Decoding Your P&L: Navigating the Financials for Bar Business Breakthroughs

Unlock the secrets to a profitable bar with this week's deep-dive into the misunderstood world of Profit and Loss statements. I'm Chris Schneider, your guide through the maze of bar bookkeeping, and together we'll clarify the complexities of P&L that so often trip up bar owners.  This is not just theory; it’s practical, actionable knowledge that will equip you with the financial acumen to lead your bar to success.

Ever wondered how to categorize costs or revenue like a pro? This episode serves up a masterclass in profit and loss statement basics, providing you with a roadmap from gross revenue to EBITDA. I'll show you how to keep your bar's financial performance unclouded by personal expenses and why detailed sub-accounts might be your new best friend in tracking costs. Get ready to dissect controllable versus non-controllable expenses, as we explore strategies to tighten the reins on the former and make peace with the latter. This isn't just about keeping the books; it’s about writing your own success story.

By understanding P&L, you can sharpen your managerial decisions and shape a more profitable future for your bar. Ready to elevate your financial game? Tune in and transform your bar's P&L from a riddle to a resource.

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Welcome to the Bar Business Podcast, the ultimate resource for bar owners looking to elevate their businesses to the next level. Our podcast is packed with valuable insights, expert advice, and inspiring stories from successful bar owners and industry professionals. Tune in to learn everything from how to craft the perfect cocktail menu to how to manage your staff effectively. Our mission is to help you thrive in the competitive bar industry and achieve your business goals.

Special thank you to our benchmarking data partner Starfish. Starfish works with your bookkeeping software by using AI to help you make smart data-driven decisions and maximize your profits while giving you benchmarking data to understand how you compare to the industry at large.

For more information on how to spend less time working in your bar and more time working on your bar:
The Bar Business Podcast Website
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Chris' Book 'How to Make Top-Shelf Profits in the Bar Business'
Bar Business Nation Facebook Group

Transcript

Speaker 1: 0:00

You're listening to the Bar Business Podcast where every week, your host, chris Schneider, brings you information, strategies and news on the bar industry, giving you the competitive edge you need to start working on your bar rather than in your bar.

Speaker 2: 0:18

Welcome to this week's edition of the Bar Business Podcast, your ultimate resource for bar owners. I am your host, chris Schneider, and this week we're going to be talking all about your profit and loss statement. And the reason we're going to talk about your profit and loss statement is because your P&L really dictates the data you have to determine the financial future of your business. It's very hard to think about cost, about your revenue, about anything when it comes to the numbers for your business and the profit you're putting in your pocket, without referring to your P&L. So, as we get in here, I do want to take a step back real quick and talk a little bit about my background. I know most of you guys know me. We've been on this podcast now over a year, but something I don't talk about as much. I do have, obviously, a lot of experience owning bars, a lot of experience consulting bars, but I also have a lot of experience in the bookkeeping space. I've worked for some very large companies doing bookkeeping and doing bookkeeping for them, for other clients, and one thing I can tell you is that bookkeeping in and of itself, the people that are making your P&Ls don't necessarily know what a bar needs. The people that are making your P&Ls don't necessarily know what a bar needs, and so it's important whether you're doing your bookkeeping yourself, whether you're having your taxpayer do your bookkeeping, whether you're hiring an outside bookkeeper to do your bookkeeping that you organize your P&L in a meaningful way that's actually going to give you data that you can use to make decisions, because if your P&L cannot give you the information needed to make a data-driven decision, it's not serving its purpose for your business. Now, when it comes to P&Ls, before we get into how to organize a P&L to be best suited for your business, I want to cover a few kind of myths and misconceptions people have regarding P&Ls and what those mean for your business, and some of the really common mistakes I see when I look at different bars profit and loss statements.

Speaker 2: 2:14

Now, one thing and this is not necessarily on the statement itself, but this is a common thought process among a lot of business owners your P&L does not show you how much cash you make. Your P&L actually is only very loosely correlated with your cash. Your P&L shows how much money you've made versus how much money you've spent, and why that doesn't necessarily tie into cash is because a P&L is only showing expenses, it's not showing anything related to the asset side of your business. So maybe your P&L says, okay, for last month I made $5,000. But you also bought a brand new cooler for $5,000. So while on your P&L you made that five grand because that cooler may or may not be expense that's a whole different tax conversation but that cooler is not showing up on your P&L, it's showing up in your assets, on your balance sheet. So, even though you made five grand, you have already spent that five grand and you don't have five grand more in the bank than when the month started. So always remember your P&L number does not equal your cash flow and so a cash flow statement totally different thing and something that you should make sure you have right. So, as you can see, you're in and outs of cash because a P&L is again only covering your revenue and expenses and not purchase of assets, not repayment of debt. There's a number of items that show up on your balance sheet in long-term liabilities, short-term liabilities, long-term assets, short-term assets that are not going to appear on your P&L. Now another thing to keep in mind when we talk about P&L, and because we're in line with there being things on the balance sheet that are not going to show up on your profit and loss statement itself.

Speaker 2: 4:05

Money that you collect that is not yours is not revenue and it is not expense. And for most bars, there are two primary types of money that we collect that are not ours as a business, and those are your sales taxes and your tips, and especially credit card tips, because our employees aren't getting those. We have to pay those out at some point, whether we're paying them out the night of, whether we're paying them out on a paycheck two weeks later. That money, those tips, are never our money. That's money we've collected on behalf of our employees that we are giving back to our employees. So it's not our money, it's not revenue for our business. It's just money we've collected that's gone in the bank, but now we have a liability and we have to pay that money out. Likewise with sales tax or VAT taxes, if you're outside the United States, that money, as a business, is not yours. You've collected it on behalf of the government and you're responsible for providing that money back to the government. So it's never your money, it's not your revenue. It's just money you've collected, established a liability that you have to pay the government and you're going to pay that out.

Speaker 2: 5:17

So it's really important to remember that tips and taxes are not on your P&L, they're not your money. Now, you will see them included sometimes, and there can be whole, really boring, if I might add bookkeeping conversations about maintaining your revenue versus an income and contra income and all this other stuff. I don't want to bore you guys with the details of the intricacies of bookkeeping, because it's just like I said, it's pretty boring, but if it's not your money, it really should not be on your P&O. The other thing that I will mention and this is more US specific, but a lot of times people talk about LLCs, and when it comes to accounting and bookkeeping, llc basically has no meaning. So, when you form a company, you're either going to form as an LLC generally or a C-corp, and LLC has a lot of meaning as far as being a limited liability company at the state level. It makes a separate legal person from you individually, and it's going to protect you on some liability measures Now, granted, I'm not an attorney by any means, so talk to your attorney about that, but there's Pierce Vail, there's all sorts of things that go around that liability protection.

Speaker 2: 6:32

What is important to understand, though, is that from a federal government standpoint in the United States, neither, or I'm sorry. An LLC means nothing at the federal level. So an LLC at the federal level meaning nothing. What matters at the federal level is the tax form you're filling out. So, whether that's a 1040, because you are a disregarded entity at the federal level, you're an LLC that's not taxed separately from the individual because it's a single owner LLC. Whether that is a 1065, so your partnership at the federal level and you have to complete tax form 1065, issue K-1s to all your members or whether you're an S-corp at the federal level. So you've made an election to be taxed as an S-corp.

Speaker 2: 7:19

There's some, really generally for most bar owners in the US, there's some really good advantages to being taxed as an S-corp as opposed to a 1065 or a sole proprietorship disregarded entity. Obviously, like I'm not an attorney, I am also not an accountant, and you need to speak to your accountant about which of these structures would work best for you, because they know your whole financial picture for you. Because they know your whole financial picture, anyone that ever tells you you should be an S-Corp if you meet X, y and Z is probably pulling your leg, because there is no way in the world anyone can give you that kind of advice without understanding all your income, all your expenses, all your assets and your entire financial picture. So it's really important that you have an accountant that you work with to determine these things. But in generalities, s-corp can be a great idea for bar owners and you're going to file one of those three tax forms at the federal level. That determines your federal tax treatment.

Speaker 2: 8:19

Your tax treatment when it comes to your bookkeeping is not necessarily going to play in that much. It will some. But unless you're a C-Corp, what's really important to understand in the US is, if you are a LLC, whether you're filing on a 1040, a 1065, or an 1120S, your taxes are not paid by the company. They're paid by you as an individual. So taxes income taxes appear nowhere on your P&L. You may have personal property taxes, you may have real estate taxes, things of that nature, but not income tax, because that's not being paid by the company. That's being paid by you as an individual again, unless you are a C corp.

Speaker 2: 9:00

Now, when it comes to P&L, the most important concept that I want you to think about as we go through this is your chart of accounts and chart of accounts is a bookkeeping term. That essentially means the list of categories that you put numbers into, and we'll break this down. There are four sections within the chart of accounts that I want to talk about. That's the four that I recommend to all my clients or anyone that I'm doing, bar bookkeeping, for that they maintain. But just remember to think of your chart of accounts as a list of categories to organize your income and expenses into. Now, a lot of times, when it comes to charts of accounts, people will go look up templates online. Those can work.

Speaker 2: 9:46

People get hung up, though, on little specifics and something to keep in mind when you're doing bookkeeping. There is managerial bookkeeping. There is tax bookkeeping. Tax bookkeeping is bookkeeping based on lines, on a tax form. That makes your CPA or tax preparer's job really easy. Managerial bookkeeping is the idea that I'm gonna keep track of all my numbers myself in a way that's actually going to be useful to me to make data-driven decisions. So, generally speaking, you wanna be more on that managerial side, because your books, as a tool for you, need to speak to you and need to speak to the data that you need in order to know how to drive your business forward Now.

Speaker 2: 10:32

With that being said, a lot of people, if you use a bookkeeper, they're going to have a way they want to do it. If you're going to use an accountant, they have a way they're going to do it. What I'm going to tell you now, I guarantee you, is probably not the way that either of those people want to do it now. But the bottom line is, if you have a good tax preparer, a good CPA, a good EA, they're going to be able to take whatever books you give them and write taxes off of them, because taxes fall down to like 20, I think there's 27 individual lines on a 1120S, something like that. I forget it's been a couple of years since I've actually looked at tax forms in that way. But the point is that you need to make your numbers work for you, not for someone else's goals. And, yeah, your accountant might spend another hour getting the numbers massaged how they want to do your tax return, but what you haven't let them do is to use your whole year of putting your data the way they want to see it versus having your data the way you want to see it and actually using it to drive your business forward. So, as I said, when we're looking at a P&O, when we're looking at a chart of accounts, we're basically looking at four sections and you can divide this up different ways. There are all sorts of different opinions. One thing I used to tell all my bookkeeping clients and when I worked at bigger companies we had whole conversations about this across different groups Bookkeeping is kind of like driving from New York to LA you start at one spot, you end up in another spot.

Speaker 2: 12:03

As long as you start with real numbers and end with accurate data that gives you the details you need. How you drive from New York to LA doesn't matter. Maybe you want to go north and see the Northern Plains and Rockies, maybe you want to go through the south and visit the southeast and then go across Texas and through the southwest. It's the journey of point A to point B. How we get from one to the other doesn't matter, but what matters is we start with accurate data, we end with accurate numbers. But nothing in bookkeeping is rigid, if you will, as long as your end result works.

Speaker 2: 12:40

Hey there, bar owners, it's Chris Schneider, the bar business coach. Are you tired of the daily grind and ready to skyrocket your profits? I've got the solution. With my coaching and consulting services, we deep dive into menu management, team empowerment and business optimization 60 plus hours a week. Picture this a thriving business that runs like clockwork, whether you're there or not, letting you enjoy the successes that you've dreamed of. Let's make it happen. Visit barbusinesscoachcom to schedule your free 30 minute strategy session with me, or you can book a session just by clicking the link in the show notes below. Together, we will turn your business into a profit powerhouse, because at the Bar Business Coach, our only goal is to help you spend less time working in your bar and more time working on your bar.

Speaker 2: 13:36

So our four basic categories are going to be our gross revenue. So what is our revenue coming in? That's section one. Section two, on your P&L, comes down to prime costs. Now, this is something where we'll get into this in more detail in a second, but this is a spot where, generally speaking, you're going to see a much different thing in the bar or restaurant industry than you would in most industries, because most industries that prime cost is just cost of goods sold. They're counting material costs only, not labor in there. We want to include labor in it because, as you guys have heard me say many, many times to make money in the bar business, we need to target a prime cost of 55% or less. In order to hit that 55% or less, we need that to be a very easy to see number on our P&L. So I like to move some of the labor that most people would include in expenses up into that cost of goods sold category so that, rather than just being material costs, we're getting a complete picture of our prime cost as a line item on our P&L, which helps us make better decisions.

Speaker 2: 14:44

Once we get past that COGS piece, we're going to have our normal expenses and generally I like to divide those up into controllable or variable costs and non-controllable or fixed costs. I use controllable and non-controllable because there are some things that are technically variable costs that I like to call non-controllable, like utilities, because the power company charges you. Whatever they charge you, you use the amount of power you use. You can turn lights off, you can control costs in that way, but you really cannot control that as a metric. It's not something that you actively as the owner of your business, as the manager of a business, can control. And so once we get past that controllable expense so we've started with our gross revenue. We've taken out our prime costs, our cost of goods sold plus our labor. We've taken out our controllable and non-controllable costs and now we essentially have earnings before interest taxes, depreciation and an amortization. So that's essentially your EBITDA.

Speaker 2: 15:43

And then we have other income and expense. Other income and expense we'll give you some specific examples here in a moment but other income and expense I use to cover the interest taxes, depreciation and amortization because I think it works really well there Again, not necessarily standard bookkeeping, but it's going to give you a much better way to track your bar's numbers and to have meaningful data. And I also like to use that other income and other expense for owner-generated expenses. So when I say owner-generated expenses I mean things like I went out to dinner at a competitor's restaurant and swiped the card from my bar. I mean things like I was driving all around town getting supplies for my bar and I filled up with gas and I charged that to the company. So expenses you incur as the owner. That way if you ever go to sell your bar, you know that item, that line item, that EBITDA kind of number, actually represents the cash flow coming through your bar and is very indicative and clearly what someone else could expect that bar to produce. If they continue to operate the exact same way you are, obviously they won't Numbers change, that's all true, but it gives you a much more accurate number. That takes out your personal expenses as the owner, because we all put some personal expenses in our business. Your tax accountant can tell you what's allowed, what's not. I don't want to get into that, but you need to be able to delineate that so that if you ever do go to a cellular bar, you can say exactly here's what I'm making and that's way easy and you don't have to back into 15 different numbers to figure out what that number would look like.

Speaker 2: 17:27

Now, in general and we're going to go through each of these sections individually, like I said, but in general, before we do the more detail you put into your books, the more you can analyze. But the more detail you put into your books, the more time it's going to take. Even if you have a bookkeeper, it takes more time to create more detail. So you can transfer this all over to somebody. You can have someone do all the work for you, but you still have to give them the information they need to classify things properly. That's going to take time from either yourself as the owner or from your management, but more detail leads to better decisions. So for each bar, for each person, each company that's doing their books, there's going to be a line that you find where you go. Okay, this takes, I'm accepting how long this takes and I accept the level of detail.

Speaker 2: 18:13

Ideally you want to have enough detail that if there was a problem in a cost, if you were overpouring somewhere, if you were underpouring somewhere, if you had food being stolen especially when it comes to theft you need to be able to identify that sort of thing from your P&O. So it's very important that you understand where that line is for you. And the wonderful thing about bookkeeping is, to an extent you can always add and subtract detail. Because one thing I highly recommend when it comes to like your chart of accounts and you're getting all this together to do your bookkeeping you're organizing how that chart of accounts should look. Use sub accounts so you can have an account called beer cost. That is just the amount of beer purchases you make, or based on inventory, rather, beer cost, and then you can have draft beer cost, bottle beer cost, can beer cost? I would at least go draft cost as a subcategory of beer costs and bottle and can cost as a subcategory of beer cost. You could go as far as saying, well, I spent this much money on IPAs and look at IPAs specifically when it comes to revenue and expense.

Speaker 2: 19:26

But now we're getting to a level of detail. Yeah, it might help you make some better decisions, but is it going to be worth all that time to categorize each type of beer you bring in the door and how much of it you sell? Maybe, maybe not. It depends on your business model, it depends on your systems. But again, find the line that exists for you between too little information and too much information. So let's go through these four categories.

Speaker 2: 19:50

So, like I said, our first one is revenue, and revenue is just money that comes in the door. That's all we're talking about here. Money that comes in the door, it's essentially everything that gets rung in your POS system and because of that, if you program your POS properly, your revenue should never be a big deal. You should be able to look at your Z reports from each day or pull a revenue report out of your POS system for the week and have all those numbers immediately at your fingertips. At a minimum, within your revenue, that top section of your P&L you should be breaking out beer, wine, liquor, food and merchandise all individually.

Speaker 2: 20:27

Because something I see a lot, especially when bars use outside bookkeepers, is that that outside bookkeeper just lumps it all together as product sales and that doesn't help you at all, because if your product sales goes down, was it your beer sales that went down or your liquor sales that went down? Are you selling more food or less food? No, you need to break that out. So at a minimum, again, beer, wine and liquor I always list them all separately on the chart of accounts. Food list that separately, merchandise list that separately. And you can go gangbusters with appetizers and different subcategories of food if you want, but you at least need to be able to isolate your major sales categories.

Speaker 2: 21:09

Other things that you may want to include there are things like if you're doing events, ticket sales, cover charges, if you sell alcohol to go like you sell packaged liquor cases of beer out the door, that should probably be separate from the beer that you're selling in-house on your P&L. And again, all this should be programmed into your POS. Your revenue section of your P&L, of your data entry for your bookkeeping should be the easiest part of the whole thing. You should be able to pull a report, copy the numbers in or, depending on your POS system, what accounting software you're using. Say, you're using Toast as a POS system and you're using QuickBooks on the backend. There are ways to make those integrate. Now one thing I will warn you anytime you're taking any software right Toast, square, stripe, any POS system and you're integrating with any accounting system bookkeeping system, most of you guys are probably using QuickBooks. But if you're using Express, what is that? Xero or Wave or some of the other ones out there, most of these allow for some integrations.

Speaker 2: 22:20

But when you integrate you have to be very, very careful and I highly suggest, if you're going to integrate your POS with your bookkeeping system, you get someone that knows how to integrate those. I cannot tell you how many people I've seen that would have had great books had they done records in days to unwind what happened in that integration, because not everything was set up right in the chart of accounts, not everything was mapped properly to move from the POS to the accounting software. That can take weeks, hundreds of hours to fix if it's bad. So if you're going to integrate, be very, very careful, but that does work if you set it up bad. So if you're going to integrate, be very, very careful, but that does work if you set it up properly. So that covers your revenue.

Speaker 2: 23:14

Now, after revenue, we move on to what on most companies books would be cost of goods sold, but for the bar business should be your prime cost, and so your prime cost is going to need a cost of goods sold category related to each category of revenue that you have. So if you have beer, wine and liquor as individual revenue categories, you need beer, wine and liquor as individual cost categories within your cost of goods sold. So you know how much beer you sold and how much you spent on that beer cost of goods sold. So you know how much beer you sold and how much you spent on that beer. If you're going to break your beer down into draft versus bottles and cans on your revenue, you should break beer up on your expense into draft versus bottles and cans. So, one for one, if it's in your revenue and it's something that you're buying and selling, you should count that in your cost section, your cost of goods sold section, as well.

Speaker 2: 24:09

Now, one thing that is true, and this is one of those places where, when you have an outside bookkeeper, it's going to make this take longer and be more difficult. The more you break it down, the more time you and your management has to spend categorizing this stuff to give to your bookkeeper. Because your bookkeeper, if you have an outside bookkeeper who is not hideously focused on the bar or restaurant industry, who doesn't know local suppliers, may or may not know that Josh Sellers on your invoice is wine and Abita on your invoice is beer. So if you're working with an outside bookkeeper, if you're working with your CPA or your accounting firm to do this data entry for you, you're gonna have to spend the time to divide up everything into the categories for them when you send them invoices or whatever to do the accounting. And, unlike the revenue side, in which case your POS system is handling 100% of that, on the cost side it's not.

Speaker 2: 25:17

It's manual frigging data and oftentimes if you're using a large distributor that's selling you both liquor and wine, you're going to have to divide up that invoice. If you're tracking draft beer and can beer, you're going to have to divide up that invoice. If you're tracking draft beer and can beer, you're going to have to divide up that invoice unless it's two separate invoices. So just be mindful of that. That's where some managerial time comes in, when it comes to setting up your bookkeeper to be able to do your bookkeeping properly. Now, with that, I should also say your numbers are only as accurate as the data you put in. Right, so that time does serve a purpose, because, again, we're doing all this to allow ourselves to make smart data driven percent data driven.

Speaker 2: 25:57

Another thing to keep in mind when it comes to your P&L and the way that accounting software works. Accounting software will assign percentages to things, and so in your cost of goods sold section, if you're including your labor there, whatever, it's going to display each of those line items as a percentage of total revenue. So if you sold a million dollars in the year and you spent $100,000 on beer throughout the year, it'll say that your beer cost is 10% of your revenue. That's the way that that accounting system, that accounting program, is going to display that data. Now, what's different in bars and restaurants compared to a lot of other industries is when we talk beer cost, we don't mean what was your beer, how much money did you spend on beer out of your total revenue, because that's not really relevant. What we care is how much money did you spend on beer versus how much money did you sell that beer for? So, generally speaking, and every accounting system except maybe restaurant 365, because that was specifically made for the restaurant business the percentages that you see next to your individual cost lines are not the same as when we talk about beer cost or food cost or wine cost. Again, they're percentages of total revenue that you'll see on a P&L that you pull out of QBO, not percentages of just that specific category of revenue. So that's important to keep in mind.

Speaker 2: 27:30

Now, as I mentioned, within your prime cost, within your cost of goods sold section, something that you don't see in other industries but you should absolutely do is include your prime cost all of them, which means including your labor. Now, when I say include your labor in your cost of goods sold section, what I'm really talking about is direct labor. So, for most small bars, our labor and our direct labor are the same thing. But if you get into a situation where you have a bar group of four or five bars, maybe you have an HR person that works for all of them, maybe you have a marketing person that works for all of them. Maybe you have a social media person that works for all of them. Maybe you have a regional manager that works for all of them. That is not direct labor to the production of food and beverage at that establishment and therefore should not be included in your prime costs. That should go in indirect labor, which should be in your expenses. But that labor in your prime cost is very important because what we're doing here, we have our revenue, we have our cost of goods sold, we're adding in that labor, we're getting a prime cost, so that gross margin line, which is what most accounting software will call the line that is the sum or the product of subtracting your cost of goods sold from your revenue, or in this case, your prime cost from your revenue. That all works. It gives you the prime cost percentage right there. It's so easy. But you want to include your direct labor and prime cost.

Speaker 2: 28:53

Now, anytime we're talking labor costs whether we're talking about direct labor in that cost of goods sold prime cost section or we're talking about indirect labor that may appear below in the expenses on your P&L you have got to break this down into multiple categories and this will vary country to country, but for the US. Here's what you need. You need at least four categories to break your labor into. You want management and salary, so you know what that chunk is. You want hourly staff wages, so you know what that chunk is. And that's really important because, let's be honest, your salary employees aren't going to turn over as much. They're not going to get raises, maybe two, three times a year, four times a year, but month to month generally they're not getting raises and that cost is staying consistent. So the hourly becomes important, so that month to month we can say, okay, what was our hourly expenditure to deliver our product to our customers, how much did we sell? And you can look at that number and understand it a lot easier if you break it out. If it's included with your salaries and wages, it kind of muddles. Or with your salaries and your management labor, rather, it kind of muddles everything.

Speaker 2: 30:05

The other line item that you want under your labor expense and again, whether we're doing the direct labor and the cost of goods sold or the indirect labor in the general expenses is your employee benefits. So anything that is a direct or indirect employee benefit that you're putting there, that could be employee meals, that could be health insurance, that could be employee bonuses, that could be all number of things that could be. You give that could be all number of things that could be. You give everybody a gift for Christmas, but make sure that you are including those benefits in that labor calculation, because that is the cost of employing someone. Yes, it's not on your payroll, yeah, it's a little bit different, but that is your cost of employing someone.

Speaker 2: 30:47

The other thing that you want to include in either of your labor expense areas is taxes, now, something that a lot of people get wrong when it comes to doing their bookkeeping for taxes. Frequently, if you're using ADP, if you're using paychecks, if you're using any pretty much any of the major payroll providers, you'll get a number that says we took this much out and put it on your employee checks, and we took this much out for your taxes. Here's the thing, though Not all of those taxes that are getting paid in taxes are actually paid by the employer. Some of those got withheld from the employee wages. So it's important, when you're doing bookkeeping on your labor, anything your employees, their wages or salaries, need to get recorded at gross. So, before any of those deductions for taxes, and then the taxes that you show on your P&L are not the taxes that your employees are paying, right, it's not part of their salary that you're paying them. That's withheld and sent to the government. Those are the taxes that you're paying that are not withheld from them. So things like the employer side of Social Security, unemployment tax, those are employer-based taxes that should be on your P&L as taxes. But your income withholding from your employees, the social security payments, the portion coming from your employees, the Medicare payments portion coming from your employees, those should be included as part of their wages or part of their salaries.

Speaker 2: 32:22

Now there's a few other things that potentially can get included in this prime cost section. One thing I always like to include there is your merchant services. So what are you paying for? Credit cards? It's a direct cost. It always exists and in my mind that's always part of your prime cost. That's in your cost of goods sold. It's just there and it's real and it's always there. So make sure your merchant services are out there because, as we all know, that's about another 3% that you have to contend with.

Speaker 2: 32:53

And then paper goods. Now, paper goods may or may not be included in your prime cost or could be included in normal expenses. Generally, the way I like to look at this is are paper goods something I use all the time? So what I mean by that, if you are McDonald's, you only sell a drink in a plastic or paper cup. That plastic or paper cup gets used 100% of the time you sell a beverage. Now, if you're like most bars, we're not using disposable glasses every time we sell a drink, so maybe someone gets it to go drink, or a soda to go, or a water or something or coffee that we're giving them in a cup to take out of the bar Because it's not used all the time, I would call that an expense and include it there, not in my cost of goods sold. But if it's not used all the time, I would call that an expense and include it there, not in my cost of goods sold. But if it's something that goes with every piece of food, every beverage that goes out. Say, you're a college bar or you're a beach bar and you just don't use real glasses, you use plastic cups because you know some dude's going to walk down the beach and you don't want him breaking glass by your pool, great, that plastic cup gets included, but unless it's part of your service, every single time you put that drink across the bar. It should not be included in your prime costs.

Speaker 2: 34:22

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Speaker 2: 35:01

Now that takes us to expenses, and when it comes to expenses, we're gonna break these down into two sections. We have controllable and non-controllable expenses. Like I said vaguely fits what you guys probably remember from college, if you took an accounting course, or maybe high school. Variable expenses are essentially controllable. Non-variable or fixed expenses, rather, are non-controllable, more or less. Within variable expenses, I look at things like advertising, marketing, music and entertainment, office supplies, administrative expenses, repairs and maintenance, professional fees, things of that nature. They're expenses that you incur in the normal course of business, but they're expenses that you can pretty much control. All right, you can decide whether or not you want to hire an attorney. Now, I know, in most cases, if you're hiring an attorney and we're talking professional fees you don't have that much of a choice. Somebody has to do your taxes. So you can decide which accountant you hire, but maybe not that you hire an accountant to do your taxes, um, but all of those are things that we have some control over. So I like to have a controllable expenses, because now I'm just I'm I'm putting what I can actually control in a separate section, because what here?

Speaker 2: 36:18

In a second we'll talk about non-controllable expenses. You really don't have options there, so you can do whatever you want, but you can't really make the number go up and down, so they don't matter. So controllable expenses are that. It just highlights where management can make an impact on the numbers. It highlights where we can make data-driven decisions that are actually going to impact our business in a positive way. Now, just like we were talking about with cost of goods sold and prime costs, you can break your expenses down your controllable and non-controllable expenses, but especially controllable expenses. You can break those down 15,000 different ways. From a bookkeeping perspective. There's nothing wrong with saying professional fees and putting all your coaching and consulting your attorneys, your potentially marketers, but I would call that more advertising your accountants. All that can just be lumped in professional fees and you don't have to break it down Again.

Speaker 2: 37:15

This is a place where I like to see more data. I want to know what I'm spending on coaching and consulting, what am I spending on legal fees and what am I spending on account, because I want to control each of those variables. Generally speaking, what you're spending on accounting or bookkeeping. If you have the right people, it's not going to be cheap, but you have some wiggle room there to potentially negotiate. Or maybe you have your accountant doing the bookkeeping and then you bring it in house and you decide I'm going to do it myself so that I can get the KPIs I want, so I can make really good decisions and that can lower that expense, so I can make really good decisions and that can lower that expense. Obviously, an attorney, I use attorneys, I like attorneys, I have friends that are attorneys, but I try to keep that cost at zero if at all possible every year.

Speaker 2: 38:04

And then, when it comes to coaching and consulting, it's important to know what you spent so that you can look at the ROI. I'm out here as a business consultant and coach. My goal is that you spend less money on me than you earn from my services. As a matter of fact, if you don't, I'll give you your money back. That's a whole different conversation, though, about guarantees, but the bottom line is, if you're going to hire a consultant, if you're going to hire a coach, you need to understand am I making money on their services or not? So having that as a separate line item helps. If you lump that all on professional fees, it doesn't help. But again, this is all a personal choice and you can be as detailed or loose about your COA as you would like.

Speaker 2: 38:37

And again, another thing that we're going to include in these expenses is indirect labor. So, like I said, that would be HR, potentially marketing sales in a multi-unit group. It could be if you, as the owner, aren't really an active manager but you're paying yourself an ownership salary, it should probably fall there as well, or potentially even an other expense, but that would be really controversial with the accounts, but potentially a brilliant idea. So I didn't tell you that, but that gives you an idea of how to put your controllable expenses on your P&L. When it comes to non-controllable expenses, there are a few basic ones that almost every P&L is going to have. The first ones are going to be your occupancy costs. So your rent, your mortgage if you own the building or you rent if you don't. If you don't own the building, your triple net expenses, your CAM, your taxes, your insurance. If you do own the building but it's in a separate company, you're going to be charging all these expenses to yourself, so they would still appear like you were renting.

Speaker 2: 39:32

I also like to include utilities in the occupancy expense. Yes, utilities are technically a variable expense. There you can exert some control. But, as I said at the beginning of the episode, you can't right, because the electric company tells you what they charge. You can't shop it In Texas. You can't right, because the electric company tells you what they charge. You can't shop it In Texas, you can't, but most places you can't shop it and you're just kind of stuck with what it is and you're going to use the amount of electricity you use Most of the time. Turning off the light switch is not going to be a huge impact on your electrical use.

Speaker 2: 40:10

The other non-controllable expenses that I see frequently on bar P&Ls or when I'm helping someone build a COA, that are frequently involved on bar P&Ls personal property taxes, so taxes that are paid directly from the business on its personal property, permits and licenses so think your food sales license, liquor license, local business permits those would all fall there and obviously you have no control over what the government charges you, except for voting, which is not control in the business world. And then equipment leases. So you know ice machines are notoriously a bad buy because they break a lot and they're really freaking expensive. So you lease your ice machine and that leased ice machine you can't control what you're spending on that lease. I guess you could switch companies or something, but that's basically a non-controllable expense. It's a fixed cost month to month.

Speaker 2: 40:55

So I would put that in that section. Now what this does if you have organized your P&L this way, with your revenue up top your prime cost, we've co-opted the normal cost of goods sold section to make prime cost. So that gross margin number that all the accounting software will calculate after cost of goods sold is an accurate representation of both our prime cost and our profit left after prime cost. And then we put in our expenses. That gives you essentially your EBITDA minus or your EBITDA plus, I should say owner-directed money, things that you've spent on yourself as the owner, and that's what I like to use other income and expense for. And I know that some of my friends that are accountants are going to listen to this and they're going to call me and they're going to be pissed because I told you to do this, but it just makes your life easier to make data-driven decisions with your data and, frankly, when they go to do your taxes, they can move things around a little bit. It's not a big deal on their end. Trust me, I know the software they use. It's really not a big deal on there.

Speaker 2: 42:06

So what are those expenses? So, in general, the non-controversial expenses in your other income and expense are going to be things like interest income. If you have money in the bank and you make interest, that's not really revenue because it's not direct income from your business activity. It's income you get on money sitting in the bank. That's other income. Credit card rewards People don't think about this a lot but technically, if you get 2% cash back and that's 10 grand over the course of the year, you made 10 grand Because you didn't pay the 10 grand. The credit card company gave it to you. So credit card rewards would fall down there Interest expense. So if you have a mortgage or you have bought equipment on a loan or you have a business loan or you have a credit card, all that interest expense has to go somewhere and it would fall down there Depreciation, amortization taxes if the business actually has to pay them.

Speaker 2: 43:06

We talked at the beginning how, if you're an LLC, probably are not business taxes involved. Could be in some states, but probably there aren't Versus like a C-corp, where the business is actually paying income tax. And the other thing that I put in there is owner-based expenses right. So auto expense we can have a long conversation about auto expense too, but just as a quick aside, don't pay yourself gas. Don't generally want to like pay for your oil changes and things. You're almost always better off using mileage and just paying yourself the IRS mileage rate for the time that you use your vehicle for your business. Obviously, though, I don't know your individual tax situation Talk to your tax preparer, talk to your accountant about that but probably, in my experience, 95 times out of 100, you're better off taking the mileage than trying to take actual expenses for your vehicle on your P&L or on your business tax. But that gives you an idea of what's going into that other income and expense. Now, obviously we talked through this really quick. A lot of information here.

Speaker 2: 44:10

But setting up your chart of accounts, setting up the framework of your P&L in a way that is going to allow you to succeed and give you the data you need to make the proper decisions, that actually helps you understand your business at a glance, is hugely important. Now, a lot of people will say, well, a P&L is a lagging indicator. Why do I care so much? It's all about comparing periods, about comparing last quarter to the quarter before, to the same quarter a year prior. It's how you get good forecasting. And if you want to look at forecasting there was an episode a couple of months back about forecasting We'll walk you through how to do that. But the better your data, the you through how to do that. But the better your data, the better your P&L, the better organized your chart of accounts is.

Speaker 2: 44:55

Not to some bookkeeper standard, not to what QuickBooks or somebody says hey, here's the basic P&L. No, the more specifically it is targeted towards your specific activities as a bar, but also just the bar and restaurant hospitality business in general, the better decisions you can make. And if you use a bookkeeper or a CPA or accounting software and you're just using a standard chart of accounts, I promise you you are missing things that could help you make more money and put more profit in your pocket. So that chart of accounts organization is essential. Now, if you want examples of charts of accounts, if you want to talk about what should be in your chart of accounts, definitely go down to the show notes.

Speaker 2: 45:42

Schedule a strategy session with me. I am a quite the accounting nerd if you can't tell by the end of this episode and I'm quite passionate about how this stuff should go. Unfortunately, I pick not the coolest thing to be a nerd about, but numbers in business is how we make money. Right, it's all about profit at the end of the day. So that's where I focused a lot of my time and energy on over the years. But if you need help organizing a chart of accounts, whether it's in QuickBooks or any other program, I can help you do that. Just schedule a strategy session in the show notes below.

Speaker 2: 46:14

Now that's going to about wrap us up for today, if you enjoyed what we talked about today.

Speaker 2: 46:19

If you like talking about bookkeeping, I'm sure some of you I put to sleep, but for those of you that are still with me and enjoyed it, make sure that you like, subscribe and leave a review for the podcast.

Speaker 2: 46:35

I love to hear from you guys and some of the positive stories that this podcast has made for your businesses. If you want to gain more insights on the bar industry in general and interact with a really cool community of bar owners that is growing every week, check the show notes, join the Bar Business Nation Facebook group. It is a great resource and we're having some really fun conversations there about all facets of the bar business and, like I said before, you can schedule a strategy session with me by clicking the links in the show notes as well, and we can talk about COAs and bookkeeping, or we can talk about draft peer systems Anything that you would like to discuss in your bar we can talk about and what I can do to help you be successful there. So, with that being said, I hope you guys all have a great day and we will talk again later.

Speaker 1: 47:25

Thanks for listening to the Bar Business Podcast. Make sure to subscribe so you don't miss any future episodes. Check out our website at barbusinesspodcastcom and join our Bar Business Nation Facebook group for more strategies and tips.