Your Pizzeria’s Report Card
My mentor Roger Duncan, founder of Rusty’s Pizza in California, shared this wisdom with me. “Sales are made in the restaurant. Profits are made in the office.”
Let us embark on a journey to pizzeria profitability. The cast of characters is this:
Your pizzeria (Student)
Your accountant (Teacher)
The P&L (Student’s report card)
The Balance Sheet (Parent’s report card)
Step into my office.
When we first open our pizzeria, the purpose of accounting is to pay our bills. Quickly we understand the second purpose of accounting; to pay our taxes. Only after accomplishing paying our bills and paying our taxes do we move into the third purpose of accounting; to know if we are making money. Finally, the smartest among us discover the fourth purpose of accounting; to grow our business.
Let us begin with the basic tools needed in this classroom/office. We will need a bookkeeper, and accounting program (i.e. QuickBooks), an accountant, and a payroll company.
After we have our basic tools, we will need a system. This consists of a weekly check run to pay bills, weekly or monthly inventory, payroll reporting, monthly bank reconciliation, monthly P&Ls, and quarterly Balance Sheet. With these tools and systems, you are now paying your bills, paying your taxes, and you know if you are making money.
I have met very few business owners who have graduated to the next level. These few are the most successful businesspeople I know. The next level is using these financials to grow your pizzeria business.
I began by saying the P&L is like a report card. It tells you how your pizzeria (the Student) is performing during that period. The measure is profitability. Did your pizzeria get an ‘A’, ‘B’, or some lesser grade? However, the report card does not tell you everything. Enter the Balance Sheet, aka your (the Parent’s) report card. Your accountant (the Teacher) should produce both for you each month. It is the study of this data that will help you graduate to the next level of business management.
First, look at your sales. Are your sales trending up, down or static? How do they compare to the same period of the previous year?
Next, look at your COGS (Cost of Goods Sold). These are your food and labor costs, also known as your ‘variable’ or ‘controllable’ costs. You have direct control of these dollars spent. A pizzeria should run anywhere from 50 percent (an A+) to 65 percent (a passing C-).
Following your COGS are the EXPENSES, also known as ‘non-variable’ or ‘fixed’ costs. These include all your business expenses after COGS. ‘Fixed’ is really a misnomer as you do have control over these costs. Is the air-conditioner programmed correctly? Do you have cash shortages? Are you maintaining your equipment? Although you have control over these costs, the expression ‘Chasing the pennies while the dollars fly away’ applies here. The expenses are the pennies. Control the expenses by looking at them monthly but focus on where the dollars are. Food & Labor costs make or break pizzerias.
The Balance Sheet
Only one number flows from the P&L’s to the Balance Sheet. The ‘Net Income’, the bottom line. So, what are all those other numbers on the Balance Sheet all about? Good question. Like you, I am the Parent, the pizzeria owner.
I first learned how to read a P&L because I had to. I knew that if I did not have a positive number, a profit, on the bottom line of the P&L, then I would not be able to pay my bills. The Balance Sheet was more difficult. At first it did not seem very important.
Come tax season, my accountant would print the Balance Sheet and start asking questions about my business. They were not profitability questions. The questions were about equipment, remodeling, inventory, loans and credit card debt. When I decided to open a second pizzeria, the landlord asked for my current Balance Sheet. The Balance Sheet began to seem important.
Your accountant will teach you how to read the Balance Sheet. I have always believed that to succeed, you must surround yourself with experts. The expert is the accountant, your Teacher. We are the Parent of the pizzeria. What has this Parent learned?
The Balance Sheet is a snapshot of the business at any moment. It has three parts: Assets, Liabilities and Equity.
Assets shows how much money you have ‘on the shelf’. This includes cash in the bank and in your till, food, supplies, equipment, autos and building improvements.
Liabilities shows the money you owe.
Equity shows where the money came from.
KPI is an acronym for Key Performance Indicator. By identifying key financial areas that you need to measure performance, you will set your business on the road to success.
Each month your accountant should print a set of P&Ls for the month. Set a monthly appointment with yourself and a key manager to review your P&L KPIs. Quarterly, meet with your accountant to review both your P&L KPIs and your Balance Sheet KPIs. I recommend the following KPIs:
From the P&Ls
1. Sales. How are the sales trending? What needs to change?
2. COGS. What are the food and labor cost percentages? How can they be improved?
3. Bottom line. Do you have a profit or loss? What needs to change?
From the Balance Sheet
1. What is the Quick Ratio?
2. What is the Working Capital?
3. What is the Debt-to-Equity Ratio?
These Balance Sheet metrics are what banks and landlords look at. They are not critical to your day-to-day operations but are a good measure of the health of your business.
OK, office time is up. Back to doing what you do best; satisfying customers with the best pizza on the planet. But remember, sometimes you must step away from the pizza. Come back to the office regularly to make your life’s investment profitable!
Dan Collier is the founder of Pizza Man Dan’s in California and a speaker at International Pizza Expo.