Advanced Food and Beverage Exam 1

Variance Analysis

** are financial objectives achieved? Budgetary control process -determining budget variances (dollar difference vs. % difference) -determining which variances are significant -analyzing significant variances -determining the problems -taking corrective actions **think of control techniques -establishing standards -establishing procedures -training personnel -setting examples -observing and correcting employee actions -requiring records and reports -disciplining employees

examples other controllable expenses

- Direct operating expenses -music and entertainment -marketing -utilities -general & administrative expenses -repairs and maintenance

Food and Bev inventory levels too high relative to corresponding sales

- too much food sitting in your storage will result in excess waste, over-portioning, and employee theft (ties up most valuable asset, cash) - How do you determine how much inventory is too much or what the ideal amount of inventory is -A typical full service restaurant should have on average no more than 7 days of inventory

Demand Driven Pricing

- you have more "flexibility" in price you can charge, based on demand for your product or services -consider the price of a ticket to a sold out concert or sporting event -if you're in the airport or stadium, it's unlikely customers will leave to get a meal (demand for food>supply) -can be used on menu items where the operation has a monopoly -prices that are demand-driven tend to be on the moderate to high side of pricing continuum **changing customer perception: value-added!

Lack of understanding how to read and interpret period ending financial statements

-3 fundamental financial reports - profit and loss statement -balance sheet -statement of cash flows Operators can recognize problem areas simply by reading the financial statements -once they read that info, they can begin identifying the "red flag"

NRA Rules of thumb

-65-70% prime cost= financial red flag

Menu item sales report

-a daily record of your customers' preferences -helpful to plan daily specials -recommended to run the separate menu item sales report by meal periods (lunch vs. dinner)

3 daily numbers recommended

-a daily sales report -a menu item sales report (P mix) -An hourly staff labor report

budget

-a financial plan -a realistic expression of managements goals and objectives for specific aspects of operation -sales budgets, cash flow budgets, capital equipment budgets, and advertising budgets

P&L statement

-an accurately prepared income statement can provide a complete picture of a restaurants profitability over a designated period -important to prepare the P&L in an industry-standard format

Competition Pricing method

-assigns prices based on the general market price or those of the competition -price item the same as competitors -price it slightly lower to attract those looking for a deal -price higher to attract those looking for higher quality

Monetary sales

-average sales; sales per square foot average sales= total dollar sales/ total number of covers

experiential value

-based upon interactions involving either direct usage or distanced appreciation of goods and services -perceived playfulness, perceived efficiency, perceived aesthetics, perceived excellence

Daily sales report

-best tool used for REVENUE projecting, weekly revenue tracking, and hourly labor management -total credit card deposit, tips claimed, and gift certificates sold -measure the day's activities against the restaurants weekly goals and make plans accordingly *use these daily documents to note variance in your projections

Controllable Costs

-can be changed in the short term -often called operating costs -variable costs are controllable costs ex: advertising, management salaries

The numbers you calculate

-can tell you how well or bad you're doing -show you where you need to focus attention -tool to identify and solve problems -let you see how everyone's day to day actions impact the restaurant's success

new tax law

-changes for qualified improvement property -15 year recovery period for qualified leasehold, restaurant, and retail properties * Law: deduct the cost of restaurant-building improvements and new construction on a 15-year depreciation schedule, rather than 39.5 years *** a 15-year tax-depreciation schedule also improves cash flow -helps restaurant operators reinvest in their businesses and hire more employees

Benefits of using the USAR P&L format

-common language based on industry specific means of understanding and analyzing a restaurant's operating performance -detailed instructions for accurately recording and classifying the different transactions, costs and expenses of operating a restaurant -easy comparison of any restaurant's key costs and margins w/ other restaurants that use the same format -easy to compare a restaurant's operating results with industry averages -interpreting financial results in a more meaningful manner -enhancing the credibility of restaurant owners when presenting financial packages and business plans for raising capital from potential investors and lenders

Traditional Customer value

-functional value vs. emotional value

functional value

-functional: tangible, "hard" side of value basic value: delivered to customers ex: does the coffee taste good? does the restaurant provide clean silverware? represented as "value for money" (not especially creative or effective in differentiating the restaurant from the competition)

discounting

-how many more portions would you have to sell to make it worth while -originally $12, selling 120 produces $1440 in revenue -10% discount= 10.80x # of portions= $1440 (need 134 portions) etc.

Food and Beverage inventory levels counted and costed

-important to count and cost F&B inventory levels at the end of each accounting period - Monthly F&B purchases are not the same as the monthly usage - To calculate an accurate food cost, you need to understand the beginning and ending inventory

Buffalo Wild Wings

-include the addition of "guest experience captain" visit tables to help customers with their sports-viewing experience

old edition USAR format

-income before occupancy costs, interest, depreciation, and income taxes -income before interest, depreciation, and income taxes labor expenses listed under controllable expenses or under operating expenses

seat turnover interpretation

-indicates an index of efficiency for the operation -measures service speed -turnover is lower in a fine dining restaurant why analyze seat turnover? - measures different periods of business activity

Evaluate Current Profitability

-know the highest grossing items; the ones that make the most profit -maximize profit by raising other prices slightly or train servers to promote lobster as a special or featured item

Hourly staff labor report

-labor is the single greatest cost for most restaurants -better control staff scheduling

Psychological menu design/ subjective menu pricing methods

-limited menu option (seven options per food category) -expensive dishes belong at top of the menu (30% + order first item their eyes drawn to, profitable items in upper-right corner) -Reference Pricing: pricing at moderate level and positioning it next to a more expensive model in the hope that the customer will use the higher price as a reference price -odd-number pricing: setting prices using odd numbers that are slightly below whole dollar amounts (increasing perceived value for some restaurants) ** may not work in fine dining -Price on menu: w/out $ signs: dollar sign reminds diners that they are spending money -add photos: increases sales by 30% -bundle pricing: put together as a package deal and are charged a single price ex: happy meal -competition pricing method: -leader pricing: restaurant operators sells one or a few items at a deep discount to increase traffic and sales

Red Lobster

-lost 3.3 million on a seven week promotion - Darden Replaced president of Red Lobster

uncontrollable costs

-management has little or no control over it -costs cant be changed in short term - fixed cost is uncontrollable cost -depreciation is an uncontrollable fixed cost ex: rent, interest on a mortgage, real estate taxes, license fees, equipment leases

Menu items not accurately documented...

-many operators tend to simply rely on "subjective" menu pricing method - it takes a lot of discipline and time to carefully and accurately document and cost menu items - "how can operators possibly manage their restaurants food costs if they don't even know what each and every item is costing them"F

Market-driven pricing

-market determines price -prices that are market driven must be responsive to competition: items that are common -if menu item is a commodity in economic sense, it's available just about everywhere and quality differences are minimal (a definite price exists in the market and in the mind of the customer -operators estimate how much customers are willing to pay -prices tend to be on moderate to low side

Chuck E. Cheese

-offers golden ticket promotion Introduced a new menu targeting the more sophisticated tastes of parents -a weekday lunch buffet at all of its chuck e. cheese locations

Prime cost

-one of the most important and revealing numbers in any restaurant - If there's a problem w/ food, bev, or labor the weekly prime cost report puts them in a position to know about it and react quickly -reflects expenses where operators have the highest exposure for losses and greatest opportunities to impact profitability in the short term **table service restaurants: no more than 65% of total sales -casual theme chain operators: keep around 60% or less -quick service: usually goal is 60% of total sales or less, but many bar operators/ fast food ops keep around 50-55%

Problem w/ single mark-up to every item

-over pricing for high cost items -under-pricing for low cost items

Weekly numbers to calculate

-prime cost

8th edition USAR

-prime cost -other controllable expenses -controllable -non controllable expenses * new: -merchandise and other (gift cards, t-shirts, hats, vending) -a separate main category of labor cost - added a separate line item for prime cost

operating budget

-projected sales figures: a forecast of sales activity -projected costs: An estimate of costs that will be incurred in the process of generating sales -indication of expected or desired profit -important to learn from historical performance

Sales per square foot

-sales volume has the greatest opportunity to generate a sizable amount of profit (most reliable indicator of a restaurants potential for profit = annual sales/square footage ** total square footage: total interior square footage including kitchen, dining, storage restaurants, etc. (usually equal to the net rentable square feet in a leased space)

non-montary sales

-seat turnover; total covers; average covers seat turnover (average # of times each seat in a restaurant is occupied per day= number of seats occupied during a given period/ # of seats total covers= total # of customers served in a given period average covers: covers/hour= total covers/# of hours of ops Covers/day= total covers/ # of days of ops Covers/server= total covers/ # of servers

USAR

-seeks to provide a consistent and clear manner in which to record sales, expenses, and overall financial condition

declining balance

-the asset depreciates more in the earlier years -provides much larger deductions in the first years and much smaller deductions in the last years

Key Metrics to tack POS sales report

-top-selling/worst-selling items -sales activity by day/date range -sales by employee/product/department -menu reports (sales by menu item) -most commonly returned items -gross profits for week, month, year, etc. -online and/or mobile sales

Ways to analyze restaurant sales

-total sales by category -total sales per server -total sales from each menu -total sales (non-promotional periods vs. promotional periods) -totals sales per seat (=total sales/ #of seats

occupancy cost

-usually 10% or less as a percentage of total sales -on average 6-7%

Key Operating expenses too high

-usually restaurant prime costs account for 65-70 cents of every dollar in restaurant sales - usually if prime cost percentage exceeds 70% (or 65%) a red flag is raised, unless the restaurant has a very favorable rent expense (e.g. less than 4% of sale)

importance of value and pricing

-value used to be a tradeoff between quality and price -all value is relative/subjective (personal perception) -the customer's perception of value is individualized and dependent on context and circumstances value doesn't have to mean discounting

Top 5 mistakes operators make (why they fail)

1) failure to read and interpret monthly P&L statement and use as a management tool 2) failure to analyze the performance of the menu based on empirical data 3) failure to establish and communicate brand 4) confusing costs with profit 5) confusing management with leadership

5 customer needs according to GFS

1) profitability/cost control 2) sales building/staffing 3) compliance 4) strategic planning 5) buying food

8 psychological tricks of Restaurant Menus

1) they limit your options 2) they add photos 3) they manipulate prices 4) they use expensive decoys 5) they play with your eyes 6) they utilize colors 7) they use fancy language 8) they make you feel nostalgic

Top 10 Growth Chains

10) Zaxby's 9) Wawa 8) Dave & Busters 7) Domino's 6) Firehouse Subs 5) Chick-Fil-A 4) Raising Cane's Chicken Fingers 3) Wingstop 2) Marco's Pizza 1) Jersey Mike's Subs

_____ % of restaurants fail w/in the first three years

60%

Contribution margin pricing

=food cost + contribution margin

prime cost pricing method

=prime cost/ prime cost percentage ex: step 1: determine labor costs per guest =labor costs/# of expected guests step 2: determine prime cost per guest (assume food cost) food cost+ labor cost per guest (from above) = prime cost per guest step 3: determine menu item's base selling price =prime cost per guest/ desired food cost percentage (food cost% + labor cost %)

Perceived playfullness

Active aspect of value -engaging in activities that are absorbing -interaction with employees and other customers -experienced by customers themselves (internal, initiative, and self-oriented) -involve an active role of customer

perceived efficiency value

Active source of value -customer return on investment (CROI) -active investment of financial, behavioral, and psychological resources that potentially yield a return -perception of affordable quality/ economic value

Papa Johns

Breakaway from value-focused competition -focus on creating a "stronger emotional connection" for customers

Variable Costs

Costs clearly related to business volume - food and bev costs -As business volume increases, variable costs will increase -directly linked to volume of business - total directly variable costs increase or decrease in direct proportion to sales volume

Daily & Weekly financial operating data not collected, reviewed or acted upon

Every chain restaurant generates some type of daily and weekly report *3 daily numbers recommended - a daily sales report -a menu item sales report - an hourly staff labor report

Cost-to-Sales Ratio

Food cost %= Food cost/ menu selling price

Causes of excess cost in foodservice

IFEW - Inefficiency - Fraud - Errors - Waste

Monthly numbers to calculate

P&L statement

Ideal Food Cost Pricing Method

Price= Raw food cost of item / ideal food cost percentage

perceived aesthetic value

Reactive aspect of value -salient visual elements of the restaurant environment (ex: design, physical attractiveness and beauty in the restaurant setting -entertaining or dramatic aspects of the service performance itself

Payroll Cost

Semi-variable cost

GFS Presentation Case Study

The Brown Bear

Demand-Driven Pricing method

The demand for food is greater than the supply, so people are willing to pay for it

T/F All fixed costs change over time

True

T/F Changes in fixed costs are not normally related to short-term changes in business volume

True

T/F While total variable cost may change as sales volume changes, theoretically variable cost per unit should remain the same

True

Sales=

Variable cost + fixed cost + profit

Variable rate=

Variable cost/ sales

Straight-line method

assumption: the asset depreciates by an equal percentage of its original value for each year that it is used -provides the same deduction amount every year * simplest and most commonly used method Annual depreciation expense= (purchase price of asset- approximate salvage value)/ estimated useful life of assets (years)

Fixed Costs

costs unaffected by changes in sales ex: depreciation on equipment, Real estate taxes and rents, repairs and maintenance -don't change from one accounting period to the next

Contribution Margin Ratio

difference between sales and variable expenses, expressed as a percentage CR + VR= 1 CR= 1-VR

Food Cost % pricing method

factor method or multiplier step 1: calculate factor using formula: 1/standard food cost % step 2: factor x menu item cost= base selling price

Salvage Value

is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative; known as residual value

Depreciation

it can be fixed or variable depending on the nature of the depreciation method used -2 main ways depreciation methods based on time **straight line method **declining-balance method

emotional value:

less tangible, "soft" side of value) -emotional reaction that customers gain during and after receiving it -how employees interact w/ and treat diners? -does a service provider really care about customers? -more important in producing positive impression of restaurant

Rules of thumb

losing money - full-service- $150 or less, limited service: $200 or less Break Even -full service: $150 to $250, limited service: $200-$300 Moderate Profit -full: $250-$350, limited: $300-$400 High Profit -Full: more than $350, limited: more than $400

Benefits of 4 week accounting period

most chains use 4 week accounting 1) better comparability of your numbers (year-to-year sales) 2) Easier to plan and perform physical inventories 3) compliments a weekly cycle for the preparation of weekly reports (weekly flash report) 4) may eliminate the need to accrue payroll 5) simplifies weekly prime cost and profit and loss reporting

absence of implemented accounting system

most important -You cannot manage what you cannot count -directly correlated to how well the owner is managing his "books" -P&L and balance sheet alone may not be adequate for evaluating the financial health of a restaurant -all other "red flags" can't be accurately identified or evaluated if account system is not set up and implemented properly

Controllable Profit

one of key indicators to evaluate management's effectiveness in driving sales and controlling costs -controllable income= total revenues-total controllable expenses

Restaurant Operations Report

one tool for controlling costs -based on financial and operating data from 630+ restaurants -analyzes restaurant income and expense statements to profile operations data for four restaurant profiles * 3 in full-service (based on $$ average check per person) - one in limited service -Includes info on restaurant type, location, sales volume, and other performance measures -presents operating results as amounts per restaurant seat and as ratios to total sales

Perceived Excellence value

reactive aspect of value -product and service performance (task related performance) -generalized consumer appreciation of a service provider who demonstrates expertise and maintains reliable service