cost control – reasons restaurants fail – define management’s role in cost control – define...
Post on 21-Dec-2015
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COST CONTROL
–REASONS RESTAURANTS FAIL–DEFINE MANAGEMENT’S ROLE IN COST
CONTROL–DEFINE THE CONTROL PROCESS–DEFINE TERMINOLOGY—COSTS, SALES–DISCUSS BASIC COST CONTROL FORMULAS
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PURPOSE OF COST CONTROL
1. Manage labor costs2. Manage inventory3. Make a profit
Costs = Expenses incurred in production of food & beverage.
Includes all outlays even if they don’t produce revenue
-spoilage-free merchandise-inefficient labor
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PURPOSE OF COST MANAGEMENT
“In a study in Columbus, Ohio, Professor H.G. Parsa of Ohio State University, tracked new restaurants and found that in the first year, 26% closed. Another 19% closed the second year, and 14% the third. Collectively, 59% of new restaurants closed those three years. By the way, the "failure" rate wasn't very different between franchised restaurants – 57% — and independent restaurants – 61%.”
USAToday
More than 2/3’s of all foodservice establishments that fail in the first
three years, fail in year one. A. Asch
“Average” profitability in the foodservice business is 3-7%. National Restaurant Assoc.
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Management’s job includes—
1. Planning 2. Organizing 3. Directing
4. Controlling
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1. Planning Who is the Customer?
-Who will frequent your establishment?-What will be their expectations?-How will they drive your business?
Determine Your Objectives -profit
-customer retention-promoting a cause
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Planning
Long-term vs. Short-term Budgeting Scheduling Facility Design Menu Adjustments Future Expansion Plans Vendor Selection
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2. Organization
Labor
-Hiring good people
-Scheduling
-Workflow
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3. Directing
Directing personnel is the most time consuming job of management
Delegation
Hiring competent personnel
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4. Controlling Develop standards that are measurable
Assessment and adaptationIf met: If not met:Continue to monitor Reassessment of standard
Corrective measuresAdded trainingDisciplinary action -verbal -written -dismissal
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TERMINOLOGY--COSTSFixed Costs —those that don’t fluctuate when volume changes
RentInsuranceManagement salariesDepreciationSome taxes
Variable Costs —those that are tied to the volume of business
Cost of GoodsHourly labor
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A portion of FC must be covered by each unit sold. If volume increases, the amount covered by each unit decreases.
Fixed Cost $1,0001,000 units sold $1.00 per unit5,000 units sold $ .20 per unit Variable Costs1,000 units sold $1.00 per unit5,000 units sold $1.00 per unit
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TERMINOLOGY - COSTS
Controllable Costs—costs that can be increased or decreased within a short time frame
-cost of foods-labor costs
Non-controllable costs—costs that are unchangeable in the short term
-rent-management costs-federal tax withholdings-depreciation
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TERMINOLOGY - COSTS
Forecasted Costs—costs management expects to incur in the future
-standardized recipes=COGS costs-union contracts= labor cost
Actual Costs—true cost of doing business based on day-to-day business activity
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TERMINOLOGY - COSTS
Average Costs —total costs/total unit quantity
$Revenue/Covers=$Average Cover $Total Labor/Hours Worked=$Avg. Labor per Hour Overhead Costs —costs other than food,
beverage & labor
Rent, utilities, insurance, maintenance, linens, etc.
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TERMINOLOGY—SALES
Total Sales —all sales that contribute to a particular business or category.
Sales by Category —sales broken down by
specific menu classification -Entrees, appetizers, desserts, soups, etc.
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TERMINOLOGY - SALES
Average Sales=Total Sales/an individual selling unit; used for control and forecasting
Sales by serverSales by shiftSales by meal period (i.e. average lunch sale)
Sales Mix—percentage an item contributes to the total; used
for forecasting and scheduling
Steak Sales/Total Sales=%Sales Mix for Steak
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IMPORTANT FORMULAS$Food Cost / $Food Sales = %Food Cost $Food Sales x %Food Cost = $Food Cost $Food Cost / %Food Cost = $Food Sales $Labor Cost / Total Sales = %Labor Cost $Total Sales x %Labor Cost = $Labor Cost $Labor Cost / %Labor Cost = $Total Sales
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TERMINOLOGY
Depreciation—the cost of wear and tear as a result of doing business
-This is a deductible tax allowance and lowers taxes owed
-Commercial depreciate over 15 years
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ESTABLISHING STANDARDS
• QUALITY, QUANTITY, COST STANDARDS• $FOOD COST• % FOOD COST• OPERATING BUDGETS & P&L STATEMENTS• MAKE VS. BUY ANALYSIS
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ESTABLISHING STANDARDSStandards are based on the target audience. Training is the best way to ensure standards will be met
Three areas in which standards are necessary:
1. Quality —every employee and product should meet your pre-determined standard for quality
2. Quantity—every food/beverage item must have a size/quantity spec
3. Cost/Price—what do you expect to pay each worker; what will each ingredient/product cost you
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Food Cost and Labor Cost contribute +/- 60% of Total Cost for foodservice establishments
$Food Cost = $Opening Inventory + $Purchases – $Closing Inventory
%COGS = $Food Cost / $Food Sales
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Other items to consider:
+Transfers in—wine coming in from the bar = a cost -Transfers Out—food sent to the bar for happy hour =a credit (a
reduction) -Employee meals—generally accounted for on a separate line
item (i.e. employee benefits) -Promotional Expenses—give-a-ways used to generate good will =
a credit (a reduction) -Grease Sales—value of used grease = credit
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CALCULATING $COGSALES $1,100OP $500PURCHASES $1,000CLOSING INVENTORY $400TRANSFERS IN $100TRANSFERS OUT $200EMPLOYEE MEALS $300PROMOTIONS (AT RETAIL, 30%COG) $150
$COGS (CF)
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If sales are $7,500, with 25%COG for food and 10%COG for beverages, where beverages equal 50% of sales, what are $COG for Food & Beverage?
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% COGS and Labor generally operate at opposite ends of the spectrum
Low High Example%COG %Labor Voltaire%Labor %COGS McDonald’s
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Major reasons for restaurant failure:
--Inability to control costs
--Inability to control the flow of goods through the operation
--Failure to control revenue
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U. S. Chamber of Commerce Statistics:
“30% of all business failures are due to theft”
“Theft accounts for 1-2% of gross sales annually.” “Hospitality profits could be increased by 3-7% if theft were eliminated.”
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Cost Control Budgets
OPERATING BUDGET
The budget written to forecast sales and expenses for a particular period of time.
PROFIT & LOSS STATEMENT
The statement that compares ACTUAL sales and expenses to those forecast in the Operating Budget for the same period.
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Operating Budget
Revenue:Sales-$COGSGross Profit%GOG
-Expenses:Labor Costs+BenefitsTotal Labor
Operating Expenses:-Rent-Utilities-Marketing-Depreciation-Other Expenses
Net Profit before Taxes-Taxes
After-tax Profit
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Make vs. Buy Analysis
Considerations:
Quality—will quality meet your standards if you buy from an outside source?
Cost—does the cost savings justify going outside?-how much will you save on COG?-will you underutilize current labor?-can you cut labor cost by going outside?-are energy savings significant?
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What does one portion cost to make?
-Cost standard recipe -consider utilization of trimmings/waste
-Add in labor cost
-Divide by # of portions produced
-Compare vs. outsourced pricing
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USING TECHNOLOGY TO IMPROVE CONTROLS
1. Guest-driving technology-comfort (i.e. in-room temperature control systems)-enjoyment (i.e. wireless access)-cost savings (i.e. self checkout, “smart card”, internet reservations)
2. Cost Controls-Inventory control systems
3. Increase Sales/Control Revenue-POS systems for FOH
4. Reduce Labor Cost-Hi-tech equipment (standardized interfaces); less labor/less skilled labor
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Farm to Table
-Genetically modified foods—enhanced yield-Process control—enhanced shelf life and lower costs through more rapid processing
Supply Chain ManagementIntegrated systems that oversee food chain from supplier to end user
-supplier-manufacturer-wholesaler-restaurant/retailer-end user
Reduce inventoryReduce carrying costs
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Purchasing & Warehouse Operations
Integrated Purchasing---volume discounts for multi-unit operations
Computer generated perpetual inventory Warehouse organization--easy access and reduced labor “Trade show” web sites-- new product information Temperature and Climate Control
Scanners/Barcode Inventory Systems
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Production Moist/Dry Heat Ovens—reduce shrinkage Programmable Cook Times—HAACP critical control analysis Recipe Conversion Nutritional Analysis Menu Making Software—allow operation to take advantage
of specials/overstocks Production Cost Analysis—aids in menu pricing
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Increased Sales Web sites for greater exposure Computerized Reservations Self Order Kiosks for fast foods Centralized Take-Out sends orders to the nearest store
to reduce delivery costs POS generates reports by server to allow analysis of cash
received and productivity
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DOWNSIDE OF TECHNOLOGY
Reduction in the number of entry-level jobs-much of foodservice has been on-the-job training
Small business can’t afford/can’t compete Departments/Businesses are becoming obsolete
-reservations department-bookkeeping