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Cost Control

Cost Control. Chapter 1 Managing Revenue and Expense. Main Ideas. Professional Foodservice Manager Profit: The Reward for Service Four Major Foodservice Expense Categories Percentages Percentages in Foodservice Profit Formula Understanding the Income (Profit and Loss) Statement

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Cost Control

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  1. Cost Control Chapter 1 Managing Revenue and Expense

  2. Main Ideas • Professional Foodservice Manager • Profit: The Reward for Service • Four Major Foodservice Expense Categories • Percentages • Percentages in Foodservice • Profit Formula • Understanding the Income (Profit and Loss) Statement • Common Percentages Used in a P&L Statement • Understanding the Budget • Technology Tools

  3. Professional Foodservice Manager • Management handles functions of product sales to product delivery. • Management of foodservice is more difficult than for manufacturing or retailing management counterparts.

  4. Profit: The Reward for Service • If management focuses on controlling costs more than on servicing guests, problems will certainly surface. • Do not 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.

  5. Profit: The Reward for Service • Efforts to reduce costs that result in unsafe conditions for guests or employees are never wise. • The question is whether costs are too high or too low, given management’s view of the value.

  6. Profit: The Reward for Service Revenue - Expenses = Profit • Revenue is the amount of dollars you take in. • Expenses are the costs of the items required to operate the business. • Profit is the amount of dollars that remain after all expenses have been paid.

  7. Profit: The Reward for Service Revenue - Expenses = Profit • The following terms will be used interchangeably: revenue and sales; expenses and costs. • All foodservice operations, including non-profit institutions, need revenue in excess of expenses if they are to thrive. • Profit is the result of solid planning, sound management, and careful decision-making.

  8. Profit: The Reward for Service Revenue – Desired Profit = Ideal Expense • Desired profit is defined as • Profit that the owner wants to achieve on that predicted quantity of revenue. • Ideal Expense is defined as • Management’s view of the correct or appropriate amount of expense necessary to generate a given quantity of revenue.

  9. Profit: The Reward for Service Revenue – Desired Profit = Ideal Expense • Revenue varies with • Number of guests • Amount of money spent by each guest • Increase revenue by • Increasing the number of guests served • Increasing the amount that each guest spends • Or a combination of both

  10. Four Major Foodservice Expense Categories • Food Costs • Costs associated with actually producing menu items • Largest or second largest expense category • Beverage Costs • Costs related to the sale of alcoholic beverages-beer, liquor, wine • May also include ingredients, mixers and garnishes

  11. Four Major Foodservice Expense Categories • Labor Costs • Cost of all employees, including taxes • Labor costs are second only to food costs in total dollars spent • Some include the cost of management in this category. Others prefer to place the cost of managers in the Other Expense category. • Other Expenses • Include all expenses that are neither food, beverage nor labor, such as utilities, rent, linen, etc.

  12. Percentages • Numbers can be difficult to interpret due to inflation. Therefore, the industry often uses percentage calculations. • You will be evaluated primarily on your ability to compute, analyze, and control these percent figures.

  13. Percentages • Percent (%) means “out of each hundred.” • There are three (3) ways to write a percent: • Common Form • “%” sign is used, as in 10% • Fraction Form • the part, or a portion of 100, as in 10/100 • Decimal Form • the decimal point (.), as in 0.10

  14. Percentages • Divide the number that is the part by the number that is the whole. Part = Percent Whole

  15. Percentages in Foodservice • Percentage of revenue that went to pay for expenses: • Expense • Revenue = Expense %

  16. Percentages in Foodservice • As long as expense is smaller than revenue, some profit will be generated • Modified profit formula: • Profit • Profit % = Revenue Revenue - (Food and Beverage Cost + Labor Cost + Other Expenses) = Profit

  17. Profit Formula • Put in another format, the equation looks as follows: • Revenue (100%) • - Food and Beverage Cost % • - Labor Cost % • - Other Expense % • = Profit %

  18. Understanding the Income(Profit and Loss) Statement • Profit and loss statement (P&L) lists revenue, food and beverage cost, labor cost, other expense, and profit. • The P&L is important because it indicates the efficiency and profitability of an operation.

  19. Understanding the Income(Profit and Loss) Statement • 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. • Published by the National Restaurant Association.

  20. Common Percentages Used in a P&L Statement • Food and Beverage Cost Revenue= Food and Beverage Cost % • Labor Cost Revenue= Labor Cost % • Other Expense Revenue= Other Expense % • Total Expense Revenue= Total Expense % • Profit Revenue= Profit %

  21. Understanding the Budget • Budget • An estimate of projected revenue, expense, and profit. • The budget is known as the plan. • All effective managers, whether in the commercial (for profit) or non-profit sector, use budgets.

  22. Understanding the Budget • Performance to budget is the percentage of the budget actually used. • The 28-day-period approach to budgeting • 13 equal periods of 28 days each

  23. Understanding the Budget • Percentages are used to compare actual expense with the budgeted amount, using the formula Actual Budget = % of Budget

  24. Understanding the Budget • “in-line” with the budget vs. “significant” variation to the budget. • A significant variation is any variation in expected costs that management feels is an area of concern.

  25. Understanding the Budget • If significant variations with planned results occur, management must: • Identify the problem • Determine the cause • Take corrective action

  26. Technology Tools • Most hospitality managers would agree that an accurate and timely income statement (P&L Statement) is an invaluable aid to their management efforts. • There are a variety of software programs on the market that can be used to develop this statement.

  27. Technology Tools • Variations include programs that can compare actual results to budgeted figures or forecasts, to prior-month performance, or to prior-year performance. • P&L’s can be produced for any time period, including months, quarters, or years. • Most income statement programs will have a budgeting feature and the ability to maintain historical sales and cost records.

  28. Technology Tools • Not all information should be accessible to all parties, and security of cost and customer information can be just as critical as accuracy. • To effectively manage an operation, a manager will need to communicate with employees, guests, and vendors. Thus, the software you will need includes office products for word processing, spreadsheet building, faxes, and e-mail.

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