June 23, 2014 |

Ask Big Dave: Understanding Expenses on a Financial Statement

By Dave Ostrander

PIZZA INDUSTRY EXPERT BIG DAVE OSTRANDER OFFERS TIPS ON UNDERSTANDING EXPENSES ON A FINANCIAL STATEMENTQ: How and where are expenses shown on a financial statement? – Kenny Reid, Boston, Massachusetts

A: Your financial statement really is your periodic snapshot and should be treated as your business’s report card. The function of business is to make a profit. If you do not make profit you are acting as a social worker, without a license.

It seems that every accountant has his or her favorite format for financial statements. If you are happy with the reports you’re getting (or not getting), stop reading and turn the page. If you can’t explain every deduction, what they represent and how they were arrived at you are exactly the kind of pizzeria the IRS is itching to audit. I’ve been audited three times in my career. After all the dust settled and several tense meetings it was up to me, not my accountant, to pay all of the unpaid back taxes as well as a huge penalty. Ignorance of the tax code is no defense. You lose and they win, period. Lose or forget a receipt or two or misclassify an expense and get ready to pay up. Just remember: if you can’t prove an expense, with absolute documentation, it doesn’t count and never happened.

There is an industry standard on how restaurant financials should look. It’s called The Uniform System of Accounts for Restaurants. It is recommended by the National Restaurant Association. One of the authors is a familiar name to our industry: CPA Jim Laube. I can’t count how many times I’ve relied on his expertise on money issues for clients.

I’ve also been asked “What makes up the expense category we call ‘labor.’ ” Labor cost is computed by adding up the following expenses:

  • Management: generally full-time supervisors who are typically paid salary as well as the working owner/operator’s salary. Management bonuses and educational trips fall here as well.
  • Staff: Hourly employees, cooks, drivers, prep, counter and all other staff.
  • Taxes and benefits: These hidden soft labor costs are a direct cost of employees. Add the sum of all taxes, which includes federal payroll taxes, federal unemployment tax, state unemployment tax and state health insurance tax.
  • Insurance and other related costs include: worker’s compensation insurance premiums as well as any disability, medical, group insurance, pension or retirement costs.
  • Employee meals, parties, awards, prizes and bonuses also fall under the labor category. Essentially, any expense that is a cost to the business that is employee incurred is a cost of labor and should be included when reported.

If your detailed P&L statement doesn’t show labor expenses (or any other categories) in the proper line, you may be underestimating your true labor cost. My rule of thumb is this: a $10 an hour employee really costs the business around $13 an hour after all of the soft costs are added in.

Big Dave Ostrander owned a highly successful independent pizzeria before becoming a consultant, speaker and internationally sought-after trainer. He is a monthly contributor to Pizza Today.