The Chemistry of a Restaurant P&L

Why Comingling Expenses Can Affect Your Ability to Respond to the Data

Deep Dive Podcast

In this industry, we often confuse "hard work" with "good business." We assume that if the dining room is full and the kitchen is in the weeds, we must be making money.

But any seasoned operator knows that volume is vanity. Profit is sanity. And the only way to retain your sanity is to have a Profit & Loss statement (P&L) that actually functions as a diagnostic tool, rather than just a list of bills you paid.

The most common, fatal error I see in restaurant accounting? Booking Labor costs into Cost of Goods Sold (COGS).

To the uninitiated, they are both "costs." To a professional, they are two completely different species of expense that behave according to different laws of physics. Mixing them isn’t just messy; it renders your financial data useless.

The Variance Problem: Consumption vs. Capacity

The reason we separate these categories isn't because accountants are obsessive about formatting. It is because of variance.

COGS represents consumption. It is a variable cost. If you sell a steak, you consume a steak. If you sell zero steaks, your theoretical usage is zero. The relationship between sales and COGS should be linear.

Labor represents capacity. It is a semi-fixed cost. You schedule a dishwasher not based on the exact number of plates washed, but on the probability of plates needing washing. If it rains and covers drop by 20%, you still pay that dishwasher.

If you blend these lines, you lose the ability to answer the most important question in operations: "Where is the leak?"

If your combined cost line spikes, you have no way of knowing if your Kitchen Manager is over-ordering Meat (4030) or if your GM is failing to cut the Dishwashers (4370). You cannot fix a problem you cannot isolate.

The Architecture of a Professional P&L

Let’s look at a proper P&L framework. It’s structured to tell a story about operational efficiency, moving from the things you can control to the things you can’t.

1. The Top Line: Specificity in Sales

First, we analyze revenue. We don't just book "Sales." We split Food Sales from Liquor Sales ( and Beer Sales. Why? Because food and alcohol have drastically different margin profiles. If you lump them together, a shift in product mix (selling more wine, less pasta) will skew your cost percentages and lead you to chase "cost problems" that don't exist.

2. The First Cut: COGS

This section tracks the raw materials. A robust Chart of Accounts uses specific account numbers. We don't just have "Food Cost." We have:

• Produce (4010)

• Dairy (4020)

• Seafood (4040)...

This granularity allows for surgical strikes. If "Food Cost" is high, you panic. If "Poultry" is high, you check the chicken invoice for price hikes or check the prep table for waste.

Additionally, I also recommend the inclusion of Purchase Discounts. If you aren't tracking your vendor rebates separately, you are obscuring your true food cost.

3. The Second Cut: Labor Analysis

• Labor is not a monolith. A smart P&L separates production from management.

• Back of House: Distinct lines for Prep Cook vs. Line Cook. One prepares the mise en place; the other executes service. Their wages can drastically differ as well as their probability for overtime.

• Front of House: Bartenders are separated from Hosts and Servers for the same reasons.

• Training: Having a specific line for BOH and FOH Training . This is critical. Training is an investment; operations is an expense. If your labor is high because you are training new staff, that is a temporary investment. If it's high because your scheduling is loose, that is operational bleed. You need to be able to to tell the difference.

The Holy Grail: Gross Profit After Prime Costs

By keeping Labor and COGS distinct, we arrive at the most vital metric in the restaurant world: Gross Profit After Prime Costs.

• Prime Cost = Total COGS + Total Labor.

• This number tells you if your business model works. If your Prime Cost is running 55-60%, you have a fighting chance to pay your rent and investors. If this number is blown, no amount of "saving on electricity" will save you. This line is the report card for your General Manager.

The "Below the Line" Reality

Once we pass Prime Cost, we enter the realm of Fixed/Semi-Variable Costs. Here, granularity prevents "death by a thousand cuts."

• Occupancy includes the expenses it takes to occupy the property. That is Rent, Utilities, CAM Charges, Trash Removal, etc.

• Comps and Discounts don't reduce sales, they are marketing expenses. Whether they are for repairing a negative situation or promotional.

• Employee Discounts are not a marketing expense. These should be considered with your other labor expenses since they are a part of the expense of having employees.

• Even marketing is dissected. DoorDash fees are separated from general Advertising. Why? Because DoorDash commissions are a cost of doing business on a specific channel, while Advertising is discretionary spend.

Mise En Place

The restaurant business is hard enough without blinding yourself to the data. If your P&L is a jumbled mess of mixed labor, goods and semi-variable expenses, you aren't managing a business; you're just hosting a very expensive party.

Structure your accounts. Isolate your variables. Respect the difference between capacity and consumption. Give yourself the dignity of knowing exactly why you made (or lost) money last month, so you can actually do something about it.