Chapter 10 - Planning for profit. This chapter presents the following content: Financial analysis and profit planning, menu analysis, cost/volume/profit analysis, the budget, developing the budget, monitoring the budget, technology tools.
Chapter 10 Planning For Profit © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Main Ideas Financial Analysis and Profit Planning Menu Analysis Cost/Volume/Profit Analysis The Budget Technology tools © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Financial Analysis and Profit Planning Three areas of analysis in planning for profit: Menu Analysis Cost/Volume/Profit (CVP) Analysis Budgeting © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Financial Analysis and Profit Planning Menu Analysis concerns itself with the profitability of each menu item you sell CVP analysis deals with the sales dollars and volume required in order to avoid an operating loss and to make a profit Budgeting allows you to plan your next year’s operating results by projecting sales, expenses, and profits to develop the budgeted P&L statement © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Menu Analysis Menu analysis involves marketing, sociology, psychology, and emotions Guests respond best to menu item, descriptions, the placement of items on the menu, their price, and their current popularity Remember, the guests don’t respond to financial analyses © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Menu Analysis Three of the most popular systems of menu analysis are food cost%, contribution margin, and goal value analysis The matrix analysis provides a method for comparisons between menu items A matrix allows menu items to be placed into categories based on whether they are above or below menu item averages for factors such as food cost %, popularity, and contribution margin. © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 10.1 Three Methods of Menu Analysis Method Food cost % Contribution margin Goal value analysis Analysis Method Matrix Variables Considered a Food cost % b Popularity a Contribution margin Matrix b Popularity a Contribution margin % Algebraic b Popularity equation c Selling price d Variable cost % e Food cost % Goal Minimize overall food cost % Maximize contribution margin Achieve predetermined profit % goals © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Menu Analysis Food cost percentage method: the operator seeks menu items that have the effect of minimizing overall food cost percentage Contribution margin approach: the operator seeks to produce a menu that maximizes the overall contribution margin © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 10.2 Maureen's Menu Analysis Worksheet Date: 1/1 - 1/7 Menu Item Strip Steak Coconut Shrimp Grilled Tuna Chicken Breast Lobster Stir-Fry Scallops/Pasta Beef Medallions Total # Sold 73 121 105 140 51 85 125 700 Weighted Average 100 Selling Price $17.95 16.95 17.95 13.95 21.95 14.95 15.95 Total Sales $1,310.35 2,050.95 1,884.75 1,953.00 1,119.45 1,270.75 1,993.75 11,583.00 Item Cost $8.08 5.09 7.18 3.07 11.19 3.59 5.90 Total Cost $ 589.84 615.89 753.90 429.80 570.69 305.15 737.50 4,002.77 16.55 1,654.71 5.72 571.82 Item Contribution Margin $9.87 11.86 10.77 10.88 10.76 11.36 10.05 10.83 Total Contribution Food Cost Margin % $720.51 45% 1,435.06 30 1,130.85 40 1,523.20 22 548.76 51 965.60 24 1,256.25 37 7,580.23 1,082.89 35 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Menu Analysis To analyze a menu using the food cost percentage method, you must separate menu items based on two variables: Food cost percentage Popularity (number sold) Popularity High Food Cost % Low Low High food cost % Low popularity Low food cost % Low popularity High High food cost % High popularity Low food cost % High popularity © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Installing lowflow faucet aerators on all sinks to cut water usage by as much as 40%; from a standard 4 gallons per minute to a costsaving 2.5 gallons a minute. Implementation of an effective preventive maintenance program for all cooking equipment including frequent and accurate temperature recalibrations Reducing waste disposal costs by implementing effective source reduction plans as well as pre and postproduction recycling efforts © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget In general, the budget should be monitored in each of the following areas: Revenue Expenses Profit © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 10.14 College Cafeteria Revenue Budget Summary Time Period: First Months Meal Period A.M P.M Total Budget $480,500 350,250 830,750 Actual $166,698 248,677 415,375 % of Budget 35% 71 50 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Some foodservice operators relate revenue to the number of seats they have available in their operation. The formula for the computation of sales per seat is as follows: Total Sales Available Seats © 2011 John Wiley & Sons = Sales per Seat Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Some operators elect to utilize the yardstick method of calculating expense standards so determinations can be made as to whether variations in expenses are due to changes in sales volume, or other reasons such as waste or theft © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Developing Yardstick Standards for Food Step 1. Divide total inventory into management designated subgroups, for example, meats, produce, dairy, and groceries Step 2 Establish dollar value of subgroup purchases for prior accounting period Step 3. Establish sales volume for the prior accounting period Step 4 Determine percentage of purchasing dollar spent for each food category © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Developing Yardstick Standards for Food Step 5 Determine percentage of revenue dollar spent for each food category Step 6. Develop weekly sales volume and associated expense projections. Compute % cost to sales for each food grouping and sales estimate Step 7 Compare weekly revenue and expense to projection. Correct if necessary © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 10.15 Marion's College Cafeteria Food Data Last School Year (9 Months) Total Sales: $450,000 Purchases Meats Fish/Poultry Produce Dairy Groceries Total © 2011 John Wiley & Sons Average Sales Per Month: $50,000 $66,600 36,500 26,500 20,000 18,300 167,900 Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Developing Yardstick Standards for Labor Step 1. Divide total labor cost into management designated subgroups Step 2 Establish the dollar value spent for each subgroup during the prior accounting period Step 3. Establish sales volume for the prior accounting period Step 4 Determine percentage of labor dollar spent for each subgroup © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget Developing Yardstick Standards for Labor Step 5. Determine percentage of revenue dollar spent for each labor category Step 6. Develop weekly sales volume and associated expense projection. Compute % cost to sales for each labor category and sales estimate Step 7. Compare weekly revenue and expense to projection. Correct if necessary © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 10.16 Marion's College Cafeteria Labor Data Last School Year (9 Months) Total Sales: $450,000 Labor Costs Management Food Production Service Sanitation Total © 2011 John Wiley & Sons Average Sales Per Month: $50,000 $40,000 65,000 12,000 18,000 135,000 Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Budget As business conditions change, changes in the budget are to be expected. This is because budgets are based on a specific set of assumptions, and if these assumptions change, so too will the budget Budgeted profit levels must be realized if an operation is to provide adequate returns for owner and investor risk The primary purpose of management is to generate the profits needed to continue the business. Budgeting for these profits is a fundamental step in the process © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Technology Tools The software required to do an overall breakeven analysis is readily available, as well as the required analysis for budgeting Specialized software in this area is available to help you Evaluate item profitability Conduct menu matrix analysis Perform breakeven analysis Budget revenue and expense levels Budget profit levels © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Technology Tools Assemble budgets based on days, weeks, months, years, or other identifiable accounting periods Conduct performance to budget analysis Maintain performance to budget histories Blend budgets from multiple profit centers (or multiple units) 10 Perform budgeted cash flow analysis © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Summary Financial Analysis and Profit Planning Menu Analysis Cost/Volume/Profit Analysis The Budget Technology Tools © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller ... High Food Cost % Low Low High food cost % Low popularity Low food cost % Low popularity High High food cost % High popularity Low food cost % High popularity © 2011 John Wiley & Sons Food? ?and? ?Beverage? ?Cost? ?Control, 5th ... Popularity C = Selling Price D = 1.00 - (Variable Cost % + Food Cost %) © 2011 John Wiley & Sons Food? ?and? ?Beverage? ?Cost? ?Control, 5th Edition Dopson, Hayes,? ?& Miller Figure 10. 6: Goal Value Analysis Results... The information needed to calculate a MSP is as follows: Food? ?Cost? ?% Minimum payroll? ?cost? ?needed for the time period Variable? ?Cost? ?% © 2011 John Wiley & Sons Food? ?and? ?Beverage? ?Cost? ?Control, 5th Edition Dopson, Hayes,? ?& Miller Cost/ Volume/Profit Analysis