Chapter 2
Forecasting and
Budgeting
Controlling
Foodservice Costs
Learning Objectives
After completing this chapter, you should be able to:
• Explain the purpose of budgets and forecasts.
• List and describe the forecasting methods used by
restaurant and foodservice managers.
• Describe types of budgets.
• Identify the purpose of the income statement.
• Describe how to prepare food and labor cost budgets.
• Explain the importance of variance and its use in
operations.
Chapter 2 Forecasting and Budgeting
THE IMPORTANCE OF BUDGETS AND FORECASTS
Advantages of Budgets
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Improves interdepartmental communication
Provides for a common goal
Provides accountability
Establishes a measurable target
Provides a control tool
Considers both internal and external influences
Disadvantages of Budgets
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Preparation and implementation time
Confidentiality
Forecasting
Support
Control
Chapter 2 Forecasting and Budgeting
THE FORECASTING PROCESS
Forecasting Customer Counts
Chapter 2 Forecasting and Budgeting
Forecasting Revenue
Chapter 2 Forecasting and Budgeting
TYPES OF BUDGETS
Long-Term versus Short-Term Budgets
• Capital budgets and Operating budgets are long-term
• Short term budgets are for a week, month or quarter
Fixed versus Flexible Budgets
• Fixed – based on a specific level of sales
• Flexible – variable based on several possible levels of sales
Chapter 2 Forecasting and Budgeting
INCOME STATEMENTS
Revenue – Expenses = Profit
Chapter 2 Forecasting and Budgeting
Restaurant and Foodservice Income Statement
Chapter 2 Forecasting and Budgeting
Prime Cost and Other Expenses
Chapter 2 Forecasting and Budgeting
THE BUDGETING PROCESS
Step 1 - Budgeting Revenue
Sales Forecasts for a New Establishment
Chapter 2 Forecasting and Budgeting
Step 2 - Budgeting Expenses
Food and Beverage Costs
Chapter 2 Forecasting and Budgeting
Chapter 2 Forecasting and Budgeting
Labor Costs
Other Expenses
Chapter 2 Forecasting and Budgeting
Budgeting Profit
How to Calculate a Break-Even Point
• Determine the fixed and variable expenses
• Subtract the variable cost % from 100% to get the
gross profit margin %
• Divide the fixed expenses by the gross profit
margin % to get the break even point
Chapter 2 Forecasting and Budgeting
THE BUDGET AS A CONTROL TOOL
Chapter 2 Forecasting and Budgeting
Assessing Results
Determine the variance and the
tolerance at which point action
must be taken
Chapter 2 Forecasting and Budgeting
Taking Corrective Action
Chapter 2 Forecasting and Budgeting - Summary
Key Terms:
Break-even point The minimum amount of sales an establishment must
generate to cover all costs.
Budget A plan that indicates an operation’s financial objectives or
financial standards.
Budgeting process The way managers go about developing a budget,
which is a process of both planning and control.
Capital expenditure budget A budget that allows an establishment to
plan for the replacement of high-cost equipment that wears out, and to
purchase new types of equipment that may come on the market.
Controllable profit The profit amount that reflects only those line items
over which a manager has any influence or control.
Cost of sales The cost of the food and beverage products to a given
operation.
Chapter 2 Forecasting and Budgeting - Summary
Key Terms continued:
Fixed budget A budget that is based on a certain level of sales revenue;
expense estimates for food, labor, and other costs are then calculated
based on that level of sales.
Flexible budget A budget that is based on several possible levels of sales
activity, also known as a variable budget.
Forecasting Making future predictions about the budget based on
current situations and trends.
Income statement A document that reports an operation’s sales,
expenses, and profits or losses for a period of time, such as a month, a
quarter, or a year.
Long-term budget A budget from one year to five years in the future.
Operating budget A formal one-year operating plan to achieve the
financial goals of an organization.
Chapter 2 Forecasting and Budgeting
Key Terms continued:
Percentage of sales method A method that involves estimating
expenses for a future period as a percentage of the sales forecast.
Return on investment (ROI) Profit resulting from specific investments
made in an operation.
Sales forecast The process of using historical information and knowledge
of external factors to predict future sales.
Short-term budget A budget planned for a week, a month, or a quarter.
Shrinkage Decrease in the weight of purchased meat because of
cooking or trimming.
Simple markup method A markup method based on expenses being
increased by a predetermined amount, normally a percentage of the
previous year’s expense.
Chapter 2 Forecasting and Budgeting
Key Terms continued:
Utilization factor The percentage of an amount of a food item served to
a guest.
Variance The difference between actual results (i.e., sales) and targeted
or budgeted results.