Foundations of cost control by daniel traster chapter14

chapter 14 Income Statements and Budgets Class Name Instructor Name Date, Semester Foundations of Cost Control Daniel Traster Income Statement Disclaimer • The National Restaurant Association’s Uniform System of Accounts for Restaurants describes an industry standard format for income statements, so businesses can compare their data to other businesses • The income statement format described here is NOT the NRA approach, but a similar, simplified version that is easier to learn and that makes a transition to the NRA format easier as well • The NRA version is described in the appendix Three Financial Reports Income Statement Format • Can be written to cover any time period • Common Size Income Statement lists dollars and percents for each line item and category • Percents express each line item as a percent of sales, except for the subheadings under “Cost of Sales” Figure 14a: Portion of Common Size Income Statement Total Sales $375,400 100.0% Salaries and Wages $110,380 29.4% Employee Benefits $24,838 6.6% $135,218 36.0% Labor Total Labor Cost Income Statement Format (cont.) • Always start with a “Sales” category, which is subdivided into “food” and “beverage” sales • Percents for food and beverage sales show the sales mix between food and beverage • Total sales always equals 100% Income Statement Format (cont.) Subcategories under “cost of sales” use different percent bases (not based on total sales) Income Statement Format (cont.) Income Statement Format (cont.) Income Statement Format (cont.) 10 Example 14f For next year, management knows rent will remain $4,800 per month Property taxes are increasing to $800 per month Property insurance will be $630 per month If these are the only components of occupancy cost, what is the monthly and annual budget for next year’s occupancy cost line? Monthly = $4,800 + $800 + $630 = $6,230 Annual = $6,230 X 12 months = $74,760 42 Planning for Profit If entering all sales and expense dollars, based on forecasts and management goals, into budget spreadsheet does not generate desired profit, management must adjust the expense lines to try to hit the profit target – unless the profit goal is unrealistic 43 Planning for Profit (cont.) • Changes to initial budget must be feasible for managers to achieve, or they will never materialize • Every change must come with a plan of action describing how the change will be managed in the real-world 44 Dividing a Budget into Smaller Time Frames • Easier to adjust daily work habits, schedules, and purchases to align with a budget if the budget is done in a smaller time frame • Using only annual budgets, managers may not catch problems until it is too late • Business fluctuates seasonally, so managers cannot just divide annual budget by 12 or 52 to get monthly or weekly versions 45 Dividing a Budget into Smaller Time Frames Historical data reveals the percent of annual revenue that is brought in each month, week, or day Historical patterns are usually consistent from year to year 46 Creating a Monthly Revenue Budget List last year’s historical revenue per month and total annual revenue Calculate percent revenue each month represents Monthly sales % = Annual sales Using next year’s annual sales forecast, calculate each month’s sales as: Annual Sales X % for a given month (from step 2) 47 Example 14g In August last year, sales were $33,300 Annual sales were $358,000 If next year’s sales budget is $380,000, what should August’s sales budget be? $33,300 ÷ $358,000 = 0.093 or 9.3% (August %) $380,000 X 0.093 = $35,340 (August sales) 48 Calculating Monthly Budget • Management may adjust monthly percents slightly based on internal or external variables • From monthly sales, calculate monthly expenses: • Keep variable costs the same % of sales • Write fixed costs based on their payment schedule; may be evenly divided by month 49 Calculating Monthly Budget (cont.) • For semi-variable costs, separate the fixed and variable components • Divide fixed components evenly over the year; keep variable components the same percent of sales • With labor, factor in any planned pay increases • For expenses with an irregular payment schedule (e.g., repairs and maintenance), schedule the payments for the appropriate months 50 Calculating Shorter Time Frame Budgets • Use the same logic as for monthly budgets ―For weekly, compare the same week of the prior year (e.g 32nd week of the year) ―For daily, compare the same day of the week of the prior year (e.g nd Monday in April) • Always factor in any internal and external variables that may change sales percents • For weekly or daily budgets, fixed costs paid monthly may not be relevant, so remove them 51 Example 14h • Manager forecasts $800,000 in annual sales next year • Last year, June was 10.2% of sales • Budget forecasts cost of goods sold at 32.5% of sales and annual occupancy costs of $80,000 If occupancy costs are divided evenly over the year, calculate the June expense lines for cost of goods sold and for occupancy costs 52 Example 14h (cont.) June sales = $800,000 X 0.102 = $81,600 COGS = $81,600 X 0.325 = $26,520 Occupancy = $80,000 ÷ 12 months = $6,667 53 More on Shorter Budgets • Profit % may not match annual % because sales dollars fluctuate seasonally but fixed costs not • Can create daily budgets for every ingredient, employee, etc., but unless manager incorporates them into daily control processes, they become a waste of time • Manager should compare weekly schedule to weekly budget to try to stay on budget; chef can the same for weekly food orders • If weekly revenue targets are missed, management may need to shift marketing strategies or adjust expense budgets 54 More on Shorter Budgets • Making changes weekly rather than waiting a full year allows managers plenty of time to change course to maintain profit • It is possible to create weekly budgets first (from guest forecasts and average check) and then to create monthly and annual budgets, but annual budgets must be adjusted for profit and then weekly budgets must be adjusted accordingly 55 The Evaluation Cycle • Always evaluate budget’s accuracy and company’s adherence to budget guidelines • Variances can stem from poor controls or from poor forecasting and budgeting • Learning from mistakes, managers can improve forecasting and budgeting ability in the future 56 ... $982,755 100.0% Food Cost $255,180 31.0% (% of food sales) Beverage Cost $58,804 23.0% (% of beverage sales) Total Cost of Goods Sold $283,984 28.9% Gross Profit $698,771 71.1% Cost of Sales 11 Income... Figure 14e: Portion of Common Size Income Statement Fixed Costs Occupancy Costs $98,800 10.0% Interest $28,746 2.9% Depreciation $31,678 3.2% Total Fixed Costs $159,224 16.2% Profit before Taxes... category • Percents express each line item as a percent of sales, except for the subheadings under Cost of Sales” Figure 14a: Portion of Common Size Income Statement Total Sales $375,400 100.0%