Chapter 9

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Cost Control
Chapter 9
Analyzing Results Using The
Income Statement
Main Ideas
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Introduction to Financial Analysis
Uniform System of Accounts
The Income Statement (USAR)
1.
2.
3.
4.
5.
6.

Analysis of Sales/Volume
Analysis of Food Expense
Analysis of Beverage Expense
Analysis of Labor Expense
Analysis of Other Expense
Analysis of Profits
Technology Tools
Introduction to Financial Analysis
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
Documenting and analyzing sales, expenses, and
profits is called cost accounting or managerial
accounting.
It allows you to answer the questions:
•
•
•

How much money did we take in?
How much money did we spend?
How much profit was made?
Financial statements related to the operation of a
foodservice facility are of interest to management,
stockholders, owners, creditors, governmental
agencies, and often, the general public
Uniform System of Accounts


The National Restaurant Association has developed
the Uniform System of Accounts for Restaurants
(USAR). The USAR seeks to provide a consistent and
clear manner in which to record sales, expenses,
and overall financial condition.
The uniform system of accounts attempts to
provide operators guidelines rather than mandated
methodology.
The Income Statement (USAR)
The Income Statement


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The income statement, often referred to as the profit and
loss (P&L) statement, is the key management tool for cost
control.
Each operation’s P&L statement will look slightly different.
The income statement (USAR) can better be understood by
dividing it into three sections: gross profit, operating
expenses, and nonoperating expenses.
These three sections are arranged on the income statement
from most controllable to least controllable by the
foodservice manger.
The Income Statement (USAR)
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
Each revenue and expense category on the income
statement can be represented both in terms of its
whole dollar amount, and its percentage of total
sales.
All ratios can be calculated as a percentage of total
sales except the following:
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–
–
–
Food Costs are divided by food sales
Beverage Costs are divided by beverage sales
Food Gross Profit is divided by food sales
Beverage Gross Profit is divided by beverage sales
The Income Statement (USAR)


The income statement is an aggregate statement –
summary.
The details can be found in supporting schedules.
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Example – Question #1 (Income Statement)
Analysis of Sales/Volume


Foodservice operators can measure sales in terms
of dollars or number of guests served.
Overall sales increases or decreases can be
computed using the following steps:
1. Determine sales for this accounting period
2. Calculate the following: this period’s sales minus last
period’s sales.
3. Divide the difference in #2 above by last period’s sales to
determine percentage variance.
Analysis of Sales/Volume

There are several ways a foodservice operation
experiences total sales volume increases. These
are:
1. Serve the same number of guests at a higher check
average
2. Serve more guests at the same check average
3. Serve more guests at a higher check average
4. Serve fewer guests at a much higher check average

It is not always obvious from an income statement
which of these 4 things are happening.
Analysis of Sales/Volume

The procedure to adjust sales variance for known
menu price increases is as follows:
Step 1.
Step 2.
Step 3.
•
Increase prior period sales (last year) by amount
of the price increase.
Subtract the result in Step 1 from this period’s
sales
Divide the difference in Step 2 by the value of
Step 1.
Example – Question #2
Analysis of Food Expense

A food cost percentage can be computed for each
food subcategory. For instance, the cost percentage
for the category Meats and Seafood would be
computed as follows:
Meats and Seafood Cost
Total Food Sales
=
Meats and Seafood Cost %
Analysis of Food Expense
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
Inventory turnover refers to the number of times
the total value of inventory has been purchased
and replaced in an accounting period.
The formula used to compute food inventory
turnover is as follows:
Cost of Food Consumed
Average Inventory Value
= Food Inventory Turnover
Analysis of Food Expense

The average inventory value is computed as
follows:
Beginning Inventory Value + Ending Inventory Value
2
= Average Inventory Value

Be sure that a high inventory turnover is caused by
increased sales and not by increased food waste,
food spoilage, or employee theft.
Analysis of Beverage Expense

Beverage inventory turnover is computed using the
following formula:
Cost of Beverages Consumed
Average Beverage Inventory Value


= Beverage Inventory Turnover
If an operation carries a large number of rare and expensive
wines, it will find that its beverage inventory turnover rate is
relatively low.
Conversely, those beverage operations that sell their
products primarily by the glass are likely to experience
inventory turnover rates that are quite high.
Analysis of Beverage Expense
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
If you change your drink prices during the year, you
need to adjust your numbers.
Similar to the method for adjusting sales, the
method for adjusting expense categories for known
cost increases is as follows:
Step 1.
Step 2.
Step 3.
Increase prior-period expense by amount of cost
increase.
Determine appropriate sales data, remembering
to adjust prior period sales, if applicable.
Divide costs determined in Step 1 by sales
determined in Step 2.
Analysis of Beverage Expense

All food and beverage expense categories must be
adjusted both in terms of costs and selling price if
effective comparisons are to be made over time.

As product costs increase or decrease, and as menu
prices change, so too will food and beverage
expense percentages change.
Analysis of Labor Expense
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When total dollar sales volume increases, fixed labor cost
percentages will decline.
Variable labor costs will increase along with sales volume
increases, but the percentage of revenue they consume
should stay constant.
When you combine a declining percentage (fixed labor cost)
with a constant one (variable labor cost), you should achieve
a reduced overall percentage, although your total labor
dollars expended can be higher.
Declining costs of labor may be the result of significant
reductions in the number of guests served.
Analysis of Labor Expense

Salaries and wages expense percentage is
computed as follows:
Salaries and Wages Expense
Total Sales


= Salaries and Wages Expense %
COLA (Cost of living adjustments) or raises will require adjustments to
your accounting files.
Adjust both sales and cost of labor using the same steps as those
employed for adjusting food or beverage cost percentage and compute
a new labor cost as follows:
Step 1.
Determine sales adjustment
Step 2.
Determine total labor cost adjustment
Step 3.
Compute adjusted labor cost percentage.
Analysis of Labor Expense

This year’s projected labor cost is computed as follows:
This Year’s Sales x Last Year's Adjusted
Labor Cost Percentage
= This Year’s Projected Labor Cost

Increases in payroll taxes, benefit programs, and employee
turnover all can affect labor cost percentage.

Example – Question #4
Analysis of Other Expense

Other Expenses are all Operating Expenses
excluding salaries, wages, and employee benefits.

For comparison purposes, use the Restaurant Industry Operations
Report published by the National Restaurant Association and Prepared
by Deloitte & Touche (can be ordered through www.restaurant.org)
For operations that are a part of corporate chain, unit managers can
receive comparison data from district and regional managers who can
chart performance against those of other operators in the city, region,
state, and nation.
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Analysis of Profits

Profit percentage using the profit margin formula is
as follows:
Net Income
Total Sales

=
Profit Margin %
Profit variance % for the year can be measured by
the following formula:
Net Income This Period – Net Income Last Period
Net Income Last Period
= Profit Variance %
Analysis of Profits
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Profit margin is also knows as Return on Sales, or ROS. For
the foodservice manager perhaps no figure is more
important than the ROS.
This percentage is the most telling indicator of a manager’s
overall effectiveness at generating revenues and controlling
costs in line with forecasted results.
While it is not possible to state what a “good” return on
sales figures should be for all restaurants, industry averages,
depending on the specific segment, range from 1% to over
20%.
Technology Tools

The best programs on the market will:
1.
Analyze operating trends (sales and costs) over management-established time
periods.
2. Analyze food and beverage costs.
3. Analyze labor costs.
4. Analyze other expenses.
5. Analyze profits.
6. Compare operating results of multiple profit centers within one location or across
several locations.
7. Interface with the facilities point of sales (POS) system or even incorporate it
completely.
8. Red flag areas of potential management concern.
9. Evaluate the financial productivity of individual servers, day parts, or other specific
time periods establish by management.
10. Compare actual to budgeted results and compute variance percentages as well as
suggest revisions to future budget periods based on current operating results.
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