Managing Revenue and Expense

Chapter 1 Managing Revenue and ExpenseMain IdeasProfessional Foodservice ManagerProfit: The Reward for ServiceFour Major Foodservice Expense CategoriesPercentagesPercentages in FoodserviceProfit FormulaUnderstanding the Income (Profit and Loss) StatementCommon Percentages Used in a P&L StatementUnderstanding the BudgetTechnology ToolsProfessional Foodservice ManagerHospitality managers controls product production to product sales/ distribution.Management of foodservice is more challenging than the management of a manufacturing or retailing business. The food service operator must serve as a food factory supervisor, and a cost control manager.Profit: The Reward for ServiceIf management focuses on controlling costs more than on properly servicing guests, problems will certainly result.Managers should never feel that “low” costs are good and “high” costs are bad. That is not true.Improvements in business operations should yield more customers which, in turn, will yield greater operational expense. Profit: The Reward for ServiceEfforts to reduce costs that result in unsafe conditions for guests or employees are never wise.The question is not whether costs are too high or low, but whether costs are too high or too low, given management’s view of the intended value to be delivered.Profit: The Reward for ServiceRevenue is the amount of dollars an operation takes 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.Revenue - Expenses = ProfitProfit: The Reward for ServiceThe 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. Revenue - Expenses = ProfitProfit: The Reward for ServiceDesired profit is defined asProfit that the owners of a business want to achieve based on an estimated quantity of revenue.Ideal Expense is defined asManagement’s view of the correct or appropriate amount of expense necessary to generate the same estimated quantity of revenue.Revenue – Desired Profit = Ideal ExpenseProfit: The Reward for ServiceRevenue varies withnumber of guests served.amount of money spent by each guest.Operators can increase revenue byincreasing the number of guests served.increasing the amount spent by each guest.increasing the number of guests served and the amount spent by each guestsRevenue – Desired Profit = Ideal ExpenseProfit: The Reward for ServiceEnvironmental sustainability describes a variety of earth-friendly practices and policies designed to meet the needs of the present population without comprising the ability of future generations to meet their own needs.Positive benefits that accrue when businesses incorporate green activities are significant and on the increase.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:BeerWineLiquor May also include ingredients, mixers and garnishesFour Major Foodservice Expense Categories Labor Costs Cost of paying all employees, including payroll taxes Labor costs are usually second only to food costs in total dollars spent in a foodservice operation Some operations include the cost of management in this category. Others may prefer to place the cost of managers in the Other Expenses category. Other Expenses Includes all expenses that are neither food, beverage nor labor; examples include utilities, rent, and advertising.PercentagesNumbers can be difficult to interpret due to inflation. Therefore, the industry often uses percentage calculations.Operating results of businesses are most often reported in both dollar amount and percentage. Managers are usually evaluated on their ability to compute, analyze, and control expenses expressed in percentage terms.PercentagesPercent (%) means “out of each hundred.”There are three (3) ways to write a percent:Common Form“%” sign is used, as in 10%Fraction Formthe part, or a portion of 100, as in 10/100Decimal Formthe decimal point (.), as in 0.10 PercentagesDivide the number that is the part by the number that is the whole. Part = Percent WholePercentages in FoodservicePercentage of revenue that went to pay for expenses: Expense Revenue = Expense %Percentages in FoodserviceAs long as expense is smaller than revenue, some profit will be generatedModified profit formula: Profit Profit % = Revenue Revenue - (Food and Beverage Cost + Labor Cost + Other Expenses) = ProfitProfit FormulaPut in another format, the equation looks as follows:Revenue (100%)- Food and Beverage Cost %- Labor Cost %- Other Expense %= Profit %Understanding the Income(Profit and Loss) StatementA profit and loss statement (P&L) lists revenue, food and beverage cost, labor cost, other expenses, and profit.The P&L is important because it indicates the efficiency and profitability of an operation.Managers are often evaluated on the basis of their ability to meet established P&L targets. Understanding the Income(Profit and Loss) StatementThe accounting tool managers use to report an operations’ revenue, expenses, and profit for a specific time period is called the Statement of Income and Expense. The Statement of Income and Expense is also commonly known as the Income Statement; or the profit-and-loss statement, which is shortened by many food service managers to simply the P&L.Understanding the Income(Profit and Loss) StatementA Uniform System of Accounts is used to ensure consistency in reporting operating results for a business. The Uniform System of Accounts for Restaurants (USAR) is used to report financial results in most foodservice units. The USAR is published by the National Restaurant Association (NRA).Dan’s SteakhouseDan’s SteakhouseDan’s SteakhouseCommon Percentages Used in a P&L StatementFood 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 %Understanding the BudgetBudgetA budget is an estimate of projected revenue, expense, and profit for a defined accounting period.The budget is also known as the plan or forecast.All effective managers, whether in the commercial (for profit) or non-profit sectors should utilize properly developed budgets.Understanding the BudgetPerformance to budget is the percentage of the budget actually used.The 28-day-period approach to budgeting13 equal periods of 28 days eachUnderstanding the BudgetUnderstanding the BudgetPercentages are used to compare actual expense with the budgeted amount, using the formula: Actual Budget = % of BudgetUnderstanding the BudgetManagers must determine if they are “In-line” with the budget or if there are “significant” variations from the budget.A significant variation is any variation in expected revenue, costs or profits that management feels are areas of concern.Understanding the Budget If significant variations with planned results occur, management must:Identify the problemDetermine the causeTake corrective actionTechnology ToolsMost 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.Technology ToolsComputer programs exist to 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 revenue (sales) and expense (cost) records.Technology ToolsNot 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 needed to operate a business should include products for word processing, spreadsheet building, faxes, and e-mail.