Effective Cost Control Strategies for Business Success

1. Chapter 3 Cost Control

2. Cost Control Overview Cost control is a business’s efforts to manage how much it spends. • Every business needs to make more money than it spends in order to survive. • Its sales, or revenue, have to be higher than its costs. • Revenue is the income from sales before expenses, or costs, are subtracted. • Cost is the price an operation pays out in the purchasing and preparation of its products or the providing of its service. 3.1 Chapter 3 | Cost Control

3. Types of Costs • A successful restaurant or foodservice operation needs to manage and control many costs. • Four main categories of costs: • Food costs • Beverage costs • Labor costs • Overhead 3.1 Chapter 3 | Cost Control

4. Costs cont. • Controllable costs can change based on sales • Variable: go up and down as sales go up and down (food cost) in direct proportion (more business, buy more food inventory) • Semivariable: go up and down as sales go up and down in indirect proportion; labor costs (less business, must pay manager but can have less waiters) • the operation has a certain amount of control in how it spends on these aspects of the operation.

5. Costs cont. • Non-controllable/fixed costs: needs to be paid regardless of whether the operation is making or losing money • overhead costs = lease, utilities, insurance • do not change based on the operation’s sales.

6. Operating Budgets An operating budget is a financial plan for a specific period of time (usually monthly) • Forecast is a prediction of sales levels or costs that will occur during a specific time period. • Steps of forecasting • Analyze sales history: what items were popular at what time • Account for externalities: hurricane, hot weather • Predict sales volume: How busy will certain days be? • Predict sales mix: how will each menu item sell Most forecasting techniques rely on having accurate historical data 3.1 Chapter 3 | Cost Control

7. Forecasting cont. • The most common foodservice revenue forecasting techniques are based on the number of customers and average sales per customer. • A sales history is a record of the number of portions of every item sold on a menu. • Most operations can run historical sales and production reports from their point-of-sale (POS) systems.

8. Profit-and-Loss Report A profit-and-loss report (P&L)is sales and cost information for a specific period of time. P&L is also known as an income statement p. 157 • A P&L shows whether an operation has made or lost money during the time period covered by the report. • A P&L helps management determine areas where adjustments must be made to bring business operations in line with established financial goals. • For an operation to be profitable, sales must exceed costs. • Net earning is listed on bottom of P&L statement 3.1 Chapter 3 | Cost Control

9. Cost-Control Tools • Cost control measures: • Portioning menu items (food costs) • Time clocks/POS systems (labor costs) • Full-line supplier co.: one-stop shops that provide equipment, food, and supplies have software programs to help control costs 3.1 Chapter 3 | Cost Control

10. Steps in Controlling Food Costs Food costs must be controlled during all seven stages of the food flow process: • Purchasing • Receiving • Storage • Issuing • Preparation • Cooking (production) • Service (sale) 3.2 Chapter 3 | Cost Control

11. Determining Food Cost Food cost: actual dollar value of the food used by an operation during a certain period (sold, given away, wasted, spoiled, overportioned, etc.) • Inventory: dollar value of a food product in storage and can be expressed in terms of units, values, or both: • Opening inventory is the physical inventory at the beginning of a given period. • The closing inventory is the inventory at the end of a given period. • food cost formula: (Opening inventory + Purchases = Total food available) – Closing inventory = Total food cost 3.2 Chapter 3 | Cost Control

12. Determining FoodCost Percentage Total food cost percentage is the relationship between sales and the cost of food to achieve those sales. • Food cost % formula Total food cost ÷ Sales = Food cost % • Food cost is a variable cost: It should increase or decrease in direct proportion to an increase or decrease in sales 3.2 Chapter 3 | Cost Control

13. Establishing StandardPortion Costs • Most every operation has standardized recipes that are followed every time a menu item is prepared. • For every standardized recipe, an operation should establish a standard portion cost, which is the exact amount that one serving, or portion, of a food item should cost when prepared according to the item’s standardized recipe. • A recipe cost card is a tool used to calculate the standard portion cost for a menu item (p. 169) • As with the standardized recipe, a recipe cost card should exist for every multiple-ingredient item listed on the menu (p. 169) 3.2 Chapter 3 | Cost Control

14. As-purchased versusEdible-portion Costs • The as-purchased (AP) method is used to cost an ingredient at the purchase price before any trim or waste is taken into account.(p. 171) • The edible-portion (EP) method is used to cost an ingredient after trimming and removing waste, so that only the usable portion of the item is reflected. 3.2 Chapter 3 | Cost Control

15. Recipe Yields A recipe yield is the process of determining the number of portions that a recipe produces. • To convert a recipe, use the formula: desired yield = conversion factor original yield • When determining yield, take into account for cooking loss of meats and some vegetables (greens) 3.2 Chapter 3 | Cost Control

16. Controlling Portion Sizes • Controlling portions is very important for a restaurant to meet its standard food cost. • Tools that are essential for accurate portion control include: • Scoops • Ladles • Serving spoons • Portion scales • Another mechanism for ensuring that portions are the right size is to preportion any item that can be preportioned before serving. 3.2 Chapter 3 | Cost Control

17. Monitoring ProductionVolume and Cost • When restaurants produce too much, food cost goes up; produce too little, and sales are lost. • A food production chart shows how much product should be produced by the kitchen during a given meal period. • A well-structured chart can ensure product quality, avoid product shortages, and minimize waste • Sales history is critical in helping management forecast how many portions of each menu item to produce on a given day. • p. 177 3.2 Chapter 3 | Cost Control

18. Menu Pricing • The menu is the primary sales tool in most restaurant • There are a number of methods for menu pricing: (p.178) • A contribution margin is the portion of dollars that a particular menu item contributes to overall profits. 1. Contribution margin method, an operation must know the portion costs for each item sold. 2. Straight markup pricing method, multiply raw food costs by a predetermined fraction. 3. Average check method, the total revenue is divided by the number of seats, average seat turnover, and days open in one year. 4. Food cost percentage is equal to the food cost divided by food sales. 3.2 Chapter 3 | Cost Control

19. Budgeting Labor Costs • Labor is a semivariable, controllable cost. Labor costs are tied to sales, but not directly. • Most operations have both full-time and part-time staff. • Operations must be aware of the fluctuations in their sales so as to have just the right amount of staff on hand to handle customers efficiently, 3.3 Chapter 3 | Cost Control

20. Labor Cost Factors • Business volume: amount of sales an operation is doing for a given time period, impacts labor costs. • Employee turnover: the number of employees hired to fill one position in a year’s time. • Quality standards: specifications of the operation with regard to products and service (employee skills will need to be higher in fine dining vs. quick service) • A restaurant or foodservice operation must meet operational standards. If an employee does not prepare a product that meets the operation’s standards, the item must be redone. This costs money, in terms of wasted product and lost productivity (overcooked steaks, burnt fries) 3.3 Chapter 3 | Cost Control

21. Scheduling • A master schedule: shows the number of people needed in each position to run the restaurant or foodservice operation for a given time period. P. 190 • To make the best estimates for a master schedule, it also needs to consider current trends (economy, unemployment) • A crew schedule is a chart that shows employees’ names and the days and times they are to work. P. 191 • A contingency plan helps an operation remain efficient and productive even during adverse conditions (power outage, employee absences) • Cross-training employees • On-call employees 3.3 Chapter 3 | Cost Control

22. Quality Standards forPurchasing and Receiving • Purchasing: choose a credible supplier • Receiving: receive only when operation is slow Meat: 2 or 3 times a week Dairy: at least 2X a week Fish: fresh, daily; frozen fish, weekly • When receiving: • 1. well lit area • 2. Have a copy of purchase order on hand • 3. Check delivery against both purchase order and invoice (bill from vendor) 3.4 Chapter 3 | Cost Control

23. Quality Standardsfor Storing • Monitor perishable food daily to preserve its quality. • Rotate all products in storage following the FIFO (first in, first out) system. • Check storage facilities: • Dry storage 50-70 degrees • Refrigerator: below 41 degrees • Freezer: 0 degrees 3.4 Chapter 3 | Cost Control

24. Quality Standards for Food Production and Service • Standard-portion sizes, standardized recipes, and standard-portion costs are all food-production standards. • Managers should taste each item to be sure that it meets quality standards 3.4 Chapter 3 | Cost Control

25. Quality Standardsfor Inventory • Physical inventory means counting and recording the number of each item in the storeroom. • Closely monitor inventory to ensure that products are ordered as they are needed. • Carefully monitoring inventory also helps ensure that no product goes to waste. Minimizing waste keeps costs down and sales up. • 75% of all inventory shortages are due to employee theft 3.4 Chapter 3 | Cost Control