As a business person you will come across various management and accounting reports, but perhaps the most important is the Profit and Loss Account. It will inform your decisions when you take on a pub, run the pub and sell your interest on.
What is a Profit and Loss Account (sometimes called an Operating Statement)?
Just like any accounting document it is a snapshot in time and is always historic. In it’ simplest form it is a table that shows how much you take in sales, what it costs to make those sales and how much profit or loss you make on those sales.
Why is it important?
Your Profit & Loss Account (P&L) is the fundamental management tool you will employ to assess your profitability over a period of time (i.e. weekly, monthly, periodically, quarterly, annually, or cumulatively).
What do I need to build a P&L?
You will need accurate details of your sales (bars, food, other income and AWP /machine income); accurate details of your direct costs of sales (the costs of the drinks, food and other things you sell) and finally an accurate record of all the spending your business has for all its overheads (rent, insurance, staff etc).
How do I make sense of it and then use that information?
The easiest way to understand your P&L is to understand four things:
- P&L are all net of VAT at the prevailing rate (as you will be collecting VAT on your sales for HMRC and claiming back VAT on your expenses from HMRC) and these “ex-VAT” figures are the most important.
- What your sales and their costs are, the difference being your Gross Margin.
- What your business spends on everything apart from your costs of sales, the Overhead
- What profit or loss you have made and at what point you need to trade to breakeven (make neither a profit or a loss)
This guide will help you understand how a P&L works and what you should concentrate on to improve the profitability of a pub business. Some of the assumptions and views expressed on these outcomes of the business are valid for many types of pub businesses irrespective of style of operation or location.
Once you understand what the P&L is telling you, you can make informed decisions on how to manage your pub to achieve the maximum profit.
Sales, Cost of Sales and Gross Margin
Throughout a trading period (be it a week, a month or a year) you will need to keep an accurate record of what you sell. This means adding up all your sales from all your tills for three main sales areas: the bars, food sales and then any other sales (function room hire, raffles, etc – basically non-food and non-bar sales).
You will also need to keep a full record of how much you spend on drinks and other items such as snacks, tobacco etc for the bar and what your kitchen spends on food to sell to customers (and feed you and your staff).
Lastly record your spending on other sales, for instance prizes for raffles etc.
Similar figures are detailed for your food (Dry) and other sales.
Below this section (Sales) is recorded the amount you spend on those sales (Costs), again broken down by type of sales.
The next section deals with the difference you make on sales less their direct costs. This is the Gross Margin.
Wet Sales less, the cost of all the beer, wines, spirits, soft drinks etc leaves a gross margin. By dividing the gross margin by the sales and then multiplying the result by 100 you will get a figure that represents the percentage gross margin you have achieved on your bar sales. The same calculation can be made for food and other sales.
Maintaining the maximum level of gross margin is one of the most important tasks you, as the manager of your business, undertake. Things that affect gross margin are sales price, cost price, waste and shrinkage (theft) and if you control these items you will be well on the way to ensuring profit.
You will notice that different pubs will achieve different gross margins; for instance a free of tie pub buys its beers etc for considerably less than a tied pub so their gross margin will be greater.