Every restaurant runs on a financial model. Most operators did not design theirs deliberately — they inherited it from the concept they opened, the lease they signed, and the staffing decisions they made in the first few months. But the model exists whether you designed it or not, and understanding it is the difference between managing a business and reacting to one.
The restaurant P&L is the clearest expression of that model. It is not just an accounting document. It is a map of how revenue flows through the business, where it gets consumed by costs, and what — if anything — is left at the end. Reading it correctly, and understanding why each line behaves the way it does, is the foundation of every financial decision you will make as an operator.
Revenue: Where It Starts
The P&L begins with revenue, and the first distinction worth making is between gross sales and net sales. Gross sales is everything the POS recorded. Net sales is what you actually keep after removing sales tax (which belongs to the government), comps and voids (meals that were not paid for), and discounts.
Every cost percentage on your P&L — food cost, labor cost, prime cost — should be calculated against net sales, not gross. Using gross sales as the denominator makes every cost look lower than it actually is and produces benchmarks you cannot trust.
Below net sales, many P&Ls break revenue down by channel: dine-in, bar, takeout, delivery, catering. This segmentation matters because the margin profile of each channel is different. Dine-in and bar typically carry the highest margins. Third-party delivery, after platform commissions of 15 to 30 percent, often generates little or no incremental profit. Understanding which revenue channels are actually profitable — and which are revenue for its own sake — is one of the most important analyses an operator can do.
Cost of Goods Sold: The First Major Cost
COGS — cost of goods sold — is the cost of the food and beverage you sold during the period. It is calculated as beginning inventory plus purchases minus ending inventory. This is not the same as what you purchased this week. Purchases and COGS only match if your inventory level is unchanged, which is rarely the case.
Food cost percentage — COGS divided by net sales — is the primary metric used to evaluate how efficiently the kitchen is converting product into revenue. Benchmarks vary by concept: a casual restaurant might target 28 to 32 percent, a fine dining concept might run 30 to 35 percent with higher check averages compensating, and a bar-heavy concept might run lower on food cost while carrying significant beverage cost.
Beverage cost follows the same logic but with different benchmarks. Beer and wine typically cost 20 to 30 percent of sale price. Liquor, with its higher markup, often runs 15 to 22 percent. Draught beer falls somewhere in between depending on yield and portion consistency.
Labor: The Most Complex Line
Labor is almost always the largest expense on the P&L, and it is the most operationally complex. It includes hourly wages, salaried management, payroll taxes, workers’ compensation insurance, and employee benefits. Many operators track only gross wages in their labor percentage, which significantly understates true labor cost.
All-in labor — everything included — typically runs 30 to 38 percent of net sales for a full-service restaurant. Quick-service and counter concepts, with lower labor intensity, might target 25 to 30 percent.
Labor is semi-variable: it has a fixed floor — the minimum staffing required to open the restaurant — and a variable component that can be adjusted with sales volume. Managing labor well means disciplined scheduling based on projected sales, real-time floor management to avoid overtime and idle hours, and constant monitoring of the relationship between labor dollars spent and revenue generated.
Prime Cost: Food Plus Labor
Prime cost — COGS plus total labor — combines the two largest and most controllable expense categories into a single figure. It is the most important number on the P&L for day-to-day operational management.
A healthy prime cost for a full-service restaurant is 60 to 65 percent of net sales. Above 65 percent, most models struggle to generate meaningful profit after paying occupancy, overhead, and other fixed costs. Below 60 percent typically requires either unusually high check averages, a streamlined concept with low labor complexity, or both.
Prime cost is the number to watch weekly. Every other metric on the P&L is downstream of whether prime cost is in range.
Occupancy: The Fixed Weight
Occupancy costs — rent, common area maintenance, property taxes passed through from the landlord, and sometimes utilities if they are included in the lease — are the defining fixed cost of the business. Unlike food and labor, occupancy does not flex with sales. The rent is the same whether you do a record week or your slowest week of the year.
This creates the fundamental occupancy challenge: as a percentage of sales, occupancy looks expensive in slow months and reasonable in strong ones. The dollar amount never changes. What changes is the sales base absorbing it.
A reasonable occupancy target is 8 to 12 percent of net sales, depending on the market. Prime urban locations often run 12 to 15 percent. Suburban or secondary market locations frequently operate with lower occupancy costs, which is one reason why the financial model can be meaningfully stronger in those markets even with lower sales volumes.
Below the Line: Everything Else
Below prime cost and occupancy, the P&L includes a range of smaller but meaningful expense categories: marketing and advertising, credit card processing fees, supplies and smallwares, repairs and maintenance, insurance, accounting and legal fees, and any corporate or royalty fees for franchise operators.
These line items are individually smaller but collectively significant. Together they typically account for 8 to 15 percent of net sales. Each deserves a budget and periodic review — the tendency is to set them in the early months of operation and never revisit them, which means recurring vendor relationships and subscription costs accumulate over time without scrutiny.
Net Income: What’s Left
Net income — what remains after all expenses — is the bottom line of the P&L. For independent full-service restaurants, a sustainable net income target is 5 to 10 percent of net sales. Fast-casual concepts can sometimes achieve 10 to 15 percent with lower occupancy and labor costs. Fine dining, with its higher costs of product and service, often operates in the 5 to 8 percent range.
Many restaurants operate at net income margins below 5 percent, which means any significant disruption — a slow month, an unexpected repair, a key employee departure — is enough to turn a profitable period into a loss. This is not inherently unsustainable, but it is fragile, and fragility requires deliberate cash management to survive.
The P&L is the scoreboard. Understanding every line on it — not just the totals — is what lets you manage the game.
The author is a former CFO for a multi-unit restaurant brand. RestaurantBottomLine.com is dedicated to helping independent operators protect their financial model.
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PROTECTING THE BOTTOM LINE 