Know Your Worth: Understanding a Restaurant Balance Sheet and Other Financial Statements

As a business owner, you've likely realized that running a successful restaurant depends on doing many things well. One of the most critical matters is making educated financial decisions. The fiscal state of your business will determine your restaurant's short and long-term success. Therefore, it's imperative that you have a solid understanding of where you stand.

Financial statements, such as a restaurant balance sheet, are vital in keeping a pulse on the financial health of your business. So let's explore this and other important reports you'll need to make intelligent, data-driven decisions.

What is a Restaurant Balance Sheet?

Let's start by defining what a restaurant balance sheet is. In its simplest terms, it's a snapshot of your restaurant's finances at a specific point in time. It summarizes financial balances into three categories — assets, liabilities, and equity.

• Assets: things your restaurant owns, such as equipment and cash on hand
• Liabilities: what your restaurant owes, such as vendor bills, loans, and rent
• Equity: the difference between assets and liabilities

You don't need to reconcile your balance sheet daily, but setting up a recurring reconciliation schedule such as monthly, bi-monthly, quarterly, or semi-annually is a smart idea. Sticking to a regular timeline will give you a clear picture of your restaurant's financial health and help you avoid unpleasant surprises.

P&L and Cash Flow Statements

While your restaurant's balance sheet gives you a comprehensive overview, it's not the only financial report you'll need to keep a pulse on your business.

In addition to a balance sheet, you'll also want to keep a record of both a profit and loss (P&L) statement and a cash flow statement to tell the whole story of your business' financial health.

The profit and loss statement, also referred to as the P&L statement or income statement, provides data to measure your restaurant's efficiency and performance. The P&L statement summarizes your restaurant's revenue, cost of goods sold (COGS), operating expenses, and fixed charges over a certain period of time — the sum of which results in net income or net loss.

The cash flow statement helps you understand the amount of cash coming in and cash paid out that relates to your restaurant’s operating, investing, and financing activities.

While the cash flow statement is closely related to the P&L statement, it also includes other sources and uses of cash, such as investments in equipment and proceeds from a bank loan, so that you can monitor how efficiently your restaurant is utilizing its money. Cash management is vital because it impacts how effectively you can operate, invest in, and finance your restaurant.

The SkyTab Diner: An Example Of Financial Reports In Action

Now that we know the different types of financial statements let's look at them in action.

Let us introduce you to an up-and-coming, fictional restaurant: The SkyTab Diner. We've been open for one month and think we're doing okay so far. Still, we need to carefully evaluate our finances to know for sure.

P&L Statement Example

Our P&L statement lets us know how many waffles, burgers, and drinks we sold – our revenue. We also know how much we spent on waffle mix, beef, buns, and soda – our COGS. Lastly, we need to track labor costs and other expenses such as rent, utilities, advertising, and loan interest to calculate net income. The following is the formula and example for your P&L statement:

Net Income/Loss = Revenue - Expenses

When finding these figures for your P&L statement, one of the first places you should look is your point of sale (POS) system. Your POS system tracks your restaurant's activity, and the POS reports deliver a wealth of information. For instance, with a SkyTab POS system you’ll be able to pull a profit margin report that includes inventory cost. Additionally, you can leverage one of our advanced inventory management integrations for even more data.

Balance Sheet Example

To get a complete view of SkyTab Diner’s financial well-being, we also need to look at our balance sheet, which you can calculate using the following formula:

Assets = Liabilities + Equity

The balance sheet provides us with the financial health of our business at a specific point in time, as well as the short and long-term cash needs. Here’s SkyTab Diner’s balance sheet at the end of our first month.

You can see that our current assets ($140,000) are more than enough to cover our current liabilities ($40,000). Our current assets will allow us to continue operating our restaurant without raising additional capital.

Additionally, like the P&L statement, you'll be able to find some of these numbers using a mix of POS reports and your accounting software — the latter of which should integrate with your POS system for a smoother restaurant accounting process.

Cash Flow Statement Example

Finally, we will look at our cash flow statement. This statement details the sources and uses of cash in our business. The cash flow statement formula and example are as follows:

Beginning Cash + Cash Provided by Operating Activities - Cash Used in Investing Activities + Cash Provided by Financing Activities = Ending Cash

From an internal perspective, a positive cash flow indicates that you can generate enough cash to stay afloat and grow your business. From an external perspective, banks and other financial institutions will use your cash flow statement to determine the creditworthiness of your business should you need to secure a business loan or other type of working capital.

Bring Balance To Your Restaurant’s Finances

Regarding your business' overall financial health, there isn't one report that will give you all the information you need. Unfortunately, most owners put so much emphasis on restaurant sales reports that they never look at the bigger picture. So, while sales reports are important, they provide only a tiny glimpse into the restaurant's finances.

As a best practice, using a combination of POS reports and accounting software to create a restaurant balance sheet, a P&L statement, and a cash flow statement to give you a holistic picture of your business' finances so you can make smart, data-driven decisions.

Disclaimer: This content is provided solely for informational purposes and is not intended to serve as accounting, tax, legal, or other professional advice. You are solely responsible for your own compliance with laws and regulations. You should contact your accountant, attorney, or other relevant advisors for advice specific to your circumstances.