Introduction to Financial Statements

Objective: By the end of this lesson, you will understand the three financial statements every restaurant business plan needs, and how they connect. You will be able to:

• Explain what the income statement, balance sheet and cash flow statement each show.
• Describe how the three statements link together.
• Know which statements lenders and investors will expect in your plan.

Three statements, three questions

Statement	Question it answers	Covers
Income statement (profit and loss, P&L)	Did we make money?	A period — a month, a quarter, a year
Balance sheet	What do we own and what do we owe?	A single date — a snapshot
Cash flow statement	Where did our cash come from and where did it go?	A period — the same as the income statement

Why you need all three

A restaurant can show a profit on paper and still run out of cash — because it paid for new equipment, repaid a loan, built up inventory or waited for catering clients to pay. The income statement tells you whether the business model works; the cash flow statement tells you whether you can pay the bills; the balance sheet tells you how strong the business is overall.

How they connect

• The net profit from the income statement is added to retained earnings on the balance sheet.
• The cash flow statement starts with net profit and explains every change in cash between two balance sheets.
• The closing cash on the cash flow statement must equal the cash shown on the balance sheet.

In the next three lessons you will follow one example restaurant — a 60-seat bistro in its first month — through all three statements, so you can see the numbers connect.

What to include in your business plan

• A projected income statement, monthly for year 1 and yearly for years 2 and 3.
• A projected cash flow statement, monthly for at least year 1.
• An opening balance sheet (the day you open) and a projected balance sheet at the end of each year.
• The assumptions behind your numbers: covers per day, average cheque, food and labour cost percentages, rent and loan terms.

Work with an accountant to finalize your statements; your bank or investor will expect them to follow standard accounting rules.