HMD 461 Cal Poly Pomona Food Managers Summary Essay

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ffirs.qxd 1/24/07 3:05 PM Page iii FOOD AND BEVERAGE COST CONTROL Fourth Edition Lea R. Dopson David K. Hayes Jack E. Miller John Wiley & Sons, Inc. ffirs.qxd 1/24/07 3:05 PM Page ii ffirs.qxd 1/24/07 3:05 PM Page i FOOD AND BEVERAGE COST CONTROL Fourth Edition ffirs.qxd 1/24/07 3:05 PM Page ii ffirs.qxd 1/24/07 3:05 PM Page iii FOOD AND BEVERAGE COST CONTROL Fourth Edition Lea R. Dopson David K. Hayes Jack E. Miller John Wiley & Sons, Inc. ffirs.qxd 1/24/07 3:05 PM Page iv  This book is printed on acid-free paper.  Copyright © 2008 by John Wiley & Sons, Inc. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, e-mail: permcoordinator@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where John Wiley & Sons, Inc. is aware of a claim, the product names appear in initial capital or all capital letters. Readers, however, should contact the appropriate companies for more complete information regarding trademarks and registration. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Dopson, Lea R. Food and beverage cost control / by Lea R. Dopson, David K. Hayes, Jack E. Miller. — 4th ed. p. cm. “Published simultaneously in Canada.” Includes bibliographical references and index. Jack E. Miller appeared as the first author on 2nd and 3rd editions. ISBN: 978-0-471-69417-5 (cloth/cd) 1. Food service — cost control. I. Hayes, David K. II. Miller, Jack E. III. Title. TX911.3.C65 2008 647.950681—dc22 2006014655 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.qxd 1/24/07 3:05 PM Page v This edition is dedicated to the memory of Jack E. and Anita Miller. ffirs.qxd 1/24/07 3:05 PM Page vi ftoc.qxd 1/24/07 2:54 PM Page vii Contents Preface xvii Acknowledgments xxvii Before You Start: How to Use Spreadsheets CHAPTER 1 xxix MANAGING REVENUE AND EXPENSE 1 PROFESSIONAL FOODSERVICE MANAGER 2 PROFIT: THE REWARD FOR SERVICE 3 Revenue 5 Expenses 6 GETTING STARTED 8 Precent Review 9 Computing Percent 10 Using Percent 11 UNDERSTANDING THE INCOME (PROFIT AND LOSS) STATEMENT 13 UNDERSTANDING THE BUDGET 17 Technology Tools 21 Apply What You Have Learned Key Terms and Concepts 22 Test Your Skills 22 CHAPTER 2 22 DETERMINING SALES FORECASTS 27 IMPORTANCE OF FORECASTING SALES 28 SALES HISTORY 29 Computing Averages for Sales Histories 32 Recording Revenue, Guest Counts, or Both 35 MAINTAINING SALES HISTORIES 37 SALES VARIANCES 38 vii ftoc.qxd 1/24/07 viii 2:54 PM Page viii Contents PREDICTING FUTURE SALES 40 Future Revenues 40 Future Guest Counts 42 Future Average Sales per Guests Technology Tools 46 Apply What You Have Learned Key Terms and Concepts 47 Test Your Skills 48 CHAPTER 3 44 47 MANAGING THE COST OF FOOD MENU ITEM FORECASTING 54 STANDARDIZED RECIPES 57 Factor Method 60 Percentage Method 60 INVENTORY CONTROL 62 Determining Inventory Levels 62 Setting the Purchase Point 68 PURCHASING 69 What Should Be Purchased? 70 What Is the Best Price to Pay? 75 How Can a Steady Supply Be Assured? 79 One Vendor Versus Many Vendors 80 Purchasing Ethics 81 Daily Inventory Sheet 82 Preparing the Purchase Order 84 RECEIVING 88 Proper Location 88 Proper Tools and Equipment 89 Proper Delivery Schedules 90 Proper Training 91 Receiving Record or Daily Receiving Sheet 97 STORAGE 99 Placing Products in Storage 99 Storage Areas 102 Storage Basics 104 Maintaining Product Quality and Safety 104 Maintaining Product Security 105 Determining Inventory Value 106 53 ftoc.qxd 1/24/07 2:54 PM Page ix Contents DETERMINING ACTUAL FOOD EXPENSE 109 Beginning Inventory 110 Purchases 110 Goods Available for Sale 110 Ending Inventory 111 Cost of Food Consumed 111 Employee Meals 111 Cost of Food Sold 111 Variations on the Basic Cost of Food Sold Formula Food Cost Percentage 115 Estimating Daily Cost of Food Sold 115 Technology Tools 119 Apply What You Have Learned Key Terms and Concepts 122 Test Your Skills 122 CHAPTER 4 ix 111 121 MANAGING THE COST OF BEVERAGES SERVING ALCOHOLIC BEVERAGES 131 Beverage Only 131 Beverage and Food 132 Beverage and Entertainment/Activity 133 Classifications of Alcoholic Beverages 133 Responsible Alchoholic Beverage Service 134 FORECASTING BEVERAGE SALES 134 Forecasting Beer Sales 135 Forecasting Wine Sales 136 Forecasting Spirit Sales 138 STANDARDIZED DRINK RECIPES AND PORTIONS 139 PURCHASING BEVERAGE PRODUCTS 142 Determining Beer Products to Carry 143 Determining Wine Products to Carry 145 Determining Spirit Products to Carry 148 Beverage Purchase Orders 151 RECEIVING BEVERAGE PRODUCTS 151 STORING BEVERAGE PRODUCTS 152 Liquor Storage 153 130 ftoc.qxd x 1/24/07 2:54 PM Page x Contents Beer Storage 153 Wine Storage 154 BAR TRANSFERS 155 COMPUTING COST OF BEVERAGES 158 SPECIAL FEATURES OF LIQUOR INVENTORY 159 Liquor Inventory by Weight 159 Liquor Inventory by Count 160 Liquor Inventory by Measure 160 SALES MIX 161 Technology Tools 164 Apply What You Have Learned Key Terms and Concepts 166 Test Your Skills 166 CHAPTER 5 165 MANAGING THE FOOD AND BEVERAGE PRODUCTION PROCESS 172 MANAGING THE FOOD AND BEVERAGE PRODUCTION PROCESS 173 Production Schedules 173 PRODUCT ISSUING 176 Special Concerns for Issuing Beverages 178 Estimating Daily Costs Using the Issues System 180 INVENTORY CONTROL 184 Physical and Perpetual Inventory 185 ABC Inventory Control 187 MANAGING THE FOOD PRODUCTION AREA 192 Waste 192 Overcooking 192 Overserving 194 Improper Carryover Utilization 195 Improper Make or Buy Decisions 196 MANAGING THE BEVERAGE PRODUCTION AREA 197 Free-Pour 197 Jigger Pour 198 Metered Bottle/Dispenser 198 Beverage Gun 198 Total Bar System 198 Minibars 200 ftoc.qxd 1/24/07 2:54 PM Page xi Contents Bottle Sales 200 Open Bar 201 Banquet Operations 201 EMPLOYEE THEFT 202 Reducing Bar-Related Theft 202 Reducing Kitchen-Related Theft 204 DETERMINING ACTUAL AND ATTAINABLE PRODUCT COSTS 205 Determining Actual Product Cost 206 Product Yield 209 Determining Attainable Product Cost 212 REDUCING OVERALL PRODUCT COST PERCENTAGE 215 Decrease Portion Size Relative to Price 217 Vary Recipe Composition 217 Adjust Product Quality 218 Achieve a More Favorable Sales Mix 219 Ensure That All Product Purchased Is Sold 219 Increase Price Relative to Portion Size 220 Technology Tools 221 Apply What You Have Learned Key Terms and Concepts 222 Test Your Skills 223 CHAPTER 6 222 MANAGING FOOD AND BEVERAGE PRICING 230 MENU FORMATS 231 Standard Menu 231 Daily Menu 233 Cycle Menu 233 Menu Specials 236 FACTORS AFFECTING MENU PRICING Local Competition 238 Service Levels 238 Guest Type 238 Product Quality 239 Portion Size 239 Ambiance 240 Meal Period 240 236 xi ftoc.qxd xii 1/24/07 2:54 PM Page xii Contents Location 241 Sales Mix 241 ASSIGNING MENU PRICES 245 Product Cost Percentage 245 Product Contribution Margin 247 Product Cost Percentage or Product Cost Margin 247 SPECIAL PRICING SITUATIONS 248 Coupons 248 Value Pricing 249 Bundling 249 Salad bars and Buffets 249 Bottled Wine 251 Beverages at Receptions and Parties 253 Technology Tools 256 Apply What You Have Learned Key Terms and Concepts 257 Test Your Skills 257 CHAPTER 7 256 MANAGING THE COST OF LABOR LABOR EXPENSE IN THE HOSPITALITY INDUSTRY 268 Labor Expense Defined 268 Payroll 269 Labor Expense 271 EVALUATING LABOR PRODUCTIVITY 271 MAINTAINING A PRODUCTIVE WORKFORCE 272 Employee Selection 273 Training 277 Supervision 281 Scheduling 282 Breaks 285 Morale 285 Menu 288 Convenience versus Scratch Preparation 289 Equipment 291 Service Level Desired 291 MEASURING CURRENT LABOR PRODUCTIVITY 292 Labor Cost Percentage 292 267 ftoc.qxd 1/24/07 2:54 PM Page xiii Contents Sales per Labor Hour 295 Labor dollars per Guest Served 297 Guests Served per Labor Dollar 298 Guest Served per Labor Hour 298 Six-column Daily Productivity Report 301 Determining Costs by Labor Category 302 MANAGING PAYROLL COSTS 305 Step 1. Determine Productivity Standards 305 Step 2. Forecast Sales Volume 307 Step 3. Schedule Employees Using Productivity Standards and Forecasted Sales Volume 308 Step 4. Analyze Results 313 REDUCING LABOR-RELATED COSTS 315 Employee Empowerment 316 Technology Tools 318 Apply What You Have Learned Key Terms and Concepts 320 Test Your Skills 320 CHAPTER 8 319 CONTROLLING OTHER EXPENSES MANAGING OTHER EXPENSES 329 Costs Related to Food and Beverage Operations 330 Costs Related to Labor 333 Costs Related to Facility Maintenance 333 Occupancy Costs 334 FIXED, VARIABLE, AND MIXED OTHER EXPENSES 335 CONTROLLABLE AND NONCONTROLLABLE OTHER EXPENSES 339 MONITORING OTHER EXPENSES 340 REDUCING OTHER EXPENSES 344 Reducing Costs Related to Food and Beverage Operations Reducing Utilities Usage Costs 345 Reducing Costs Related to Labor 345 Reducing Costs Related to Equipment Maintenance 348 Reducing Occupancy Costs 349 Technology Tools 350 Apply What You Have Learned Key Terms and Concepts 351 Test Your Skills 352 351 344 328 xiii ftoc.qxd 1/24/07 xiv 2:54 PM Page xiv Contents CHAPTER 9 ANALYZING RESULTS USING THE INCOME STATEMENT 358 INTRODUCTION TO FINANCIAL ANALYSIS 359 UNIFORM SYSTEM OF ACCOUNTS 361 INCOME STATEMENT (USAR) 362 ANALYSIS OF SALES/VOLUME 366 Other Factors Influencing Sales Analysis 368 ANALYSIS OF FOOD EXPENSE 369 Food Inventory Turnover 371 ANALYSIS OF BEVERAGE EXPENSE 373 ANALYSIS OF LABOR EXPENSE 375 ANALYSIS OF OTHER EXPENSES 377 ANALYSIS OF PROFITS 378 Technology Tools 380 Apply What You Have Learned Key Terms and Concepts 381 Test Your Skills 382 CHAPTER 10 381 PLANNING FOR PROFIT FINANCIAL ANALYSIS AND PROFIT PLANNING 387 MENU ANALYSIS 387 Food Cost Percentage 389 Contribution Margin 391 Goal Value Analysis 396 COST/VOLUME/PROFIT ANALYSIS 402 Linking Cost/Volume/Profit Analysis with Goal Value Analysis Minimum Sales Point 410 THE BUDGET 412 Long-Range Budget 413 Annual Budget 414 Achievement Budget 414 DEVELOPING THE BUDGET 414 Prior-Period Operating Results 415 Assumptions of Next-Period Operations 416 Establishing Operating Goals 416 MONITORING THE BUDGET 418 386 407 ftoc.qxd 1/24/07 2:54 PM Page xv Contents Revenue Analysis 418 Expense Analysis 420 Profit Analysis 425 Technology Tools 426 Apply What You Have Learned Key Terms and Concepts 427 Test Your Skills 428 CHAPTER 11 427 MAINTAINING AND IMPROVING THE REVENUE CONTROL SYSTEM 437 REVENUE SECURITY 438 EXTERNAL THREATS TO REVENUE SECURITY 439 Use of Cards as Bill Payment 441 INTERNAL THREATS TO REVENUE SECURITY 445 Cashier Theft 447 Bonding 449 DEVELOPING THE REVENUE SECURITY SYSTEM 450 Step 1. Verification of Product Issues 451 Step 2. Verification of Guest Charges 452 Step 3. Verification of Sales Receipts 455 Step 4. Verification of Sales Deposits 460 Step 5. Verification of Accounts Payable 461 THE COMPLETE REVENUE SECURITY SYSTEM 464 Technology Tools 465 Apply What You Have Learned Key Terms and Concepts 467 Test Your Skills 467 CHAPTER 12 466 GLOBAL DIMENSIONS OF MANAGEMENT AND THE ROLE OF TECHNOLOGY 470 MULTINATIONAL FOODSERVICE OPERATIONS 471 MANAGEMENT CHALLENGES IN A GLOBAL ECONOMY 472 Operational Challenges 476 xv ftoc.qxd 1/24/07 xvi 2:54 PM Page xvi Contents Cultural Challenges 478 Financial Challenges 480 ADVANCES IN TECHNOLOGY AND INFORMATION MANAGEMENT 481 Internet-Based POS Systems 482 Handwriting Recognition Systems 485 Voice-Over Internet Protocol 486 Staff-Sharing Technology 486 Paperless Paycheck Systems 487 Motion Detection/Intelligent Systems Software 488 SELECTING ADVANCED TECHNOLOGY PRODUCTS 489 Cost 491 Complexity 491 System Warranty/Maintenance 492 Upgrading 492 Reliability 492 Location 493 Psychological Impact on Guests and Employees 494 MONITORING DEVELOPMENTS IN COST CONTROL TECHNOLOGY 494 Trade Shows/Professional Associations 495 Publications 495 Current Vendors 496 Competitive Vendors 496 Technology-Related Classes 496 Your Own Organization 497 Apply What You Have Learned Key Terms and Concepts 498 Test Your Skills 498 497 APPENDIX A FREQUENTLY USED FORMULAS FOR MANAGING OPERATIONS 501 APPENDIX B MANAGEMENT CONTROL FORMS 509 APPENDIX C FUN ON THE WEB! SITES GLOSSARY 565 BIBLIOGRAPHY INDEX 583 579 563 fpref.qxd 1/24/07 2:31 PM Page xvii Preface P revious editions of this text have met with tremendous success in great part because the authors recognized that all foodservice managers, regardless of the type of foodservice business with which they are involved, must understand and manage the costs associated with operating their businesses. This fourth edition reconfirms and expands on that recognition. Today’s professional foodservice manager is faced daily with a variety of responsibilities, from accounting, marketing, human relations, facilities maintenance, and legal issues to sanitation, production, and service methods, just to name a few. Controlling costs is one of the critical skills all successful managers must master. This fourth edition continues to focus, in a very straightforward way, on helping managers understand the logic and the systems involved with managing their costs. While there is indeed “theory” relating to many aspects of cost control, students who read this book will find the practical aspects of cost control emphasized much more than the theoretical aspects. As a result, it is a book to be held in a professional manager’s personal library for reference throughout his or her entire career. It is intended to be a primer, providing students with the first step in what may well be a lifelong and rewarding study of how to better manage the important area of cost control. TECHNOLOGY IN HOSPITALITY This edition, like the previous three editions, has been painstakingly designed to present important information in a style that is easy to teach, read, and understand. However, the hospitality industry continues to evolve and, as a result, become more complex. This is especially true in the important area of technology. For example, while once considered the stuff of science fiction, the possibility of customers paying for their food with a tap of a credit card or the wave of a key has become a reality. In contactless payment applications, the cards and key fobs used by consumers contain “smart chips” imbued with radio frequency identification capabil- xvii fpref.qxd 1/24/07 xviii 2:31 PM Page xviii Preface ity. Tapping or waving either an instrument on or in front of a specially enabled point of sale (POS) device enables it to be read without actually having to be swiped through a card reader. The world of hospitality technology certainly continues to change! Because this is true, this edition of Food and Beverage Cost Control has been carefully updated to ensure that readers are aware of the most advanced technological applications of cost control technology available today. In the time between the publication of the third edition and this current edition, the advances in hospitality related to computer hardware, software, communication devices, and cost control systems integration have been nothing short of breathtaking. Indeed, the change has been so great that the entire technology approach in this edition has been modified. Readers of previous editions will recall that, in the third edition, Chapter 12, “Using Technology to Enhance Control Systems,” sought to summarize technological applications that could be used in each of the 11 preceding chapters. In this edition, the new feature, “Technology Tools,” demonstrates to readers, within the chapter, how technology can be applied to the information they have learned in that particular chapter. This association between content presentation and technology application (i.e., read and immediately apply) is in keeping with this book’s original pedagogical philosophy and continues to be one of the reasons previous editions have met with such great success. In the future, staying current in the field of cost control will, in the authors’ opinions, require continual learning and relearning on the part of those who teach and those who practice hospitality cost management. While historically, a text related to hospitality cost control might have enjoyed a life of five to seven years before an update was truly required, today, the pace of advancement in the global hospitality industry prevents such a “slow” approach. This can readily be seen in the new material contained in Chapter 12, “Global Dimensions of Management and the Role of Technology.” This chapter, the first of its kind included in a hospitality cost control text, demonstrates to students the specific challenges associated with utilizing advances in cost control technology in the international foodservice operations arena. Teachers using this text will find, as they discovered in previous editions, that the book easily allows for the integration of technology and that the teaching tools available to them have again been expanded. This includes the continued development of the very well received computer disk that comes with each copy of the text (as well as with the Instructor’s Manual). Food and Beverage Cost Control was the first text of its kind to include a floppy disk (in the second edition) for student use, and it continues its leadership position by becoming the first to now include a student CD-ROM to be utilized in completing its popular “Test Your Skills” endof-chapter exercises. The decision to include computerized application tools has proved extremely popular; and as was true in the third edition, the authors have again taken the opportunity to maximize their utilization by expanding student exercises (and providing answers in the Instructor’s Manual) as well as building greater diversity in the difficult level of these popular exercises. As a result, students will quickly see how the skills they have previously acquired while learning to use a computer can be easily adapted to the study of cost control, and practicing managers will find fpref.qxd 1/24/07 2:31 PM Page xix New in the Fourth Edition xix the book useful as a reference as well as a source for ready-to-use forms and formulas that can be easily applied to their own operations. NEW IN THE FOURTH EDITION One of the most significant changes to this edition is the elevation of Dr. Lea Dopson to the position of lead author. Dr. Dopson has been involved with the development of the text since its second edition, and she has truly become a champion for the text’s content and approach to the exciting study of food and beverage cost control. A popular teacher, able administrator, and proficient author, Dr. Dopson’s leadership on this text is evident throughout. Since the new lead author of the text is a full-time educator who teaches from the book, and the co-author is a former associate dean who is now a full-service hotel owner/consultant who uses its information on a daily basis, there has been no shortage of ideas about how to continue the improvement of Jack Miller’s original vision of creating a truly outstanding cost control text. As always, input from students and instructors, industry professionals, our colleagues at Wiley, and our own experiences have provided ample material for the new edition, and we are extremely happy with the final result. In this fourth edition, readers will be pleased to find the following significant text enhancements. • New “Technology Tools” Feature It is not enough, in most cases, to tell students “what must be done” to control costs; it is equally important to let them know “how to do it.” Increasingly, this requires students to apply advanced technology tools Technology Tools to their managerial tasks. In this chapter you learned about the menu formats you most often encounter as a hospitality This new feature introduces manager, as well as the factors affecting menu prices, and the procedures used to assign individstudents to the advancing ual menu item prices based on cost and sales data. The mathematical computations required to evaluate the effectiveness of individual menu items and to establish their prices can be complex, technology that applies dibut there are a wide range of software products available that can help you: rectly to the content found 1. Develop menus and cost recipes. within each chapter. Thus, 2. Design and print menu “specials” for meal periods or happy hours. for example, in Chapter 7, 3. Compute and analyze item contribution margin. 4. Compute and analyze item and overall food cost percentage. Managing the Cost of La5. Price banquet menus and bars based on known product costs. bor, students learn the ba6. Evaluate the profitability of individual menu items. sics of controlling their la7. Estimate future item demand based on past purchase patterns. bor costs. The Technology 8. Assign individual menu item prices based on management-supplied parameters. Tools feature in this chapter Menu analysis and pricing software is often packaged as part of a larger software program. Its importance, however, is great. It is an area that will continue to see rapid development in the also illustrates that they can future as software makers seek additional ways to improve their products. purchase computer software which (1) will forecast their operational sales volume based upon historic sales data and (2) utilize this forecasted volume data to develop future employee schedules. Each chapter in this edition concludes with a Technology Tools application segment. fpref.qxd xx 1/24/07 2:31 PM Page xx Preface • New Chapter 12: Global Dimensions of Management & the Role of Technology Serious students of food service management know that Ray Kroc opened the first McDonald’s restaurant in Des Plaines, Illinois, on April 15, 1955. What students may not know is that today McDonald’s restaurants are operated in over 115 countries worldwide and serve more than 50 million customers per day. McDonald’s operates or franchises more than 13,500 restaurants inside the United States, but an even larger number of its stores now exist outside the United States! Similarly, Coca Cola, founded in 1886, is the world’s leading manufacturer, marketer, and distributor of nonalcoholic beverage concentrates and syrups. In 1906, Coca Cola opened its first international bottling plants in Canada, Cuba, and Panama. Today, Coca Cola sells more than 400 brand-name products in over 200 countries. In fact, over 70% of the company’s income is now generated outside of the United States. From these two examples, it is clear that if today’s students and hospitality professionals are to spend their careers in the foodservice industry, they will increasingly find those careers will likely take them outside their native country. To directly address this emerging reality, this new chapter focuses on foodservice cost control from a perspective of globalization and (in keeping with the text’s continued emphasis,) the use of advanced technology when applied internationally. Thus students reading this chapter will learn about multinational foodservice operations, management challenges in a global economy, advances in international technology and information management, selecting advanced technology products, monitoring developments in cost control technology, and more. • New “Leaders Are Readers!” Feature There is perhaps no greater lesson for a hospitality student to learn than this: There are always new lessons to be learned. Because this is so, the authors truly believe that Leaders are Readers! In fact, one of the greatest distinctions between leaders and folLeaders Are Readers! lowers in any endeavor is Technology related to POS systems is one of the areas in foodservice management that has adthat true leaders convanced and continues to advance most rapidly. Part of the reason this is so is the tremendous numstantly seek to know more ber of enhancements that have been made to the record keeping and forecasting ability of these systems. To stay abreast of changes in the area of POS systems (as well as many other technoand understand better. For logical areas in the restaurant and hotel fields), we recommend that you subscribe to Hospitality the best of leaders, that Technology (HT) magazine. As an industry professional, you are likely to qualify for a complimentary subscription. To learn more go to: www.htmagazine.com. means reading vociferously. The reason for this is simple. In business, knowledge is power. Knowledge can be learned in a classroom, but lifelong learning demands that managers take responsibility for their own continuing education and thus create their own classrooms. One important way to do so is to embrace the act of reading as an effective method of skill enhancement and knowledge development. This new feature enables us, as the authors, to encourage students to discover the power of the written word by recommending books we have found especially helpful to our own professional understanding of cost control. fpref.qxd 1/24/07 2:31 PM Page xxi New in the Fourth Edition xxi • Renewed Emphasis on Simplification of Presentation While the driving force behind this revision was the continued commitment to fully utilize the computer and the Internet as teaching tools, it was also important that we continually review each line of type, chart, graph, and figure to ensure that we did not lose sight of one fact—that a text’s main function should be to enhance student learning. Students have always been our primary focus and we were delighted to find that, again and again, creative graphics and simply written narrative help to enhance the book’s reader friendliness and, as a result, present complex ideas in easily understandable ways. It is a process that we fully intend to employ in each future edition. • Expanded “Test Your Skills” Feature One of the book’s most popular features is the end-of-chapter Test Your Skills resource. These exercises have been extensively reviewed for accuracy and clarity. For this edition, this Test Your Skills segment has again been expanded 1. Gil Bloom is planning for the wedding of the mayor’s daughter in his hotel. by 20%. The emphasis of the new The reception, to be held in the grand ballroom, will be attended by 1,000 peoexercises is on developing student ple. From his sales histories of similar events, Gil knows that the average drinking habits of those attending receptions of this type are as follows: spreadsheet skills in cost control 25 percent select champagne problem solving. We believe stu50 percent select white wine dents and instructors will find the 25 percent select spirits new spreadsheets to be an excelAssuming three drinks per person and a portion size of 3 ounces for champagne, 4 ounces for wine, and 1 ounce for spirits, how much of each product, lent enhancement to this already in 750-ml bottles, should Gil order? (Multiply fluid ounces by 29.57 to constrong text feature. vert to milliliters.) Spreadsheet hint: Use the ROUNDUP function in the Total Bottles column to determine number of full bottles to order. If you were Gil, would you order more than you think you would need? Why or why not? If so, how much more would you order? • Additional Content It is clear that today’s foodservice managers must know even more about cost control than their counterparts of the past. Our challenge when writing about cost control continues to be the task of determining what specific “new” material is important enough to be included in a revised edition and, at the same time, avoiding the elimination of critical content in the current edition. While this process is challenging, it is also one of the most exciting aspects of the text revision process. In this edition, critical new information has been included about controlling utility costs (Chapter 8), the Sarbanes-Oxley Act (Chapter 9), and credit card processing fees and bogus invoice scams (Chapter 12), to name just a few new considerations. In addition, where appropriate, the content of the text has been reorganized to provide better clarity of concepts. • Extensive revision and examination of formulas Perhaps no area is more important in a book on cost control than the accuracy of the formulas and mathematical solutions used to demonstrate concepts. In addition to the extensive analysis by text reviewers, the authors have conscientiously checked and rechecked to ensure that the formulas, examples, and answers provided are indeed accurate and clarified to the greatest possible degree. fpref.qxd 1/24/07 xxii 2:31 PM Page xxii Preface ESSENTIAL ELEMENTS OF THE TEXT Overviews Each chapter begins with a brief narrative overview. This is simply a quick and easy guide to the chapter’s contents. Overviews make it easy for readers to see what the chapter is about and what they will learn by reading it. Chapter Outline The chapter outline that follows the overview helps teachers as well as students to see how each topic follows the next and provides a simple way to quickly find material within the chapter. Chapter Highlights Each chapter’s highlights tell the reader what to expect in that chapter. They are worded in such a way that the reader knows what he or she will be able to do at the conclusion of the chapter. These highlights are designed so that readers will be prepared for and excited about what they will be able to achieve when the chapter’s material is successfully mastered. Fun on the Web! This important feature of the text adds to student learning by integrating the use of technology—in this case, the Internet—to the study of cost control. Students will quickly realize the power of the Web when gathering information related to cost control. This feature also provides Web-based resources that help managers more effectively do their jobs. Leaders Are Readers! This new element directs students to books and publications which can lend greater understanding to a topic or which can provide the insight needed to better teach others on their staffs the real “whys” and “hows” of professional food and beverage cost control. Technology Tools These real-life application examples demonstrate to students that they can utilize computer hardware, advanced applications software, sophisticated communication devices, and much more to help manage their costs and improve their operating efficiency. While not all managers will use all of the tools suggested, it is important for students to understand the many technological resources available to them today. Apply What You Have Learned This pedagogical feature, placed near the end of each chapter, allows students to draw on their own problem-solving skills and opinions using the concepts explored in each chapter. Challenging and realistic, yet purposely brief, these minicases pro- fpref.qxd 1/24/07 2:31 PM Page xxiii Managerial Tools vide excellent starting points for class discussions or, if the instructor prefers, outstanding written homework assignments. Key Terms and Concepts Students often need help in identifying key concepts that should be mastered after reading a section of a book. These are listed at the conclusion of each chapter and are invaluable as study aids. Test Your Skills Exercises This popular feature has, of course, been retained and again expanded in size. As was true in previous editions, predesigned Microsoft Excel spreadsheets are employed (via student CD) to allow students to “test” their answers, thus improving the instructor’s ability to evaluate mastery of the actual cost control concepts as well as spreadsheet building ability. Test Your Skills exercises allow the reader to conclusively determine if he or she has mastered the chapter’s content. Again, the intent is to allow the reader to immediately practice the skills acquired in the chapter. Through these exercises, the authors seek to reinforce the concepts presented in the chapters. Student CD-ROM This CD-ROM, included with the purchase of each text, introduces students to the important skill of spreadsheet development. Using the supplied CD-ROM, students can immediately see how their answers to “Test Your Skills” problems translate into cost control solutions via spreadsheet formula development and manipulation. This CD-ROM assists students in understanding the how and why of building spreadsheet solutions for the cost control–related hospitality problems they will face in the classroom and in their careers. Instructors will find that the grading of problem sets becomes much easier when, with the aid of the CD-ROM, all students use a consistent approach to classroom assignments. Study Guide A newly created study guide (0-470-14058-5) provides several additional resources to help students review the material and exercises to test their knowledge of key concepts and topics. MANAGERIAL TOOLS It is the authors’ hope that readers find the book as helpful to use as we found it exciting to develop. To that end, appendices are provided that we believe will be of great value. Appendix A: Frequently Used Formulas for Managing Costs is included in the back of the text as an easy reference guide. This section allows the reader to quickly look up mathematical formulas for any of the computations presented in the text. We have intentionally chosen the simplest formulas that have the widest use. Appendix B: Management Control Forms provides simplified cost control– related forms. This popular appendix has been retained from the first edition of xxiii fpref.qxd 1/24/07 xxiv 2:31 PM Page xxiv Preface this text. These forms can be used as guideposts in the development of property specific forms. They may be implemented as-is or modified as the manager sees fit. Appendix C: Fun on the Web! Sites is designed to give readers the Internet addresses of those sites identified in the text as being helpful in learning more about cost control. In this appendix, the sites are listed as they appear in the chapters. A Glossary of industry terms is provided to help the reader with the operational vocabulary necessary to understand the language of hospitality cost control management. Finally, a Bibliography is provided for the reader who wishes to pursue his or her study by referring to a variety of excellent books. INSTRUCTOR’S MATERIALS To help instructors effectively manage their time and to enhance student learning opportunities, several significant educational tools have been developed specifically for this text: An Instructor’s Manual and, on the companion Wiley Website, slides, a test bank, and spreadsheet answer key. Instructor’s Manual As an additional aid to instructors, an Instructor’s Manual (ISBN: 0-470-04507-8) has been painstakingly developed and classroom tested for this text. The manual includes: • • • • Lecture outlines for each chapter Answers to chapter-ending Test Your Skills problems A Test Bank including exam questions developed for each chapter An Instructor’s Manual disk with the answers to the Test Your Skills spreadsheet exercises at the end of each chapter • Suggested answers for Apply What You Have Learned for each chapter Companion Website The segment of Wiley’s Website devoted entirely to this book (www.wiley.com/college) includes very important instructor aids that can immediately be used to enhance student learning. These are: PowerPoint slides: These easy-to-read and graphically sophisticated teaching aids are excellent tools for instructors presenting their lectures via computer or for those who wish to download the graphics and present them as overhead transparencies. These are available to students as well. Test Bank: Instructors utilizing the Website will find a password-protected, expanded bank of exam questions that includes each question’s correct and classroom-tested answer. Test Your Skills spreadsheet answers: Instructors will be able to access answers to the “Test Your Skills” spreadsheet exercises at the end of each chapter within the password-protected portion of the instructor’s page of the site. fpref.qxd 1/24/07 2:31 PM Page xxv Instructor’s Materials One thing that has not changed in this new edition is that the authors continue to find the topic of cost management to be one of creativity, excitement, and, in many cases, outright fun. In contrast to the prevalent perception of cost control as drudgery, in this text cost management becomes an engaging challenge for the foodservice manager. It has been said that there are three kinds of managers: those who know what has happened in the past, those who know what is happening now, and those who know what is about to happen. Clearly, the manager who possesses all three traits is best prepared to manage effectively and efficiently. This text will give the reader the tools required to maintain sales and cost histories (the past), develop systems for monitoring current activities (the present), and learn the techniques required to anticipate what is to come (the future). As was true in previous editions, the authors hope that the study of cost management creates in the reader the same interest and excitement for the topic that the authors experience. If that is the case, we will have been successful in our attempt to be true to Jack Miller’s original vision of creating an outstanding learning tool that prepares students to ultimately be successful managers in the hospitality industry. xxv fpref.qxd 1/24/07 2:31 PM Page xxvi flast.qxd 1/24/07 3:09 PM Page xxvii Acknowledgments T he first three editions of this text were very popular, for which we are deeply grateful. The success stemmed in large part from the testing of its concepts and materials in classes at the University of North Texas, Purdue University, Texas Tech University, the University of Houston, and California State Polytechnic University at Pomona, as well as from those original St. Louis Community College students who received their instruction under Jack Miller. Students today will indeed benefit from the insight and input of students in our past classes. In addition, the industry focus of this edition is exceptionally strong. This is due in large part to the staff at the Lansing Clarion Hotel and Conference Center, especially David Berger, Director of Operations, and Sam Van Sickel, Food and Beverage Director, as well as Allisha Miller, of P.A.N.D.A. Professionals. As with the first three editions, we appreciate all the assistance and comments we have received in bringing this book to fruition. We are extremely grateful to those who contributed to the original concept and idea for the book. For comment, collaboration, and constructive criticism on the manuscript, we thank our reviewers: Rick Florsheim of Orlando Culinary Academy, Roger Gerard from Shasta College, and Alan Joynson of Lake Washington Technical College. They continually improved the text by reminding us of our original goal: providing a text full of information that is easy to read, easy to understand, and easy to retain. We especially would like to thank our Wiley editors, Nigar Hale and JoAnna Turtletaub, who have supported this text for so long and whose continual support and constant attention helped encourage us to make this edition a reality. In addition, we would like to recognize Cindy Rhoads, Developmental Editor with Wiley, for her special attention to detail in this edition. We also want to thank those colleagues and family and friends who have been so supportive of us throughout our careers: Loralei, Terry, Laurie, Tutti, and Thandi, as well as Peggy, Scott, Trish, Joshua, Joe, Jack, Ray, Pauline, and M.D. We appreciate all of you! Most important of all, we wish to thank our former colleague Jack Miller, who conceived the text, and Anita Miller, his supportive wife and constant companion. xxvii flast.qxd 1/24/07 xxviii 3:09 PM Page xxviii Acknowledgments We believe they would be proud of this extension of Jack’s original textbook concept. It is the authors’ hope that this edition lives up to the high standards the Millers exhibited in their personal and professional lives, as well as demonstrates our love and admiration for them both. Lea R. Dopson David K. Hayes flast.qxd 1/24/07 3:09 PM Page xxix Before You Start: How to Use Spreadsheets T hroughout this book, all “Test Your Skills” exercises are available in Microsoft Excel spreadsheets on your student CD-ROM. Although you will be able to calculate your answers by hand, the authors recommend that you use the spreadsheets for two main reasons: (1) you will be able to practice using the spreadsheets that you may use as a manager, and (2) you will be able to “play” with the numbers and create your own scenarios. These applications can be used with a variety of spreadsheet software packages; the authors chose Excel because it is widely available. It is assumed that you have basic knowledge of spreadsheets when using these applications. The dark bold outlined spaces in all of the “Test Your Skills” exercises indicate that answers are required in those spaces. This section of the book is designed to give you formulas that you will need to complete the “Test Your Skills” exercises at the end of each chapter. These formulas will be used throughout the textbook. The authors have intentionally chosen the simplest formulas that have the widest use. More experienced spreadsheet users may want to use more advanced functions or macros. When you are using the Excel spreadsheets to complete the “Test Your Skills” exercises, you may sometimes need to enter the raw data presented in the textbook. To complete the exercises, you will have to enter formulas in the spreadsheets to perform mathematical calculations just as you would when analyzing data as a manager in a foodservice operation. BASICS OF USING SPREADSHEETS Assume you are the manager of a fine dining restaurant, and you want to see how many guests your waitstaff, Anne, Debra, and George, served on Monday and Tuesday nights. In order to quickly add up the daily totals, you decide to set up the spreadsheet at the top of the next page. xxix flast.qxd 1/24/07 xxx 3:09 PM Page xxx Before You Start: How to Use Spreadsheets A 1 B C D E Anne Debra George Total Guests 2 Monday 25 16 23 3 Tuesday 18 24 21 4 5 In order to calculate the total guests served for Monday and Tuesday, you must do the following: 1. Place the cursor in cell E2. 2. Type: sum( 3. Highlight the cells that you wish to add. (B2 through D2). 4. Excel will automatically add the cells to your formula so that it now looks like this: sum(B2:D2 5. Complete the formula by closing the right parenthesis: sum(B2:D2) 6. Hit “Enter.” 7. The number 64 should appear in cell E2. 8. To copy the same formula for cell E3, use the Auto Fill function. Simply click on the cell, E2, and then position your mouse directly over the bottom right-hand corner of the cell. The cursor will change to look like a plus sign (see the following spreadsheet). Click on the plus and drag down to cell, E3. This will copy the formula from E2 to E3. It will automatically change the cells you are adding to B3:D3. The answer you should have in E3 is 63. You can use the Auto Fill function to copy numbers or formulas horizontally or vertically in as many cells as you wish. A 1 B C D E Anne Debra George Total Guests 2 Monday 25 16 23 sum(B2:D2) 3 Tuesday 18 24 21 sum(B3:D3) 4 5 flast.qxd 1/24/07 3:09 PM Page xxxi Basics of Using Spreadsheets xxxi Formulas Needed for Test Your Skills Exercises Formula Example Explanation cell B1 Copies a number from another cell of the worksheet $column$row $B$1 “Anchors” a cell in a series of formulas. When using the same cell in a variety of formulas in a spreadsheet, place the “$” in front of the column reference and the row reference to indicate that each formula is using the same cell in the calculation. This is especially helpful when dragging the formula to copy it over a series of cells. SUM(cell:cell) SUM(B1:B5) Adds numbers in a range of cells. SUM(cell,cell) SUM(B1,B5) Adds two numbers in cells that are not adjacent to each other. (cellcell) (B1B2) Adds two numbers (cell-cell) (B1-B2) Subtracts one number from another (cell*cell) (B1*B2) Multiplies two numbers (cell/cell) (B1/B2) Divides one number into another (cell/cell)*100 (B1/B2)*100 Divides one number into another and multiplies the answer by 100 (changes answer to percentage) MIN(cell:cell) MIN(B1:B5) Chooses minimum value out of cell range. (Good to use when doing price comparisons.) ROUNDUP(cell,0) or ROUNDUP(function,0) or ROUNDUP(equation,0) ROUNDUP(B1,0) or ROUNDUP(SUM(B1:B4),0) or ROUNDUP(B1*1.05,0) Rounds numbers up. The “0” denotes that the number of decimal places will be 0. You can use 1, 2, 3, etc., to indicate decimal places more than 0. (Good to use when inventory indicates that you need 21/2 cases and you can only buy in full cases; this function will round the cases up to 3.) ROUND(cell,0) or ROUND(function,0) or ROUND(equation,0) ROUND(B1,0) or ROUND(SUM(B1:B4),0) or ROUND(B1*1.05,0) Rounds numbers up or down. The “0” denotes that the number of decimal places will be 0. You can use 1, 2, 3, etc., to indicate decimal places more than 0. When the number in one cell has been calculated as a formula and is also being used in a formula of a second cell, this will guarantee that no rounding errors will occur in the second cell. In the following formulas, the word “cell” may be replaced by an actual number, e.g., (cell25) flast.qxd 1/24/07 xxxii 3:12 PM Page xxxii Before You Start: How to Use Spreadsheets Note that, for percentages, you don’t necessarily have to type “*100” in the formula. You could, instead, do the following: 1. Highlight the cell. 2. Go to the menu at the top of the page and click on “Format.” 3. Under “Format,” click on “Cells.” 4. Under “Cells,” click on “Number.” 5. Under “Number,” click on “Percentage.” 6. You will also find a box in “Number” that will allow you to choose the number of decimal places. HOW TO CREATE A PIE CHART Although this looks like a long list of things to do to create a pie chart, it should really only take you approximately two minutes to do (once you get the hang of it). So please give it a try. Below is an example of a P&L Statement set up in Excel. Your task is to illustrate expenses and profit as a percentage of revenues in a pie chart. A B C 1 D % 2 Revenue $250,000 100.0 3 F&B Expense 130,000 52.0 4 Labor Expense 70,000 28.0 5 Other Expense 40,000 16.0 6 Total Expenses 240,000 96.0 7 Profit 10,000 4.0 1. Highlight “F&B Expense,” “Labor Expense,” and “Other Expense” in Column A, and highlight their respective dollar amounts in Column B (all at the same time). Then, hold down the “Ctrl” key on your keyboard and highlight “Profit” and its respective dollar amount. This will allow you to skip the “Total Expenses” row. 2. Go to the menu at the top of the screen and click on “Insert,” then click on “Chart.” A Chart Wizard will appear on your screen. 3. In the Chart Wizard, you have two choices—“Standard Types” and “Custom Types.” Usually, the Chart Wizard will open up automatically to “Standard Types,” which is the one you want to use. flast.qxd 1/24/07 3:12 PM Page xxxiii How to Create a Pie Chart 4. Click on “Pie” and click on the “Chart sub-type” that you want to use. Then, click on “Next” at the bottom of the Chart Wizard. 5. In the next screen, you have two choices: “Data Range” and “Series.” “Data Range” is the one you want to use. 6. If you have already highlighted your columns in the spreadsheet as instructed in Step 1 above, you will not have to type in anything on this screen. Just click on “Next” at the bottom of the page. 7. In the next screen, you have three choices: “Titles,” “Legend,” and “Data Labels.” Click on “Titles” first. 8. Under “Titles,” you will see a space labeled “Chart Title.” Type in the title that you want for your chart in that space (or do nothing if you do not want a title). 9. Now, click on “Legend.” This option is available for you if you want the legend to show. If you want a legend, make sure the “Show legend” box is checked, and then click on a “Placement” for the legend (where you want it to appear on the chart). If you do not want a legend and it has a check mark next to it, click on the check mark to remove it. 10. Now, click on “Data Labels.” You will see a list of options for labeling the pieces of the pie. The authors of this text like to use “Category Name” and “Percentage.” If you click on these, you will see that both the category names (words) and percentages appear next to the corresponding piece of the pie. This also makes a legend redundant; so, if you are using this option, you will not want to click on “Show Legend” in the “Legends” section (see Step 9 above). Click on “Next” at the bottom of the page. 11. In the next screen, you have two choices: Place chart “as new sheet” and “as object in.” This is referring to where you want the pie chart to appear, either in a new Excel spreadsheet or in an existing spreadsheet in your workbook. In most cases, you will click on “as object in.” Next to “as object in” is a scroll down list. Choose the sheet in which you want the object to appear. The current sheet you are working in is the default sheet. 12. Click on “Finish” at the bottom of the page, and you should see your finished chart! 13. To move the pie chart to a specific location on the spreadsheet, click on any white space within the chart, hold down the mouse button, and drag the chart to the desired location. 14. To resize the pie chart, click on any of the 8 dots on the border of the chart. The side middle dots make the chart larger or smaller horizontally, and the top and bottom middle dots make the chart larger or smaller vertically. The dots in the corners of the chart will resize the entire chart (larger or smaller) within the same proportions. 15. The Chart Wizard defaults percentages to “0” decimal places, e.g., 12%. If you want percentages to have one or more decimal places, e.g., 12.3% or 12.34%, double click on one of the percentages shown in your pie chart. xxxiii flast.qxd 1/24/07 xxxiv 3:28 PM Page xxxiv Before You Start: How to Use Spreadsheets A window will pop up that is labeled “Format Data Labels.” Click on the “Number” tab at the top of the window (this is the default). Then, click on “Percentage” (this is the default). You will see “Decimal Places” on the right and a box next to it. Type in the number of decimal places you want, and then click “OK” at the bottom of the window. This will set all of the percentages in your chart to the same number of decimal places. 16. Sit back and admire your work! Your chart should look like the chart shown here. P & L Percentages Other Expense 16.0% Profit 4.0% F&B Expense 52.0% Labor Expense 28.0% HOW TO SORT A TABLE Following is an example of Goal Value Analysis set up in Excel. Your task is to sort the menu items by Goal Value from highest to lowest. Menu Item A B C D Goal Value Overall menu (Goal Value) (1-.35) 100 $16.55 1-(.30.35) 376.5 Lobster Stir-Fry (1-.51) 51 21.95 1-(.30.51) 104.2 Chicken Breast (1-.22) 140 $13.95 1-(.30.22) 731.2 Beef medallions (1-.37) 125 15.95 1-(.30.37) 414.5 Coconut Shrimp (1-.30) 121 16.95 1-(.30.30) 574.3 Grilled Tuna (1-.40) 105 17.95 1-(.30.40) 339.3 Scallops/Pasta (1-.24) 85 14.95 1-(.30.24) 444.3 Strip Steak (1-.45) 73 17.95 1-(.30.45) 180.2 flast.qxd 1/24/07 3:13 PM Page xxxv How to Sort a Table 1. Highlight the table to be sorted including the header row. 2. Go to the menu at the top of the screen and click on “Data,” then click on “Sort.” 3. A “Sort” window will appear on your screen. At the bottom of the “Sort” window you will see “The data range has.” Click on “Header row” to indicate that your table has a header row. 4. At the top of the “Sort” window, you will see “Sort by.” Use the drop down menu to choose the appropriate column. In this example, you will choose the “Goal Value” column. 5. To the right of the drop down menu, you need to choose “Ascending” or “Descending.” For this example, choose “Descending” because you want the menu items to be sorted from highest to lowest. Click “OK” at the bottom of the window to sort the table. Your table should look like the one shown next. Menu Item A B C D Goal Value Chicken Breast (1-.22) 140 $13.95 1-(.30.22) 731.2 Coconut Shrimp (1-.30) 121 16.95 1-(.30.30) 574.3 Scallops/Pasta (1-.24) 85 14.95 1-(.30.24) 444.3 Beef medallions (1-.37) 125 15.95 1-(.30.37) 414.5 Overall menu (Goal Value) (1-.35) 100 $16.55 1-(.30.35) 376.5 Grilled Tuna (1-.40) 105 17.95 1-(.30.40) 339.3 Strip Steak (1-.45) 73 17.95 1-(.30.45) 180.2 Lobster Stir-Fry (1-.51) 51 21.95 1-(.30.51) 104.2 xxxv c01.qxd 1/24/07 2:56 PM Page 1 Chapter 1 MANAGING REVENUE AND EXPENSE OVERVIEW T his chapter presents the relationship among foodservice revenue, expense, and profit. As a pro- fessional foodservice manager, you must understand the relationship that exists between controlling these three areas and the resulting success of your operation. In addition, the chapter presents the mathematical foundation you must know to express your operating results as a percentage of your revenue or budget, a method that is the standard within the hospitality industry. Chapter Outline         Professional Foodservice Manager Profit: The Reward for Service Getting Started Understanding the Profit and Loss Statement Understanding the Budget Key Terms and Concepts Apply What You Have Learned Test Your Skills HIGHLIGHTS At • • • the conclusion of this chapter, you will be able to: Apply the basic formula used to determine profit. Express both expenses and profit as a percentage of revenue. Compare actual operating results with budgeted operating results. 1 c01.qxd 2 1/24/07 2:56 PM Chapter 1 Page 2 Managing Revenue and Expense PROFESSIONAL FOODSERVICE MANAGER T here is no doubt that to be a successful foodservice manager you must be a talented individual. Consider, for a moment, your role in the operation of an ongoing profitable facility. As a foodservice manager, you are both a manufacturer and a retailer. A professional foodservice manager is unique because all of the functions of product sales, from item conceptualization to product delivery, are in the hands of the same individual. As a manager, you are in charge of securing raw materials, producing a product, and selling it—all under the same roof. Few other managers are required to have the breadth of skills that effective foodservice operators must have. Because foodservice operators are in the service sector of business, many aspects of management are more difficult for them than for their manufacturing or retailing management counterparts. A foodservice manager is one of the few types of managers who actually have contact with the ultimate customer. This is not true of the manager of a tire factory or automobile production line. These individuals produce a product, but they do not sell it to the person who will actually use their product. In a like manner, grocery store or computer store managers will sell their product lines, but they have had no role in actually producing their goods. The face-to-face guest contact in the hospitality industry requires that you assume the responsibility of standing behind your own work and that of your staff, in a one-on-one situation with the ultimate consumer, or end user of your products and services. The management task checklist in Figure 1.1 shows just some of the areas in which foodservice, manufacturing, and retailing managers vary in responsibilities. In addition to your role as a food factory supervisor, you must also serve as a cost control manager, because, without performing this vital role, your business might cease to exist. Foodservice management provides the opportunity for creativity in a variety of settings. The control of revenue and expense is just one more area in which the effective foodservice operator can excel. In most areas of foodservice, excellence in operation is measured in terms of producing and delivering  FIGURE 1.1 Management Task Checklist Task Foodservice Manager Manufacturing Manager Retail Manager 1. Secure raw materials Yes Yes No 2. Manufacture product Yes Yes No 3. Distribute to end-user Yes No Yes 4. Market to end-user Yes No Yes 5. Reconcile problems with end-user Yes No Yes c01.qxd 1/24/07 2:56 PM Page 3 Profit: The Reward for Service quality products in a way that assures an appropriate operating profit for the owners of the business. PROFIT: THE REWARD FOR SERVICE T here is an inherent problem in the study of cost control or, more accurately, cost management. The simple fact is that management’s primary responsibility is to deliver a quality product or service to the guest, at a price mutually agreeable to both parties. In addition, the quality must be such that the consumer, or end user of the product or service, feels that excellent value was received for the money spent on the transaction. When this level of service is achieved, the business will prosper. If management focuses on controlling costs more than servicing guests, problems will certainly surface. It is important to remember that guests cause businesses to incur costs. You do not want to 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. A restaurant with $5 million in revenue per year will undoubtedly have higher costs than the same size restaurant with $200,000 in revenue per year. The reason is quite clear. The food products, labor, and equipment needed to sell $5 million worth of food is likely to be greater than that required to produce a smaller amount of revenue. Remember, if there are fewer guests, there are likely to be fewer costs, but fewer profits as well! Because that is true, when management attempts to reduce costs, with no regard for the impact on the balance between managing costs and guest satisfaction, the business will surely suffer. In addition, efforts to reduce costs that result in unsafe conditions for guests or employees are never wise. While some shortterm savings may result, the expense of a lawsuit resulting from a guest or employee injury can be very high. Managers who, for example, neglect to spend the money to salt and shovel a snowy restaurant entrance area may find that they spend thousands more dollars defending themselves in a lawsuit brought by an individual who slipped and fell on the ice. As an effective manager, the question to be considered is not whether costs are high or low. The question is whether costs are too high or too low, given management’s view of the value it hopes to deliver to the guest and the goals of the foodservice operation’s owners. Managers can eliminate nearly all costs by closing the operation’s doors. Obviously, however, when you close the doors to expense, you close the doors to profits. Expenses, then, must be incurred, and they must be managed in a way that allows the operation to achieve its desired profit levels. Some people assume that if a business purchases a product for $1.00 and sells it for $3.00, the profit generated equals $2.00. In fact, this is not true. As a business operator, you must realize that the difference between what you have paid for the goods you sell and the price at which you sell them does not represent your actual profit. Instead, all expenses, including advertising, the building housing your operation, management salaries, and the labor required to generate the sale, to name 3 c01.qxd 4 1/24/07 2:56 PM Chapter 1 Page 4 Managing Revenue and Expense but a few, are expenses that must be subtracted before you can determine your profits accurately. Every foodservice operator is faced with the following profit-oriented formula: Revenue  Expenses  Profit Thus, when you manage your facility, you will receive revenue, the money you take in, and you will incur expenses, the cost of the items required to operate the business. The dollars that remain after all expenses have been paid represent your profit. For the purposes of this book, the authors will use the following terms interchangeably: revenues and sales; expenses and costs. This formula holds even in the “nonprofit” sector of foodservice management. For example, consider the situation of Hector Bentevina. Hector is the foodservice manager at the headquarters of a large corporation. Hector supplies the foodservice to a large group of office workers, each of whom is employed by the corporation that owns the facility Hector manages. In this situation, Hector’s employer clearly does not have “profit” as its primary motive. In most business dining situations, food is provided as a service to the company’s employees either as a no-cost (to the employee) benefit or at a greatly reduced price. In some cases, executive dining rooms may be operated for the convenience of management. In all cases, however, some provision for profit must be made. Figure 1.2 shows the flow of business for the typical foodservice operation. Note that profit must be taken out at some point in the process, or management is in a position of simply trading cash for cash. In your own operation, if you find that revenue is less than or equal to real expense, with no reserve for the future, you will likely also find that there is no money for new equipment; needed equipment maintenance may not be performed; employee raises (as well as your own) may be few and far between; and, in general, the foodservice facility will become outdated due to a lack of funds needed to remodel and upgrade. The truth is, all foodservice operations need revenue in excess of expenses if they are to thrive. If you manage a foodservice operation in a profit  FIGURE 1.2 Foodservice Business Flowchart Cash reserves Profits Purchases Produces Supplies Accounts receivable or cash Raw materials and labor Generates Finished products c01.qxd 1/24/07 2:56 PM Page 5 Profit: The Reward for Service or a nonprofit setting, it will be your responsibility to communicate this message to your own staff. Profit is the result of solid planning, sound management, and careful decision making. The purpose of this text is to give you the information and tools you need to make informed decisions with regard to managing your operation’s revenue and expenses. If these tools are utilized properly, the potential for achieving profits you desire is greatly enhanced. Profit should not be viewed as what is left over after the bills are paid. In fact, careful planning is necessary to earn a profit. In most cases, investors will not invest in businesses that do not generate enough profit to make their investment worthwhile. The restaurant business can be very profitable; however, there is no guarantee that an individual restaurant will in fact make a profit. Some restaurants do, while others do not. Because that is true, a more appropriate formula, which recognizes and rewards the business owner for the risk associated with business ownership or investment, is as follows: Revenue  Desired Profit  Ideal Expense Ideal expense, in this case, is defined as management’s view of the correct or appropriate amount of expense necessary to generate a given quantity of revenue. Desired profit is defined as the profit that the owner wants to achieve on that predicted quantity of revenue. This formula clearly places profit as a reward for providing service, not a leftover. When foodservice managers deliver quality and value to their guests, anticipated revenue levels can be achieved and desired profit is attainable. Desired profit and ideal expense levels are not, however, easily achieved. It takes an astute foodservice operator to consistently make decisions that will maximize revenue while holding expenses to the ideal or appropriate amount. This book will help you to do just that.  REVENUE To some degree, you can manage your revenue levels. Revenue dollars are the result of units sold. These units may consist of individual menu items, lunches, dinners, drinks, or any other item produced by your operation. Revenue varies with both the number of guests frequenting your business and the amount of money spent by each guest. You can increase revenue by increasing the number of guests you serve, by increasing the amount each guest spends, or by a combination of both approaches. Adding seating or drive-through windows, extending operating hours, and building additional foodservice units are all examples of management’s efforts to increase the number of guests choosing to come to the restaurant or foodservice operation. Suggestive selling by service staff, creative menu pricing techniques, as well as discounts for very large purchases are all examples of efforts to increase the amount of money each guest spends. It is the opinion of the authors that management’s primary task is to take the steps necessary to bring guests to the foodservice operation. This is true because 5 c01.qxd 1/24/07 6 2:56 PM Chapter 1 Page 6 Managing Revenue and Expense the profit formula begins with revenue. Experienced foodservice operators know that increasing revenue through adding guests, suggestive selling, or possibly raising menu prices is an extremely effective way of increasing overall profitability, but only if effective cost management systems are in place. The focus of this text is on managing and controlling expenses, not generating additional revenue. While the two topics are clearly related, they are different. Marketing efforts, restaurant design and site selection, employee training and food preparation methods are all critical links in the revenue-producing chain. No amount of effective expense control can solve the profit problems caused by inadequate revenue resulting from inferior food quality or service levels. Leaders Are Readers! One tool used by food service establishments to go beyond managing costs to increasing revenue is the menu. Hospitality Marketing Management, Fourth Edition, by Robert D. Reid and David C. Bojanic (ISBN: 0-471-47654-4) includes a thorough examination and discussion of how to increase food service revenue through the use of effective menu pricing strategy and creative menu layout and design. Read the last two chapters of this book. What’s an ISBN? A book’s International Standard Book Number (ISBN) is the unique identification number assigned to it upon its publication. Utilized worldwide, an ISBN is used (among other things) to look up books on the Internet and to identify specific books at bookstores. Where possible, we will identify suggested reading materials by an ISBN. Effective cost control, however, when coupled with management’s aggressive attitude toward meeting and exceeding guests’ expectations, can result in outstanding revenue and profit performance. Fun on the Web! www.restaurant.org. Click on “Industry Research,” to see the National Restaurant Association’s revenue projections for the over $500 billion dollar restaurant industry.  EXPENSES There are four major foodservice expense categories that you must learn to control. They are: 1. Food costs 2. Beverage costs c01.qxd 1/24/07 2:56 PM Page 7 Profit: The Reward for Service 3. Labor costs 4. Other expenses FOOD COSTS Food costs are the costs associated with actually producing the menu items a guest selects. They include the expense of meats, dairy, fruits, vegetables, and other categories of food items produced by the foodservice operation. When computing food costs, many operators include the cost of minor paper and plastic items, such as the paper wrappers used to wrap sandwiches. In most cases, food costs will make up the largest or second largest expense category you must learn to manage. BEVERAGE COSTS Beverage costs are those related to the sale of alcoholic beverages. It is interesting to note that it is common practice in the hospitality industry to consider beverage costs of a nonalcoholic nature as an expense in the food cost category. Thus, milk, tea, coffee, carbonated beverages, and other nonalcoholic beverage items are not generally considered a beverage cost. Alcoholic beverages accounted for in the beverage cost category include beer, wine, and liquor. This category may also include the costs of ingredients necessary to produce these drinks, such as cherries, lemons, olives, limes, mixers like carbonated beverages and juices, and other items commonly used in the production and service of alcoholic beverages. LABOR COSTS Labor costs include the cost of all employees necessary to run the business. This expense category would also include the amount of any taxes you are required to pay when you have employees on your payroll. Some operators find it helpful to include the cost of management in this category. Others prefer to place the cost of managers in the category of other expenses. In most operations labor costs are an operator’s highest cost, or they are second only to food costs in total dollars spent. If management is included as a labor cost, then this category will frequently be even larger than the food cost category. OTHER EXPENSES Other expenses include all expenses that are neither food, nor beverage, nor labor. Examples include franchise fees, utilities, rent, linen, and such items as china, glassware, kitchen knives, and pots and pans. While this expense category is sometimes incorrectly referred to as “minor expenses,” your ability to successfully control this expense area is especially critical to the overall profitability of your foodservice unit. 7 c01.qxd 8 1/24/07 2:56 PM Chapter 1 Page 8 Managing Revenue and Expense GETTING STARTED Good managers learn to understand, control, and manage their expenses. Consider the case of Tabreshia Larson, the food and beverage director of the 200-room Renaud Hotel, located in a college town and built near an interstate highway. Tabreshia has just received her end-of-the-year operating reports for the current year. She is interested in comparing these results to those of the prior year. The numbers she received are shown in Figure 1.3. Tabreshia is concerned, but she is not sure if she should be. Revenue is higher than last year, so she feels her guests must like the products and services they receive. In fact, repeat business from corporate meetings and special-events meals is really beginning to develop. Profits are greater than last year also, but Tabreshia has the uneasy feeling that things are not going as well as they could. The kitchen appears to run smoothly. The staff, however, often runs out of needed items, and there seems to be a large amount of leftover food thrown away on a regular basis. Sometimes, there seem to be too many staff members on the property; at other times, guests have to wait too long to get served. Tabreshia also feels that employee theft may be occurring, but she certainly doesn’t have the time to watch every storage area within her operation. Tabreshia also senses that the hotel general manager, who is Tabreshia’s boss, may be less than pleased with her department’s performance. She would really like to get a handle on the problem (if there is one), but how and where should she start? The answer for Tabreshia, and for you, if you want to develop a serious expense control system, is very simple. You start with basic mathematics skills that you must have to properly analyze your expenses. The mathematics required, and used in this text, consist only of addition, subtraction, multiplication, and division. These tools will be sufficient to build a cost control system that will help you professionally manage the expenses you incur. What would it mean if a fellow foodservice manager told you that he spent $500 on food yesterday? Obviously, it means little unless you know more about his operation. Should he have spent $500 yesterday? Was that too much? Too little? Was it a “good” day? These questions raise a difficult problem. How can you equitably compare your expenses today with those of yesterday, or your foodservice unit with another, so that you can see how well you are doing? We know that  FIGURE 1.3 Renaud Hotel Operating Results This Year Last Year Revenue $1,106,040 $850,100 Expense 1,017,557 773,591 88,483 76,509 Profits c01.qxd 1/24/07 2:56 PM Page 9 Getting Started the value of dollars has changed over time. A restaurant with revenue of $1,000 per day in 1954 is very different from the same restaurant with daily revenue of $1,000 today. The value of the dollar today is quite different from what it was in 1954. Generally, inflation causes the purchasing power of a dollar today to be less than that of a dollar from a previous time period. While this concept of changing value is useful in the area of finance, it is vexing when one wants to answer the simple question, “Am I doing as well today as I was doing five years ago?” Alternatively, consider the problem of a multiunit manager. Two units sell tacos on either side of a large city. One uses $500 worth of food products each day; the other unit uses $600 worth of food products each day. Does the second unit use an additional $100 worth of food each day because it has more guests or because it is less efficient in utilizing the food? The answer to all of the preceding questions, and many more, can be determined if we use percentages to relate expenses incurred to revenue generated. Percentage calculations are important for at least two major reasons. First and foremost, percentages are the most common standard used for evaluating costs in the foodservice industry. Therefore, knowledge of what a percent is and how it is calculated is vital. Second, as a manager in the foodservice industry, you will be evaluated primarily on your ability to compute, analyze, and control these percent figures. While it is true that many basic management tools such as Microsoft Excel, Lotus, and other software programs will “compute” percentages for you, it is important that you understand what the percentages mean and how they should be interpreted. Percent calculations are used extensively in this text and are a cornerstone of any effective cost control system.  PERCENT REVIEW Understanding percents and how they are mathematically computed is important. The following review may be helpful for some readers. If you thoroughly understand the percent concept, you may skip this section and the Computing Percent section and proceed directly to the Using Percent section. Percent (%) means “out of each hundred.” Thus, 10 percent would mean 10 out of each 100. If we asked how many guests would buy blueberry pie on a given day, and the answer is 10 percent, then 10 people out of each 100 we serve will select blueberry pie. If 52 percent of your employees are female, then 52 out of each 100 employees are female. If 15 percent of your employees will receive a raise this month, then 15 out of 100 employees will get their raise. Figure 1.4 shows three ways to write a percent. COMMON FORM In its common form, the % sign is used to express the percentage. If we say 10 percent, then we mean “10 out of each 100” and no further explanation is necessary. The common form, the percent, is equivalent to the same amount expressed in either the fraction or the decimal form. 9 c01.qxd 1/24/07 10 2:56 PM Chapter 1 Page 10 Managing Revenue and Expense  FIGURE 1.4 Forms of Expressing Percent Percent Form 1% 10% 100% Common 1% 10% 100% Fraction 1/100 10/100 100/100 Decimal 0.01 0.10 1.00 FRACTION FORM In fraction form, the percent is expressed as the part, or a portion of 100. Thus, 10 percent is written as 10 “over” 100 (10/100). This is simply another way of expressing the relationship between the part (10) and the whole (100). DECIMAL FORM A decimal is a number developed from the counting system we use. It is based on the fact that we count to 10 then start over again. In other words, each of our major units, 10s, 100s, 1,000s, and so on, are based on the use of 10s, and each number can easily be divided by 10. Instead of using the % sign, the decimal form uses the (.) or decimal point to express the percent relationship. Thus, 10 percent is expressed as 0.10 in decimal form. The numbers to the right of the decimal point express the percentage. Each of these three methods of expressing percentages is used in the foodservice industry, and to be successful you must develop a clear understanding of how a percentage is computed. Once that is known, you can express the percentage in any form that is required or that is useful to you.  COMPUTING PERCENT To determine what percent one number is of another number, divide the number that is the part by the number that is the whole. Usually, but not always, this means dividing the smaller number by the larger number. For example, assume that 840 guests were served during a banquet at your hotel; 420 of them asked for coffee with their meal. To find what percent of your guests ordered coffee, divide the part (420) by the whole (840). The process looks as follows: Part   Percent Whole or 420   0.50 840 c01.qxd 1/24/07 2:56 PM Page 11 Getting Started Thus, 50% (common form), 50/100 (fraction form), or 0.50 (decimal form) represents the proportion of people at the banquet who ordered coffee. A large number of new foodservice managers have difficulty computing percent figures. It is easy to forget which number goes “on the top” and which number goes “on the bottom.” In general, if you attempt to compute a percentage and get a whole number (a number larger than 1), either a mistake has been made or costs are extremely high! Many people also become confused when converting from one form of percent to another. If that is a problem, remember the following conversion rules: 1. To convert from common form to decimal form, move the decimal two places to the left, that is, 50.00%  0.50. 2. To convert from decimal form to common form, move the decimal two places to the right, that is, 0.40  40.00%. In a restaurant, the “whole” is usually a revenue figure. Expenses and profits are the “parts,” which are usually expressed in terms of a percent. It is interesting to note that, in the United States, the same system in use for our numbers is in use for our money. Each dime contains 10 pennies, each dollar contains 10 dimes, and so on. Thus when discussing money, it is true that a percent refers to “cents out of each dollar” as well as “out of each 100 dollars.” When we say 10 percent of a dollar, we mean 10 cents, or “10 cents out of each dollar.” Likewise, 25 percent of a dollar represents 25 cents, 50 percent of a dollar represents 50 cents, and 100 percent of a dollar represents $1.00. Sometimes, when using percent to express the relationship between portions of a dollar and the whole, we find that the part is, indeed, larger than the whole. Figure 1.5 demonstrates the three possibilities that exist when computing a percentage. Great care must always be taken when computing percents, so that the percent arrived at is of help to you in your work and does not represent an error in mathematics.  USING PERCENT Consider a restaurant that you are operating. Imagine that your revenues for a week are in the amount of $1,600. Expenses for the same week are $1,200. Given these  FIGURE 1.5 Percent Computation Possibilities Examples Results Part is smaller than the whole 61   61% 100 Always less than 100% Part is equal to the whole 35   100% 35 Always equals 100% Part is larger than the whole 125   250% 50 Always greater than 100% 11 c01.qxd 1/24/07 12 2:56 PM Chapter 1 Page 12 Managing Revenue and Expense facts and the information presented earlier in this chapter, your profit formula for the week would look as follows: Revenue  Expense  Profit or $1,600  $1,200  $400 If you had planned for a $500 profit for the week, you would have been “short.” Using the alternative profit formula presented earlier, you would find: Revenue  Desired Profit  Ideal Expense or $1,600  $500  $1,100 Note that expense in this example ($1,200) exceeds ideal expense ($1,100) and, thus, too little profit was achieved. These numbers can also be expressed in terms of percent. If we want to know what percent of our revenue went to pay for our expenses, we would compute it as follows: Expense   Expense % Revenue or $1,200   0.75, or 75% $1,600 Another way to state this relationship is to say that each dollar of revenue costs 75 cents to produce. Also, each revenue dollar taken in results in 25 cents profit: $1.00 Revenue  $0.75 Expense  $0.25 Profit As long as expense is smaller than revenue, some profit will be generated, even if it is not as much as you had planned. You can compute profit percent using the following formula: Profit   Profit % Revenue In our example: $400 Profit   25% Profit $1,600 Revenue c01.qxd 1/24/07 2:56 PM Page 13 Understanding the Income (Profit and Loss) Statement We can compute what we had planned our profit percent to be by dividing desired profit ($500) by revenue ($1,600): $500 Desired Profit   31.25% Desired Profit $1,600 Revenue In simple terms, we had hoped to make 31.25 percent profit, but instead made only 25 percent profit. Excess costs could account for the difference. If these costs could be identified and corrected, we could perhaps achieve the desired profit percentage. Most foodservice operators compute many cost percentages, not just one. The major cost divisions used in foodservice are as follows: 1. Food and beverage cost 2. Labor cost 3. Other expense A modified profit formula, therefore, looks as follows: Revenue  (Food and Beverage Cost  Labor Cost  Other Expenses)  Profit Put in another format, the equation looks as follows: Revenue (100%)  Food and Beverage Cost %  Labor Cost %  Other Expense %  Profit % Regardless of the approach used, foodservice managers must evaluate their expenses, and they use percents to do so. UNDERSTANDING THE INCOME (PROFIT AND LOSS) STATEMENT Consider Figure 1.6, an example from Pat’s Steakhouse. All of Pat’s expenses and profits can be computed as percents by using the revenue figure, $400,000, as the whole, with expenses and profit representing the parts as on the following page: 13 c01.qxd 1/24/07 14 2:56 PM Chapter 1 Page 14 Managing Revenue and Expense Food and Beverage Cost   Food Beverage Cost % Revenue or $150,000   37.50% $400,000 Labor Cost   Labor Cost % Revenue or $175,000   43.75% $400,000 Other Expenses   Other Expense % Revenue or $25,000   6.25% $400,000 Total Expense   Total Expense % Revenue or $350,000   87.50% $400,000 Profit   Profit % Revenue or $50,000   12.50% $400,000  FIGURE 1.6 Pat’s Steakhouse Revenue Expenses Food and Beverage Cost Labor Cost Other Expense Total Expense Profit $400,000 $150,000 175,000 25,000  $350,000  $ 50,000 c01.qxd 1/24/07 2:56 PM Page 15 Understanding the Income (Profit and Loss) Statement  FIGURE 1.7 Pat’s Steakhouse P&L Revenue $400,000 Food and Beverage Cost 100% $150,000 37.50% 175,000 43.75% 25,000 6.25% Labor Cost Other Expense Total Expense $350,000  $ 50,000 Profit 87.50%  12.50% An accounting tool that details revenue, expenses, and profit for a given period of time, is called the income statement, which is commonly called the profitand-loss statement (P&L). It lists revenue, food and beverage cost, labor cost, and other expense. The P&L also identifies profits since, as you recall, profits are generated by the formula: Revenue  Expense  Profit Figure 1.7 is a simplified P&L statement for Pat’s Steakhouse. Note the similarity to Figure 1.6. This time, however, expenses and profit are expressed in terms of both dollar amount and percent of revenue. Another way of looking at Pat’s P&L is shown in Figure 1.8. The pieces of the pie represent Pat’s cost and profit categories. Costs and profit total 100 percent, which is equal to Pat’s total revenues. To put it in another way, out of every revenue dollar that Pat generates, 100 percent is designated as either costs or profit. Pat knows from the P&L that revenues represent 100 percent of the total dollars available to cover expenses and provide for a profit. Food and beverage cost  FIGURE 1.8 Pat’s Steakhouse Costs and Profit as a Percentage of Revenues Profit 12.50% Other expenses 6.25% Labor cost 43.75% Food and beverage cost 37.50% 15 c01.qxd 1/24/07 16 2:56 PM Chapter 1 Page 16 Managing Revenue and Expense is 37.50 percent, and labor cost percentage in the steakhouse equals 43.75 percent. Other expense percentage equals 6.25 percent, and her total expense percent is 87.50 percent (37.50  43.75  6.25  87.50 percent). The steakhouse profit equals 12.50 percent. Thus, for each dollar in revenue, Pat earns a profit of 12.50 cents. Pat’s revenue, expense, and profit information is contained in the steakhouse’s P&L. In restaurants that serve alcohol, food costs and beverage costs are most often separated into two categories in the P&L. Likewise, food revenues and beverage revenues are reported separately. This is done so that the food cost can be compared to food revenues, and the beverage cost can be compared to beverage revenues. Suppose, for example, that one manager is responsible for controlling food cost percent in the restaurant and another manager is responsible for controlling beverage cost percent in the bar. Separation of these two “departments,” then, is especially helpful when evaluating the performance of these two managers. It also helps these managers to quickly identify and anticipate problems associated with their costs and identify ways to correct these problems. The P&L is important because it indicates the efficiency and profitability of an operation. Because so many individuals and groups are interested in a food facility’s performance, it is important that the P&L and other financial statements are prepared in a manner that is consistent with other facilities. If, for example, you own two Italian restaurants, it would be very confusing if one of your managers used a particular method for preparing his or her unit’s P&L, while the other manager used an entirely different method. You, your investors, your accountant, governmental taxing entities, and your creditors may all be interested in your operational results, and unless you report and account for these in a manner they can easily understand, confusion may result. To avoid such a set of circumstances, 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. A Uniform System of Accounts exists for restaurants, another for hotels, and another for clubs. The Uniform System of Accounts will be discussed in greater detail later in this text. The primary purpose of preparing a P&L is to identify revenue, expenses, and profits for a given time period. As a manager, your efforts, more than any other factor, will influence your operation’s profitability. Good managers provide excellent value to their guests, which cause guests to return, and thus increases revenue. In addition, good managers know how to analyze, manage, and control their costs. For these managers, expenses are held to the amount that was preplanned. The result is the desired profit level. Good managers influence the success of their units and their own employees. The results for them personally are promotions, added responsibilities, and salary increases. If you wish to succeed in the hospitality industry, it is important to remember that your performance will be evaluated primarily on your ability to achieve the profit levels your operation has planned for. In addition to your own efforts, many factors influence profit dollars and profit percent, and you must be aware, and in control, of all of them. All of the factors that impact profit percent are discussed in later chapters of this text. c01.qxd 1/24/07 2:56 PM Page 17 Understanding the Budget 17 Fun on the Web! www.restaurant.org. Link to “Industry Research,” then “Reports” to see how you can get industry averages for P&Ls. UNDERSTANDING THE BUDGET Some foodservice managers do not generate revenue on a daily basis. Consider, for a moment, the foodservice manager at a summer camp run for children. In this case, parents pay a fixed fee to cover housing, activities, and meals for a set period of time. The foodservice director, in this situation, is just one of several managers who must share this revenue. If too many dollars are spent on providing housing or play activities, too few dollars may be available to provide an adequate quantity or quality of meals. On the other hand, if too many dollars are spent on providing foodservice, there may not be enough left to cover other needed expense areas. In a case like this, foodservice operators should prepare a budget. A budget is simply an estimate of projected revenue, expense, and profit. In some hospitality companies, the budget is known as the plan, referring to the fact that the budget details the operation’s estimated, or “planned for,” revenue and expense for a given accounting period. An accounting period is an hour, day, week, or month in which an operator wishes to analyze revenue and expenses. All effective managers, whether in the commercial (for profit) or nonprofit sector, use budgets. Budgeting is simply planning for revenue, expense, and profit. If these items are planned for, you can determine how close your actual performance is to your plan or budget. In the summer camp example, the following information is known: 1. Number of campers: 180 2. Number of meals served to each camper per day: 3 3. Length of campers’ stay: 7 days With 180 campers eating 3 meals each day for 7 days, 3,780 meals will be served (180 campers  3 meals per day  7 days  3,780 meals). Generally, in a case such as the summer camp, the foodservice director is given a dollar amount that represents the allowed expense for each meal to be served. For example, if $1.85 per meal is the amount budgeted for this director, the total revenue budget would equal $6,993 ($1.85 per meal  3,780 meals  $6,993). From this figure, an expense budget can begin to be developed. In this case, we are interested in the amount of expenses budgeted and the amount actually spent on expenses. Equally important, we would be interested in the percent of the budget actually used, a concept known as performance to budget. c01.qxd 1/24/07 18 2:56 PM Chapter 1 Page 18 Managing Revenue and Expense A simple example may help to firmly establish the idea of budget and performance to budget. Assume that a child has $1.00 per day to spend on candy. On Monday morning, the child’s parents give the child $1.00 for each day of the week, or $7.00 total ($1.00  7 days  $7.00). If the child spends only $ 1.00 per day, he or she will be able to buy candy all week. If, however, too much is spent in any one day, there may not be any money left at the end of the week. Too ensure a week of candy eating, a good “candy purchasing” pattern could be created, such as the one in Figure 1.9. The “% of Total” column is computed by dividing $1.00 (the part) by $7.00 (the whole). Notice that we can determine the percent of total that should have been spent by any given day; that is, each day equals 14.28 percent, or 1/7 of the total. This same logic applies to the foodservice operation. Figure 1.10 represents commonly used budget periods and their accompanying proportion amount. Many foodservice operations are changing from “one month” budget periods to periods of 28 days. The 28-day-period approach divides a year into 13 equal periods of 28 days each. Therefore, each period has four Mondays, four Tuesdays, four Wednesdays, and so on. This helps the manager compare performance from one period to the next without having to compensate for “extra days” in any one period. The downside of this approach is that you can no longer talk about the month of March, for example, because “period 3” would occur during part of February and part of March. Although using the 28-day-period approach takes a while to get used to, it is an effective way to measure performance and plan from period to period. For example, in Camp Eureka, after one week’s camping was completed, we found the results shown in Figure 1.11. We can use the expense records from the previous summer as well as our solid industry knowledge and experience to develop expense budget figures for this summer. In this case, we are interested in both our plan (budget) and our actual performance. Figure 1.12 shows a performance-to-budget summary with revenue and  FIGURE 1.9 Candy Purchases Weekday Budgeted Amount % of Total Monday $1.00 14.28% Tuesday $1.00 14.28% Wednesday $1.00 14.28% Thursday $1.00 14.28% Friday $1.00 14.28% Saturday $1.00 14.28% Sunday $1.00 14.28% Total $7.00 100.00% c01.qxd 1/24/07 2:56 PM Page 19 Understanding the Budget  FIGURE 1.10 Common Foodservice Budget Periods Budget Period Portion % of Total One week One day 1/7 or 14.3% Two-week period One day One week 1/14 or 7.1% 1/2 or 50.0% One month 28 days 30 days One week One day One day 1/4 or 25.0% 1/28 or 3.6% 1/30 or 3.3% One day 1/31 or 3.2% Six months One month 1/6 or 16.7% One year One day One week One month 1/365 or 0.3% 1/52 or 1.9% 1/12 or 8.3% 31 days  FIGURE 1.11 Camp Eureka One-Week Budget Item Budget Actual 3,780 3,700 Revenue Food Expense Labor Expense $6,993 $2,600 $2,800 $6,993 $2,400 $2,900 Other Expense $ 700 $ 965 $ 893 $ 728 Meals Served Profit  FIGURE 1.12 Camp Eureka Performance to Budget Summary Item Budget Actual 3,780 3,700 97.9% Revenue Food Expense Labor Expense Other Expense $6,993 $2,600 $2,800 $ 700 $6,993 $2,400 $2,900 $ 965 100.0% 92.3% 103.6% 137.9% Total Expense $6,100 $6,265 102.7% Profit $ 893 $ 728 81.5% Meals Served % of Budget 19 c01.qxd 1/24/07 20 2:56 PM Chapter 1 Page 20 Managing Revenue and Expense expenses presented in terms of both the budget amount and the actual amount. In all cases, percentages are used to compare actual expense with the budgeted amount, using the formula: Actual   % of Budget Budget In this example, revenue remained the same although some campers skipped (or slept through!) some of their meals. This is often the case when one fee or price buys a number of meals, whether they are eaten or not. In some other cases, managers will only receive revenue for meals actually served. This, of course, is true in a traditional restaurant setting. In either case, budgeted amount, actual expense, and the concept of percent of budget, or performance to budget, are important management tools. In looking at the Camp Eureka performance-to-budget summary, we can see that the manager served fewer meals than planned and, thus, spent less on food than estimated, but spent more on labor than originally thought necessary. In addition, much more was spent than estimated for other expenses (137.9 percent of the budgeted amount). As a result, the profit dollars were lower than planned. This manager has some problems, but they are not everywhere in the operation. How do we know that? If our budget was accurate and we are within reasonable limits of our budget, we are said to be “in line,” or in compliance, with our budget, because it is difficult to budget exact revenue and expenses. If, as management, we decided that plus (more than) or minus (less than) 10 percent of budget in each category would be considered in line, or acceptable, then an examination of Figure 1.12 shows we are in line with regard to meals served, food expense, labor expense, and total expense. We are not in line with other expenses because they were 137.9 percent of the amount originally planned. Thus, they far exceed the 10 percent variation that was reasonably allowed. Profit also was outside the acceptable boundary we established because it was only 81.5 percent of the amount budgeted. Note that figures over 100 percent mean too much (other expense), while figures below 100 percent mean too little (profit). Many operators use the concept of “significant” variation to determine whether a cost control problem exists. In this case, a significant variation is any variation in expected costs that management feels is an area of concern. This variation can be caused by costs that were either higher or lower than the amount originally budgeted or planned for. When you manage ...
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461 Chapter 7 Summary
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SUMMARY

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461 Chapter 7 Summaries

Food managers are required to have a keen understanding of effective ways to control
costs. However, the managers are tasked to have a better understanding of marketing,
accounting, and legal issues that surrounding foods and beverages in the industry. The book
allows the students and the managers to explore differ...


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