COST CONTROL
– REASONS RESTAURANTS FAIL
– DEFINE MANAGEMENT’S ROLE IN COST
CONTROL
– DEFINE THE CONTROL PROCESS
– DEFINE TERMINOLOGY—COSTS, SALES
– DISCUSS BASIC COST CONTROL FORMULAS
PURPOSE OF COST CONTROL
1. Manage labor costs
2. Manage inventory
3. Make a profit
Costs = Expenses incurred in production of food &
beverage.
Includes all outlays even if they don’t produce revenue
-spoilage
-free merchandise
-inefficient labor
PURPOSE OF COST MANAGEMENT
“In a study in Columbus, Ohio, Professor H.G. Parsa of Ohio State
University, tracked new restaurants and found that in the first year, 26%
closed. Another 19% closed the second year, and 14% the third.
Collectively, 59% of new restaurants closed those three years. By the way,
the "failure" rate wasn't very different between franchised restaurants –
57% — and independent restaurants – 61%.”
USAToday
More than 2/3’s of all foodservice establishments that fail in the first three
years, fail in year one.
A. Asch
“Average” profitability in the foodservice business is 3-7%.
National Restaurant Assoc.
Management’s job includes—
1. Planning
2. Organizing
3. Directing
4. Controlling
1. Planning
Who is the Customer?
-Who will frequent your establishment?
-What will be their expectations?
-How will they drive your business?
Determine Your Objectives
-profit
-customer retention
-promoting a cause
Planning
Long-term
vs.
Short-term
Budgeting
Scheduling
Facility Design
Menu Adjustments
Future Expansion Plans
Vendor Selection
2. Organization
Labor
-Hiring good people
-Scheduling
-Workflow
3. Directing
Directing personnel is the most time
consuming job of management
Delegation
Hiring competent personnel
4. Controlling
Develop standards that are measurable
Assessment and adaptation
If met:
Continue to monitor
If not met:
Reassessment of standard
Corrective measures
Added training
Disciplinary action
-verbal
-written
-dismissal
TERMINOLOGY--COSTS
Fixed Costs —those that don’t fluctuate when volume changes
Rent
Insurance
Management salaries
Depreciation
Some taxes
Variable Costs —those that are tied to the volume of business
Cost of Goods
Hourly labor
A portion of FC must be covered by each unit sold. If volume
increases, the amount covered by each unit decreases.
Fixed Cost
1,000 units sold
5,000 units sold
$1,000
$1.00 per unit
$ .20 per unit
Variable Costs
1,000 units sold
5,000 units sold
$1.00 per unit
$1.00 per unit
TERMINOLOGY - COSTS
Controllable Costs—costs that can be increased or decreased within a
short time frame
-cost of foods
-labor costs
Non-controllable costs—costs that are unchangeable in the short term
-rent
-management costs
-federal tax withholdings
-depreciation
TERMINOLOGY - COSTS
Forecasted Costs—costs management expects to
incur in the future
-standardized recipes=COGS costs
-union contracts= labor cost
Actual Costs—true cost of doing business based
on day-to-day business activity
TERMINOLOGY - COSTS
Average Costs —total costs/total unit quantity
$Revenue/Covers=$Average Cover
$Total Labor/Hours Worked=$Avg. Labor per Hour
Overhead Costs —costs other than food, beverage
& labor
Rent, utilities, insurance, maintenance, linens, etc.
TERMINOLOGY—SALES
Total Sales —all sales that contribute to a
particular business or category.
Sales by Category —sales broken down by
specific menu classification
-Entrees, appetizers, desserts, soups, etc.
TERMINOLOGY - SALES
Average Sales=Total Sales/an individual selling unit; used
for control and forecasting
Sales by server
Sales by shift
Sales by meal period (i.e. average lunch sale)
Sales Mix—percentage an item contributes to the total;
used for forecasting and scheduling
Steak Sales/Total Sales=%Sales Mix for Steak
IMPORTANT FORMULAS
$Food Cost / $Food Sales = %Food Cost
$Food Sales x %Food Cost = $Food Cost
$Food Cost / %Food Cost = $Food Sales
$Labor Cost / Total Sales = %Labor Cost
$Total Sales x %Labor Cost = $Labor Cost
$Labor Cost / %Labor Cost = $Total Sales
TERMINOLOGY
Depreciation—the cost of wear and tear as a
result of doing business
-This is a deductible tax allowance and lowers
taxes owed
-Commercial depreciate over 15 years
ESTABLISHING STANDARDS
•
•
•
•
•
QUALITY, QUANTITY, COST STANDARDS
$FOOD COST
% FOOD COST
OPERATING BUDGETS & P&L STATEMENTS
MAKE VS. BUY ANALYSIS
ESTABLISHING STANDARDS
Standards are based on the target audience.
Training is the best way to ensure standards will be met
Three areas in which standards are necessary:
1. Quality —every employee and product should meet your predetermined standard for quality
2. Quantity—every food/beverage item must have a size/quantity spec
3. Cost/Price—what do you expect to pay each worker; what will each
ingredient/product cost you
Food Cost and Labor Cost contribute +/- 60%
of Total Cost for foodservice establishments
$Food Cost = $Opening Inventory + $Purchases
– $Closing Inventory
%COGS = $Food Cost / $Food Sales
Other items to consider:
+Transfers in—wine coming in from the bar = a cost
-Transfers Out—food sent to the bar for happy hour =a
credit (a reduction)
-Employee meals—generally accounted for on a separate
line item (i.e. employee benefits)
-Promotional Expenses—give-a-ways used to generate
good will = a credit (a reduction)
-Grease Sales—value of used grease = credit
CALCULATING $COG
SALES
OP
PURCHASES
CLOSING INVENTORY
TRANSFERS IN
TRANSFERS OUT
EMPLOYEE MEALS
PROMOTIONS (AT RETAIL, 30%COG)
$COGS (CF)
$1,100
$500
$1,000
$400
$100
$200
$300
$150
If sales are $7,500, with 25%COG for food and
10%COG for beverages, where beverages equal
50% of sales, what are $COG for Food & Beverage?
% COGS and Labor generally operate
at opposite ends of the spectrum
Low
%COG
%Labor
High
%Labor
%COGS
Example
Voltaire
McDonald’s
Major reasons for restaurant failure:
--Inability to control costs
--Inability to control the flow of goods through
the operation
--Failure to control revenue
U. S. Chamber of Commerce Statistics:
“30% of all business failures are due to theft”
“Theft accounts for 1-2% of gross sales annually.”
“Hospitality profits could be increased by 3-7% if theft
were eliminated.”
Cost Control Budgets
OPERATING BUDGET
The budget written to forecast sales and
expenses for a particular period of time.
PROFIT & LOSS STATEMENT
The statement that compares ACTUAL sales and
expenses to those forecast in the Operating
Budget for the same period.
Operating Budget
Revenue:
Sales
-$COGS
Gross Profit
%GOG
-Expenses:
Labor Costs
+Benefits
Total Labor
Operating Expenses:
-Rent
-Utilities
-Marketing
-Depreciation
-Other Expenses
Net Profit before Taxes
-Taxes
After-tax Profit
Make vs. Buy Analysis
Considerations:
Quality—will quality meet your standards if you buy
from an outside source?
Cost—does the cost savings justify going outside?
-how much will you save on COG?
-will you underutilize current labor?
-can you cut labor cost by going outside?
-are energy savings significant?
What does one portion cost to make?
-Cost standard recipe
-consider utilization of trimmings/waste
-Add in labor cost
-Divide by # of portions produced
-Compare vs. outsourced pricing
USING TECHNOLOGY TO IMPROVE CONTROLS
1. Guest-driving technology
-comfort (i.e. in-room temperature control systems)
-enjoyment (i.e. wireless access)
-cost savings (i.e. self checkout, “smart card”, internet reservations)
2. Cost Controls
-Inventory control systems
3. Increase Sales/Control Revenue
-POS systems for FOH
4. Reduce Labor Cost
-Hi-tech equipment (standardized interfaces); less labor/less skilled labor
Farm to Table
-Genetically modified foods—enhanced yield
-Process control—enhanced shelf life and lower costs through more rapid
processing
Supply Chain Management
Integrated systems that oversee food chain from supplier to end user
-supplier
-manufacturer
-wholesaler
-restaurant/retailer
-end user
Reduce inventory
Reduce carrying costs
Purchasing & Warehouse Operations
Integrated Purchasing---volume discounts for multi-unit
operations
Computer generated perpetual inventory
Warehouse organization--easy access and reduced labor
“Trade show” web sites-- new product information
Temperature and Climate Control
Scanners/Barcode Inventory Systems
Production
Moist/Dry Heat Ovens—reduce shrinkage
Programmable Cook Times—HAACP critical control
analysis
Recipe Conversion
Nutritional Analysis
Menu Making Software—allow operation to take
advantage of specials/overstocks
Production Cost Analysis—aids in menu pricing
Increased Sales
Web sites for greater exposure
Computerized Reservations
Self Order Kiosks for fast foods
Centralized Take-Out sends orders to the nearest
store to reduce delivery costs
POS generates reports by server to allow analysis of
cash received and productivity
DOWNSIDE OF TECHNOLOGY
Reduction in the number of entry-level jobs
-much of foodservice has been on-the-job
training
Small business can’t afford/can’t compete
Departments/Businesses are becoming obsolete
-reservations department
-bookkeeping