Cost Control Chapter 1

Chapter 1
Managing Revenue and Expense

2011John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller
Main Ideas
Professional Foodservice Manager Profit: The Reward for Service Four Major Foodservice Expense Categories Percentages Percentages in Foodservice Profit Formula Understanding the Income (Profit and Loss) Statement Common Percentages Used in a P&L Statement Understanding the Budget Technology Tools
Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller
2011John Wiley & Sons
Professional Foodservice Manager

Management handles functions of product sales to product delivery. Management of foodservice is more difficult than for manufacturing or retailing management counterparts. The food service operator must serve as a food factory supervisor, and a cost control manager.
Figure 1.1 Management Task Checklist Foodservice Manager Yes Yes Yes Yes Yes Manufacturing Manager Yes Yes No No No Retail Manager No No Yes Yes Yes
Task 1. Secure raw materials 2. Manufacture product 3. Distribute to end- user 4. Market to end- user 5. Reconcile problems with end-user
Profit: The Reward for Service

If management focuses on controlling costs more than on servicing guests, problems will certainly surface. Do not get yourself in the mind-set of reducing costs to the point where it is thought that low costs are good and high costs are bad.

Efforts to reduce costs that result in unsafe conditions for guests or employees are never wise. The question is whether costs are too high or too low, given managements view of the value.
Figure 1.2 Foodservice Business Flowchart Raw materials and labor
Cash reserves
Purchases
Profits
Supplies
Produces
Accounts receivable or cash
Generates
Finished products

Revenue - Expenses = Profit
Revenue is the amount of dollars you take in. Expenses are the costs of the items required to operate the business. Profit is the amount of dollars that remain after all expenses have been paid.

Revenue - Expenses = Profit
The following terms will be used interchangeably: revenue and sales; expenses and costs. All foodservice operations, including non-profit institutions, need revenue in excess of expenses if they are to thrive. Profit is the result of solid planning, sound management, and careful decision-making.

Revenue Desired Profit = Ideal Expense
Desired profit is defined as
Profit that the owner wants to achieve on that predicted quantity of revenue.
Ideal Expense is defined as

Managements view of the correct or appropriate amount of expense necessary to generate a given quantity of revenue.

Revenue Desired Profit = Ideal Expense
Revenue varies with
Number of guests Amount of money spent by each guest
Increase revenue by
Increasing the number of guests served Increasing the amount that each guest spends Or a combination of both

Environmental sustainability describes a variety of earth-friendly practices and policies designed to meet the needs of the present population without comprising the ability of future generations to meet their own needs. Positive benefits that accrue when businesses incorporate green activities are significant and on the increase.
Four Major Foodservice Expense Categories

Food Costs
Costs associated with actually producing menu items Largest or second largest expense category
Beverage Costs
Costs related to the sale of alcoholic beverages-beer, liquor, wine May also include ingredients, mixers and garnishes
Four Major Foodservice Expense Categories

Labor Costs
Cost of all employees, including taxes Labor costs are second only to food costs in total dollars spent Some include the cost of management in this category. Others prefer to place the cost of managers in the Other Expense category.
Other Expenses
Include all expenses that are neither food, beverage nor labor, such as utilities, rent, linen, etc.
Figure 1.3 Renaud Hotel Operating Results This Year $1,106,040 1,017,557 88,483 Last Year $850,100 773,591 76,509
Revenue Expense Profits
Percentages
Numbers can be difficult to interpret due to inflation. Therefore, the industry often uses percentage calculations. You will be evaluated primarily on your ability to compute, analyze, and control these percent figures.
Percentages
Percent (%) means out of each hundred. There are three (3) ways to write a percent:
Common Form % sign is used, as in 10% Fraction Form the part, or a portion of 100, as in 10/100 Decimal Form the decimal point (.), as in 0.10
Figure 1.4 Forms of Expressing Percent Percent 10% 10% 10/100 0.10
Form Common Fraction Decimal
1% 1% 1/100 0.01
100% 100% 100/100 1.00
Percentages
Divide the number that is the part by the number that is the whole.
Part = Percent Whole
Figure 1.5
Percent Computation
Possibilities Part is smaller than the whole Part is equal to the whole Part is larger than the whole
Examples 61 100 = 61% 35 35 = 100% 125 50 = 250%
Results Always less than 100% Always equals 100% Always greater than 100%
Percentages in Foodservice
Percentage of revenue that went to pay for expenses: Expense Revenue = Expense %
Percentages in Foodservice
As long as expense is smaller than revenue, some profit will be generated
Profit Profit % = Revenue

Modified profit formula:
Revenue - (Food and Beverage Cost + Labor Cost + Other Expenses) = Profit
Profit Formula
Put in another format, the equation looks as follows:
Revenue (100%) - Food and Beverage Cost % - Labor Cost % - Other Expense % = Profit %
Understanding the Income (Profit and Loss) Statement

Profit and loss statement (P&L) lists revenue, food and beverage cost, labor cost, other expense, and profit. The P&L is important because it indicates the efficiency and profitability of an operation.
Understanding the Income (Profit and Loss) Statement

The Uniform System of Accounts is used to report financial results in most foodservice units. This system was created to ensure uniform reporting of financial results. Published by the National Restaurant Association.
Figure 1.6 Revenue
Pat's Steakhouse $400,000
Expenses Food and Beverage Cost Labor Cost Other Expense Total Expense Profit
$150,000 175,000 25,000 $350,000 $ 50,000
Figure 1.7
Pat's Steakhouse P&L $400,000 $150,000 175,000 25,000 $350,000 $50,000 37.50% 43.75% 6.25% 87.50% 12.50%
Revenue Food and Beverage Cost Labor Cost Other Expense Total Expense Profit
100%
Figure 1.8
Pats Steakhouse Costs and Profit as a Percentage of Revenues
Profit 12.50% Other Expense 6.25% Labor Cost 43.75%
Food and Beverage Cost 37.50%
Common Percentages Used in a P&L Statement

1. Food and Beverage Cost Revenue = 2. Labor Cost Revenue = 3. Other Expense Revenue = 4. Total Expense Revenue = 5. Profit Revenue =
Food and Beverage Cost %

Labor Cost % Other Expense %
Total Expense %
Profit %
Understanding the Budget

Budget
An estimate of projected revenue, expense, and profit. The budget is known as the plan. All effective managers, whether in the commercial (for profit) or non-profit sector, use budgets.

Performance to budget is the percentage of the budget actually used.
Figure 1.9 Weekday Monday Tuesday Wednesday Thursday Friday Saturday Sunday Total Candy Purchases Budgeted Amount $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $7.00 % of Total 14.28% 14.28% 14.28% 14.28% 14.28% 14.28% 14.28% 100.00%

The 28-day-period approach to budgeting
13 equal periods of 28 days each
Figure 1.10 Common Foodservice Budget Periods Budget Period One week Two-week period One month 28 days 30 days 31 days Six months One year Portion One day One day One week One week One day One day One day One month One day One week One month % of Total 1/7 or 14.3% 1/14 or 7.1% 1/2 or 50.0% 1/4 or 25.0% 1/28 or 3.6% 1/30 or 3.3% 1/31 or 3.2% 1/6 or 16.7% 1/365 or 0.3% 1/52 or 1.9% 1/12 or 8.3%

Percentages are used to compare actual expense with the budgeted amount, using the formula:
Actual Budget
= % of Budget
Figure 1.11 Camp Eureka One-Week Budget Item Meals served Revenue Food Expense Labor Expense Other Expense Profit Budget 3,780 $6,993 $2,600 $2,800 $ 700 $ 893 Actual 3,700 $6,993 $2,400 $2,900 $ 965 $ 728
Figure 1.12 Camp Eureka Performance to Budget Summary Item Meals Served Revenue Food Expense Labor Expense Other Expense Total Expenses Profit Budget 3,780 $ 6,993 $ 2,600 $ 2,800 $ 700 $ 6,100 $ 893 Actual 3,700 $ 6,993 $ 2,400 $ 2,900 $ 965 $ 6,265 $ 728 % of Budget 97.9% 100.0% 92.3% 103.6% 137.9% 102.7% 81.5%

In-line with the budget vs. significant variation to the budget. A significant variation is any variation in expected costs that management feels is an area of concern.

If significant variations with planned results occur, management must:
1. Identify the problem 2. Determine the cause 3. Take corrective action
Technology Tools
Most hospitality managers would agree that an accurate and timely income statement (P&L Statement) is an invaluable aid to their management efforts. There are a variety of software programs on the market that can be used to develop this statement.
Technology Tools
Variations include programs that can compare actual results to budgeted figures or forecasts, to priormonth performance, or to prior-year performance. P&Ls can be produced for any time period, including months, quarters, or years. Most income statement programs will have a budgeting feature and the ability to maintain historical sales and cost records.
Technology Tools
Not all information should be accessible to all parties, and security of cost and customer information can be just as critical as accuracy. To effectively manage an operation, a manager will need to communicate with employees, guests, and vendors. Thus, the software you will need includes office products for word processing, spreadsheet building, faxes, and e-mail.
Summary
Professional Foodservice Manager Profit: The Reward for Service Four Major Foodservice Expense Categories Percentages Percentages in Foodservice Profit Formula Understanding the Income (Profit and Loss) Statement Common Percentages Used in a P&L Statement Understanding the Budget Technology Tools

Cost Control Chapter 1

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Chapter 1

Managing Revenue and Expense

2011John Wiley & Sons

Professional Foodservice Manager

2011John Wiley & Sons

Profit: The Reward for Service

2011John Wiley & Sons

Profit: The Reward for Service

2011John Wiley & Sons

Figure 1.2 Foodservice Business Flowchart Raw materials and labor

Accounts receivable or cash

2011John Wiley & Sons

Profit: The Reward for Service

2011John Wiley & Sons

Profit: The Reward for Service

Profit: The Reward for Service

Ideal Expense is defined as

2011John Wiley & Sons

Profit: The Reward for Service

2011John Wiley & Sons

Profit: The Reward for Service

2011John Wiley & Sons

Four Major Foodservice Expense Categories

2011John Wiley & Sons

Four Major Foodservice Expense Categories

Revenue Expense Profits

2011John Wiley & Sons

2011John Wiley & Sons

2011John Wiley & Sons

Form Common Fraction Decimal

100% 100% 100/100 1.00

2011John Wiley & Sons

Part = Percent Whole

2011John Wiley & Sons

Examples 61 100 = 61% 35 35 = 100% 125 50 = 250%

2011John Wiley & Sons

2011John Wiley & Sons

Profit Profit % = Revenue

2011John Wiley & Sons

Understanding the Income (Profit and Loss) Statement

2011John Wiley & Sons

Understanding the Income (Profit and Loss) Statement

2011John Wiley & Sons

Figure 1.6 Revenue

Pat's Steakhouse $400,000

$150,000 175,000 25,000 $350,000 $ 50,000

2011John Wiley & Sons

Pats Steakhouse Costs and Profit as a Percentage of Revenues

Profit 12.50% Other Expense 6.25% Labor Cost 43.75%

Food and Beverage Cost 37.50%

2011John Wiley & Sons

Common Percentages Used in a P&L Statement

Food and Beverage Cost %

Understanding the Budget

2011John Wiley & Sons

Understanding the Budget

2011John Wiley & Sons

Understanding the Budget

2011John Wiley & Sons

Understanding the Budget

2011John Wiley & Sons

2011John Wiley & Sons