Controlling Other Expenses

Chapter 8Controlling Other ExpensesMain IdeasOther ExpensesControllable and Non-controllable Other ExpensesFixed, Variable, and Mixed Other ExpensesMonitoring Other ExpensesManaging Other ExpensesTechnology ToolsOther ExpensesOther expenses are the cost of those items that are neither food, beverage, nor labor.Other expenses can account for a significant amount of the total cost of operating a foodservice unit.Managers must look for ways to control all of their expenses. Sometimes the environment in which they operate will act upon their facilities to influence costs in positive or negative ways.Other ExpensesEach operation will have its own unique list of required other expenses.Other expenses can constitute almost anything in the foodservice business.Other Expenses While there are many ways in which to consider other expenses, two views of these costs are particularly useful for the foodservice manager. They are:1. Controllable or noncontrollable2. Fixed, variable, or mixedOther ExpensesSome other expenses are directly under the control of management. When following the USAR, these types of expense are reported on an operation’s income statement as “Other Controllable Expenses.”Some other expenses, however, are not directly controllable by management and, as a result, these are reported on the income statement as Non-controllable Expenses.Other ExpensesIn the past, serving water to each guest upon arrival in a restaurant was simply SOP (standard operating procedure) for many foodservice operations. The rising cost of energy has caused many foodservice operations to implement a policy of serving water on request rather than with each order.Energy conservation and waste reduction are two examples of attempts to control and reduce other expenses.Controllable and Noncontrollable Other Expenses When cost (expense) groupings are used, they should make sense to the operator and should be specific enough to let the operator know what is in each category.Operators can develop their own “Other expense” cost categories or follow those suggested in the Uniform System of Accounts for Restaurants (USAR)Controllable and Noncontrollable Other ExpensesThe individual other expense cost categories generally recommended by the USAR are divided into two primary groups:  Other Controllable ExpensesNoncontrollable ExpensesControllable and Noncontrollable Other ExpensesUSAR recommended groupings for Other Controllable Expenses are:Direct Operating ExpensesMusic and EntertainmentMarketing UtilitiesGeneral and Administrative ExpensesRepairs and Maintenance Controllable and Noncontrollable Other ExpensesUSAR recommended groupings for Noncontrollable Expenses are:Occupancy CostsEquipment RentalDepreciation and AmortizationCorporate Overhead (in multi-unit restaurants)Management FeesInterest ExpenseControllable and Noncontrollable Other ExpensesWithin each of the two primary USAR other expense cost subcategories, an operation’s individual other expenses can be even further detailed to aid managers in their reporting and decision-making.Controllable and Noncontrollable Other ExpensesFor example, the USAR suggests the following individual costs be reported under the “Other Controllable Expenses” subcategory of “Utilities.”ElectricityGasHeating Oil and Other FuelRecycling CreditsTrash RemovalWater and SewageControllable and Noncontrollable Other Expenses In most cases, a controllable expense is one in which decisions made by the manager can have an effect of either increasing or reducing the expense.In most cases, a noncontrollable expense is one that the manager can neither increase nor decreaseManagers should most of their focus attention on controllable, rather than noncontrollable, expenses. Fixed, Variable, and Mixed Other Expenses A fixed expense is one that remains constant despite increases or decreases in sales volume.Fixed, Variable, and Mixed Other ExpensesA cost percentage can be computed for other expenses using this formula:Other ExpenseTotal SalesOther Expense Cost %Fixed, Variable, and Mixed Other Expenses When rent, or any type of other cost, is fixed, the expense as expressed by the percentage of sales will vary with sales volume.The total amount spent on the fixed expense, however, does not change in response to changes in sales volume.A variable expense is one that generally increases as sales volume increases, and decreases as sales volume decreases.Fixed, Variable, and Mixed Other Expenses Fixed, Variable, and Mixed Other Expenses When rent, or any type of other cost, is variable, the expense as expressed by the percentage of sales should not vary with sales volume.The total amount spent on the fixed expense will, however, change in response to changes in sales volume.A mixed expense is one that has properties of both fixed and variable expenses.Fixed, Variable, and Mixed Other Expenses Fixed, Variable, and Mixed Other ExpensesThe following shows how fixed, variable, and mixed expenses respond to increases in sales volume. Expense As a Percentage of Sales Total DollarsFixed ExpenseDecreasesRemains the SameVariable Expense Remains the Same IncreasesMixed Expense DecreasesIncreasesFixed, Variable, and Mixed Other ExpensesIf an operator feels that a fixed expense percentage is too high, he or she must either increase sales or negotiate better rates.Normal variations in expense percentage that relate only to whether an expense is fixed, variable, or mixed should not be of great concern. It is only when a fixed expense is too high or a variable expense is out of control, that management should act. This is called management by exception.Monitoring Other ExpensesWhen monitoring other expenses, two control and assessment measures can be utilized. These are:Other expense cost %Other expense cost per guestMonitoring Other ExpensesThe Other Expense Cost Per Guest formula is especially helpful when the lack of a sales figure makes the computation of a useful other expense cost % difficult or impossible.Other ExpensesTotal SalesOther Expense Cost %Other ExpenseNumber of Guests ServedOther Expense Cost Per GuestMonitoring Other ExpensesMonitoring Other ExpensesManaging Other ExpensesFor most managers the effective management of other expenses includes special attention to three key cost areas:Food and Beverage OperationsEquipment Maintenance and RepairOccupancy Costs Managing Other Expenses Related to Food and Beverage OperationsIn many respects, the other expenses related to food and beverage operations should be treated just like food and beverage expenses.In most cases, reducing the total dollar amount of variable cost expenses is generally not desirable because, in fact, each additional sale will bring additional variable expense.An operation's fixed costs percentage can only be reduced by increasing the operation’s total sales. Managing Other Expenses Related to Food and Beverage OperationsUtility services costs are an extremely important category of other expenses related to food and beverage operations.A kilowatt hours (kwh)—is a measure of electrical usage. Like food and labor costs, utility (energy usage) costs can be controlled.Managing Other Expenses Related to Food and Beverage OperationsManaging Other Expenses Related to Food and Beverage Operations Managing Other Expenses Related to Food and Beverage Operations Managing Other Expenses Related to Food and Beverage Operations Managing Other Expenses Related to Equipment Maintenance and RepairProperly designed and implemented preventative maintenance programs can go a long way toward reducing equipment failure and thus decreasing equipment and facility-related costs.Proper care of mechanical equipment prolongs its life and reduces operational costs.Managing Other Expenses Related to Equipment Maintenance and Repair The use of a competitive bidding process for awarding service contracts is recommended.Maintenance contracts (for example, for kitchen or mechanical equipment, elevators, or grounds) should be bid on at least once per year.Air-conditioning, plumbing, heating and refrigerated units should be inspected yearly, and other kitchen equipment should be inspected monthly as part of en effective preventative maintenance program. Managing Other Expenses Related to Equipment Maintenance and Repair Managing Occupancy CostsOccupancy costs refer to those expenses incurred by the foodservice unit that are related to the building or other physical facility it occupies.For the foodservice manager who is not the operation’s owner, the majority of occupancy costs will be noncontrollable. Managing Occupancy CostsAn owner must find ways to control occupancy costs such as mortgage payments, rent and interest on debt.If occupancy costs are unrealistically high, no amount of effective cost control can help “save” the operation’s profitability.Other Expenses SummaryTotal controllable and non-controllable other expenses in an operation can range from 5% to 15% or even more of the unit’s total sales. Experienced managers know that, although other expenses are sometimes considered to be minor expenses, they are extremely important to overall operational profitability.This is especially true where the number of guests served is fixed (or nearly so) and the prices allowed to be charge for products are also fixed.Technology ToolsDepending upon the specific food service operation, these costs can represent a significant portion of the operation’s total expense. Software and hardware can be purchased to assist controlling these costs including applications that help managers in:Assessing and monitoring utilities costMinimizing energy costs via the use of motion-activated sensorsTechnology ToolsManaging equipment maintenance recordsTracking marketing costs/benefitsPrinting menu and promotional materials printing (hardware and software)Analyzing communications costs (internet, telephone tolls)Analyzing other expense costs on a per-guest basisTechnology ToolsAnalyzing other expense costs on a “cost per dollar sale” basisComparing building/contents insurance costs across alternative insurance providersAssisting in the preparation of the income statement, balance sheet, and the statement of cash flows.Income tax managementIncome tax filing