The profit and loss statement is the single most important document in restaurant management. It is a financial snapshot — typically produced weekly, monthly, and annually — that tells you whether the business is working. And yet, for many operators, the P&L remains an uncomfortable document: something reviewed briefly at the end of the month, filed away, and not thought about again until the next one arrives.
That relationship with the P&L is itself a financial problem. The operators who run the healthiest restaurants are the ones who read their P&L with the same fluency they bring to reading a menu or a reservation count. They know what each line means, they know what each line should look like, and they notice immediately when something is off. This post is meant to build that fluency.
The Structure of a Restaurant P&L
A restaurant P&L follows a logical top-down structure. Revenue sits at the top. Costs are subtracted in layers. What remains at the bottom is profit — or loss. Understanding the structure means understanding how each layer relates to the one above and below it.
Net Sales is where the statement begins. This is your total revenue after accounting for voids, comps, and discounts. It is not gross sales — it is what actually hit your register and counts as earned revenue. Every percentage on your P&L is expressed as a percentage of net sales, which is why that number anchors the entire document.
Cost of Goods Sold (COGS) is the first major expense line. This includes food cost and beverage cost, and sometimes packaging in a delivery-heavy model. A well-run full-service restaurant typically targets COGS between 28 and 34 percent of net sales. Quick-service concepts, with simpler menus and lower commodity costs, may run closer to 25 to 30 percent. The number matters less than understanding what is driving it and whether it is moving in the right direction.
Gross Profit is what remains after subtracting COGS from net sales. It is the pool of money available to pay labor, occupancy, and all other operating expenses, and still leave something for the owner. A gross profit percentage in the range of 65 to 72 percent is typically the zone where a full-service restaurant has enough to work with.
Labor
Labor is usually the next major section, and in most restaurants it is the largest single expense category. A well-structured P&L will break labor into at least two categories: hourly wages and management/salaried labor. Some will go further, breaking out front of house hourly, back of house hourly, and management separately.
Payroll taxes and benefits — employer-side FICA, workers’ compensation insurance, health insurance contributions — should appear either as separate line items or bundled into a total labor section. The number that matters for evaluating performance is total labor cost as a percentage of net sales, which typically should fall between 28 and 35 percent depending on concept and service model.
Prime cost — COGS plus total labor — appears either as a calculated line or is derived by adding the two sections together. As covered separately on this site, prime cost is the most important single measure of operational efficiency in the business.
Operating Expenses
Below labor sits the collection of operating expenses that keep the restaurant running. These lines vary by concept and accounting structure, but the most common include:
Occupancy — rent, common area maintenance (CAM), and property taxes. This line is largely fixed and non-negotiable month to month. A target of 6 to 10 percent of net sales is generally healthy; above 12 percent is a significant headwind that other lines will struggle to overcome.
Utilities — electricity, gas, water. Variable but not highly controllable on a short-term basis. Typically runs 2 to 5 percent of net sales depending on concept and building.
Repairs and Maintenance — a line that many operators underestimate until something breaks. A consistent monthly allocation, rather than lumpy emergency spend, reflects a well-managed operation.
Marketing — advertising, promotional spend, loyalty program costs. What this line should be depends entirely on the concept’s growth stage and strategy. Early-stage concepts investing in traffic development may run 3 to 5 percent; mature operations may run closer to 1 to 2 percent.
Credit Card Fees — processing costs on card transactions. In a cashless environment this is effectively unavoidable, typically running 2.5 to 3.5 percent of sales.
Supplies — smallwares, cleaning products, paper goods, uniforms. A catch-all that should be reviewed regularly for creep.
General and Administrative — accounting, legal, software subscriptions, office expenses. Should be small and controlled.
EBITDA and Net Operating Income
After all operating expenses are subtracted from gross profit, what remains is EBITDA — earnings before interest, taxes, depreciation, and amortization — or more practically for a restaurant unit, net operating income. This is the number that tells you whether the four walls of the restaurant are generating value.
A healthy full-service restaurant typically targets net operating income in the range of 10 to 15 percent of net sales. Quick-service and fast-casual concepts, with lower occupancy and labor requirements, may target slightly higher. Below 5 percent, the business is operating with very little margin for error. A negative number means the four walls are destroying value, regardless of how busy it looks on a Saturday night.
Below the operating income line, a full P&L may include interest expense on debt, depreciation of equipment and leasehold improvements, and owner distributions or management fees. For operators focused on unit-level performance, the operating income line is the primary target.
Reading the P&L, Not Just Reviewing It
The difference between reviewing a P&L and reading one is the difference between confirming numbers exist and understanding what they mean. A few practices that separate operators who use the P&L as a management tool from those who treat it as an administrative obligation:
Compare every line to the same period in the prior year. Revenue trends, cost structure changes, and expense creep are only visible over time. A monthly snapshot without context is limited in what it reveals.
Calculate the same percentages every period. Your food cost percentage, labor percentage, prime cost, and operating income margin should be tracked consistently so that movement in any direction is immediately visible.
Look for the disconnects. A period with strong sales but declining operating income is telling you something important — usually that costs grew faster than revenue, or that a specific expense line moved. Finding that disconnect is where the real management work happens.
The P&L does not manage the restaurant. You do. But it is the most comprehensive and honest feedback mechanism available to you, and treating it as such is one of the foundational habits of financial management in this industry.
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*Spencer Houlihan is a former CFO for a multi-unit restaurant brand. RestaurantBottomLine.com is dedicated to helping restaurant operators protect their financial model.*
PROTECTING THE BOTTOM LINE 