How to Read a Restaurant Balance Sheet

For most restaurant operators, the importance of understanding and paying attention to their profit-and-loss statement (P&L) is obvious: The P&L shows your sales volume, how much money you're making (hopefully) and your food, labor and other costs. However, the P&L doesn't tell the entire story about how your business is doing financially.

For example, the P&L doesn't tell you how much cash you have in the bank, if you're carrying too much inventory or whether you're getting behind on your bills.

It's impossible to get an accurate picture of the financial health of your restaurant without examining and understanding the numbers on your balance sheet as well as the P&L. In particular, I'm constantly amazed at how many independent restaurant operators don't understand or just don't pay attention to their balance sheet.

How One Operator Viewed His Balance Sheet

Here's a true story of my experience with one such operator who wasn't paying much attention to his balance sheet. Back in the mid-'80s I was practicing as a CPA and preparing monthly financial statements for about 12 independent restaurant operators. One of my largest clients owned three successful casual, full-service restaurants, each doing more than $1 million in annual sales.

On one occasion, I stopped by this operator's office to deliver his monthly financial statements. As I handed over the package of statements and reports, he picked up the balance sheet and after glancing at it briefly said, "Jim, you don't have to prepare this, uh, balance sheet anymore, I never look at it anyway." It's a good thing his banker or one of his investors wasn't in the room to hear that. The thought of someone responsible for managing a $5 million-a-year business not understanding the importance of his company's balance sheet is a little shocking to say the least.

As I thought about his statement, the more I realized that as his CPA, I was partially responsible. He had been my client for over three years. I should have known he didn't understand a balance sheet and I should have found out and taken the time to show him how the balance sheet could help him better understand and manage his business.