And you can drill down into this and say, weekly sales, and you can do a lot of things, but we’re just talking about a monthly P&L, at least on this podcast for today. So, that’s the first thing you start. What’s my revenue and how does it compare to previous periods? The second thing, I think you want to jump straight to prime cost. And so, if you have this P&L set up with a prime cost, you’re going to pretty much see where that baseline is, and you’re above this 65, 67 range, now we can drill down in to see where we’re at.
Remember, there’s going to be some months and where you’re going to have just unbelievable sales and so your prime cost is going to be very low, but there’s going to be some other months when your sales are just, like, not very good. So, a lot of times it’s cold weather or bad weather, or January or whenever, and then you’re not going to have a good cost. But you want to jump to your prime cost next. Once you see that, then start looking at your percentages. So, if you have a QuickBooks, for example, you want to run a report that is profit and loss statement with percentages of categories. That’s if you use QuickBooks.
If you use any other software, normally, it’s going to always have the percentages out there in your P&L. So, you’re going to want to look at those percentages. And again, what did I do last month, what did I do the previous year, and see how they are. Then you’re also going to compare it to your target, like that budget we were talking about previously. What is your target? Well, my target was 32% food costs, and I ran a 34, then you might want to look into that.
And then you also want to look at those healthy ranges we’ve talked about. Where am I in comparison to the, sort of, industry standard [benches 00:42:44]. So, once you do that—and that might take you a beginner, it might take 30, 45 minutes, an hour. For somebody who’s an expert and/or adept at looking at those, it might take 15 minutes to walk through those first five steps.
From there, it gets a little bit harder because you’re looking for all your red flags, okay? Now, there are going to be months to which your P&L is great. Don’t just ignore it and move on saying, gee, well, I’m really good. There’s all kinds of red flags. If something looks like, wow, that’s, like, a lot, we made a lot of money, there could be some inputting errors, there could be some other errors. But you’re always looking for those red flags, usually food cost, beverage cost, labor costs. That’s where you want to go first off to see where it is.
Because remember, if your prime cost is 65 that’s where 65% of your money is going to those two categories. So, you want to, kind of, go through the P&L from top, and then you want to look into your prime cost, then start breaking it down into your targets and percentages and things like that, and see if there’s any really red flags. Once you identify a red flag, then on the next podcast, we’ll be able to cover, now what do I do about that? What do I do about the red flags? And how do those red flags relate to how I’m operating my business?
Danny: Yeah, and I think the other important thing here, which I’m sure you would agree, sharing the information with the team and explaining to them the importance of a P&L. So, if you have an assistant manager and a shift leader, having weekly manager meetings and reviewing a P&L because I think it’s also incumbent upon a general manager to train assistants and shift leaders to become general managers, and they have to understand the financial side of the business to be able to get there.
Clyde: Right. So, just like any sports game or board games, if you’re into that, or card games, there’s always a scorecard. You can always see who’s going to win or who’s going to lose. And that’s sort of like the way society kind of views things at this point. So, remember that a P&L is a scorecard, and what you’re trying to do with a P&L, if you’re going to go back to your managers, is say, here’s how we performed last month.
And just started the monthly levels. Here’s how it performed last month. So, these are the red flags. Here are the things that we should do about it. So, you can either use the P&L as a tool to help you improve or you can use the P&L as a weapon to find how people are doing things wrong or they’re not performing. I’d prefer the first one because you really want your management team to win. That’s what you’re really looking for because if your management team is winning, then you’re winning. It’s like the owner of a football team. They want the team to win because if they win, the owner wins. Or even the head coach if you want to go down that way.
Danny: Yeah, and oftentimes bonuses are tied to all of these things, so you want to really be able to manage how things work.
Clyde: Yeah, yeah. And you want to pay bonuses. You want to pay the bonus because if they’re making a bonus, you’re making money.
Danny: Yeah, exactly. Very cool. All right. Clyde, I want to thank you so much. This is another great piece of information. Remember, send an email to info@therestaurantroadmap.com. We’ll be happy to share our standard Chart of Accounts with you. If you have questions, topics you want to discuss, questions that you have, remember, if your question ends up on a podcast, we’re going to give you a free 30-minute consultation. Could be with Clyde or any other one of our consultants. So, I want to thank you again, Clyde, for all of the great information.
Clyde: Yep, thank you.
Danny: Everybody, take care, and we’ll be back in touch soon. Bye-bye.
Clyde: Bye-bye.
Danny: Thanks for tuning in. We hope today’s episode gave you valuable insights you can put into action. If you have questions, want more info on today’s topic, or need support with your restaurant-specific challenges, we’d love to hear from you. Reach out anytime at info@therestaurantroadmap.com, and visit synergyrestaurantconsultants.com to explore our services, sign up for our newsletter, and catch up on past episodes. Don’t forget to follow and subscribe on YouTube, Spotify, Apple Podcasts, LinkedIn, Instagram, TikTok, and Facebook so you never miss what’s next. Do you have feedback or a topic you’d like us to cover? Contact us. We’re here to help make the world a better place to eat.