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Review Mid Term & Homework Quiz #3 Chapters 9 & 10 Last Homework Assignment Chapters 9-10 •Operating Budgets •Accounting Aspects of Food & Beverage Control Upon completion of this unit, each student will be able to: Understand how operational budgets are to be managed. Understand the various types of operational budgets. Forecast foodservice revenues and guest counts. Forecast foodservice operating expenses. Prepare an operating budget utilizing historical data. Calculate food cost, food cost percentage and inventory turn over. Determine a capital budget based on operational needs and prioritization. Perform various cost benefit analysis methods for fixed assets. Budgets will help you better manage your restaurant. They are a valuable tool used to help forecast/predict your revenues, estimate your expenses and insure that your profits meet your expectations. Remember Profit is not just what is left over, you must plan ahead and treat profit as an “expense” in order to keep your restaurant a viable operation. The primary need is for a 1 year Operating Budget that is detailed on a monthly basis and addresses items on the Income Statement. This is a detailed plan that outlines estimated revenues, expenses and profits – rolled up for each department. Accountability and responsibility can be assigned to managers for each department to achieve the budgeted revenue, expense and profit goals. Capital Budget- A budget that relates to the acquisition of equipment, land, property improvements and other fixed assets. Cash Budget- A budget that estimates cash receipts and disbursements during a specified time period. Departmental Budget- A budget that estimates revenue and allocated expenses for a specific department within the restaurant Master Budget- A budget that combines operating, capital, and cash budgets for each specific department within the restaurant Control- As managers our job is to organize, direct and manage all financial aspects of our business to assure we are meeting the overall profit goals of the business and to do this we use the budget as our plan or “blueprint”. 5 Step Management Process: 1) Establish Standards 2) Assess Actual Operating Results 3) Compare Standard Revenues and Expenses with Actual Revenues and Expenses to determine causes of differences. 4) Take Corrective Action if needed. 5) Evaluate the Results of the Corrective Action Process. 1st Step: Determine Expected Revenues 2nd Step: Determine Profit Requirements 3rd Step: Estimate Expenses to be incurred Usually the Owner or Manager in a smaller operation has the responsibility of setting the budget. In Large operations it is usually a collaborative effort amongst the various departments. Can also be dictated to you from a headquarters with targets pre-determined. Sales Histories Past sales can help identify trends Current/Anticipated Changes New competition, road construction, remodeling projects Economic Variables Inflation, people spend less money (demand lower prices), yet your costs are increasing. Department Considerations Food, Beverage and other revenues should be estimated separately Revenues projected in the budget are used for: Providing required profits Paying necessary expenses Many Managers assess expense levels after revenue is estimated, profit is then what is “left over”. Instead you should figure first what you want your profit to be, then see where the expenses have to be in order to make your profit. Fixed Costs – Based on your contracts or givens. Variable Costs – Expenses that change in direct proportion to the related revenue. Food and Beverage costs are variable costs and typically follow an increase or decrease in the adjoining revenue category. Usually these expenses are measured, forecasted, budgeted as a percentage of sales (i.e. 32% Food cost – 28% Beverage Cost) and according to the established standard Mark up method - variable expenses are budgeted by the same amount of increase or decrease that sales are projected to change Ex: If Sales are expected to ↑ 5% and last years food cost was $425,000, we would increase the budgeted food cost by 5% to $462,250. The problem with this approach is that , if $425,000 was too high for food cost, you are perpetuating this problem by budgeting from that as a base. Another method: Current percentage This method budgets expenses based on what the current percentages are for cost categories. Ex: If food costs ran 34% for last year, next year we budget food costs at 34% of the new budgeted sales forecast. This method also carries the same possible deficiencies of the current year forward into the planning for the upcoming year. Final method: Zero – based budgeting This method starts from a zero expense level for every category and through justification arrives at a new budgeted cost. MUCH more accurate, however, requires a tremendous amount of time. Most commonly used for overhead expenses categories such as repair and maintenance, office supplies, etc. The difference between budgeted and actual amounts in any revenue or expense account. Analysis should be undertaken when this difference exceeds a pre-established amount Corrective Action needs to be taken quickly to make the appropriate adjustments. Budget Re-forecasting- The process by which revenue and expense data in an operating budget are revised to reflect current economic conditions. To Reduce Implement These Corrective Actions Food Cost Reduce portion size Replace food with more cost-effective ingredients Feature items with higher profit margins Raise menu prices Food Waste Monitor portion control Monitor food storage and rotation Monitor food ordering Improve order communication to reduce production errors Inventory Cost Order appropriate quantities-avoid having too much or too little in storage Labor Cost Reduce # of employees on schedule Ask employees to end their shifts early Schedule cross trained staff (server/cashier/host) Capital Budget does not include day-to-day operating expenses and does not roll up into an operations P&L (FFEs’) What type of costs are included in capital budgets Steps in the Capital Budget Process 1. Assess the Capital Needs 2. Evaluate the Identified Needs 3. Prioritize & Justify the List of Needs Step 1: Assess Capital Needs Safety, regulatory or code issues should be addressed first Aesthetic needs that will impact sales should be considered Operational needs that will impact productivity should be considered Step 2: Evaluate Identified Needs Conduct a cost/benefit analysis to include Return on Investment (ROI) Rate of Return Income or savings ÷ Net Amount = Rate generated by project invested in project of return Payback Period Net cash outlay ÷ Annual net income = Payback for project or savings for project period Step 3: Prioritize and Justify the List of Items Highest priority must be given to the following: Items that pose a safety risk either to customers or employees, i.e. broken equipment, frayed carpet, etc. Items that cause the operation to fall beneath local codes (fire, health, etc.) Final review and approval of Capital Budgets usually falls to the owners, CEO, COO, etc. Write the Operating Budget for Roger’s for January through March from the data provided. As managers our prime costs are the most controllable: food (beverage) and labor Food costs must be understood and managed and we have multiple tools to help us accomplish this task Must understand how we get our food cost Must understand how we get our food cost percent Must understand what is our standard Figuring food cost percentage Food cost ÷ Sales = Food cost percentage A process that provides the Manager with information about a menu item’s profitability and popularity to aid menu planning, design and pricing decisions. The menu is not just a piece of paper in the restaurant. It is THE most important piece of paper in the restaurant. It not only tells your guests what you have to offer, it sets the tone for your profitability. Three Critical Tools to begin the Menu Engineering Analysis Standardized recipes Recipe Pre-Costing Determining the current market cost for the quantity of ingredients needed to produce one portion of a menu item. Consistent Recipe Use If your staff isn’t trained how to use and follow the recipes, then having recipes or pre-costing will do you no good! Menu Engineering emphasizes the “Contribution Margin”, in other words what does each item contribute to pay for fixed costs and the bottom line? Formula: food item sales – food item cost Takes into account the “Menu Sales Mix” (what percentage of sales each item represents) It separates menu items into categories based on popularity and profitability. Menu Number Pop Food Selling Item Total Total Men Item Sold Index % Cost Price CM Cost Sales CM Strip Steak 145 23.4 $7.50 $23.65 $16.15 $1087.50 $3429.25 $234 Ginger 116 18.7 $5.20 $18.00 $12.80 $603.20 $2088.00 $148 Shrimp Duck 21 3.3 $7.30 $21.50 $14.20 $153.30 $451.50 $29 Breast Lamb 11 1.8 $6.90 $22.00 $15.10 $75.90 $242.05 $16 Chops Pork Loin 45 7.3 $6.30 $20.50 $14.20 $283.50 $922.50 $63 Vegetarian 50 8.2 $3.80 $16.50 $12.70 $190.00 $825.00 $63 Burrito Veal Steak 120 19.4 $6.35 $20.85 $14.50 $762.00 $2502.00 $174 Steak 111 17.9 $7.75 $24.75 $17.00 $860.25 $2747.25 $188 Diane 619 100% $4015.65 $13207.55 $919 Average 77.38 12.5% 30.4% $1 Menu Item Menu Item Pop Category CM Category Class Strip Steak H H Star Ginger Shrimp H L Plow Horse Duck Breast L L Dog Lamb Chops L H Puzzle Pork Loin L L Dog Burrito L L Dog Veal Steak H L Plow Horse Steak Diane H H Star High H/L H/H Popularity L/L L/H Low High Contribution Margin In large operations there is often a purchasing department. This is where all ordering and receiving is handled. Various departments request (requisition) items needed, and requisitions are given to the Accounting dept. to make sure everything is accurately billed and accounted for. Collusion- A secret agreement between two or more persons to defraud the restaurant. Food cost is typically calculated on a monthly basis. However if it can be calculated daily for even tighter controls. This is especially necessary if there is a problem. Inventory- Too high of inventory opens you up to more theft and waste. Too low, obviously you are not able to serve your customers what they want. FIFO- First in, First Out- The most common method of accounting for inventory. This method assumes that products are withdrawn from inventory in the order in which they were received and entered into storage. Value of inventory is based on the most recent price of product. LIFO is the opposite. Last in, First out. This way the value of the inventory is represented by the unit cost of items in inventory the longest (oldest price first). Actual Cost- Considers the actual price paid for each product in inventory. Weighted Average- Considers the quantity of each product purchased and then the inventory value is based on the average price weighted by the quantity purchased. Physical Inventory- taking an actual physical count and valuation on hand at the close of the accounting period. Inventories should not be completed by the person responsible for ordering, because the purpose of the inventory is to confirm the quantity of product that should be in inventory. Perpetual Inventory- Allows a running balance to be kept of the quantity of items in stock at any point in time. Inventory Turnover Rate- the number of times in a given accounting period that inventory is converted into revenue. This “inventory turnover rate” measures the rate at which inventory is turned into food or beverage costs required to generate food or beverage revenue. Issuing- The process of removing food or beverage from inventory and moving them into production cycles. Accurate inventory is necessary to calculate an accurate food cost. If the inventory isn’t counted correctly, costed correctly, or calculated correctly you will not have a true picture of how well your restaurant is doing. Consistency in the month to month inventory is important. Consistent counting, rounding, estimates, etc… Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold Example: Beginning Inventory $9,500 + Purchases $16,500 = $26,000 - Ending Inventory $8,000 = Total Cost $18,000 Products costs (Food and Beverage) and labor costs, which represents the two LARGEST expenses of almost every restaurant. Prime cost is often used to weigh the option of making an item from scratch or purchasing it ready to use. Read Chapters 11-12 Assignment #4- Complete Roger’s Operating Budget Make recommendations for Alex’s Ale and Grill capital improvement process.
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