COST CONTROL

–REASONS RESTAURANTS FAIL–DEFINE MANAGEMENT’S ROLE IN COST

CONTROL–DEFINE THE CONTROL PROCESS–DEFINE TERMINOLOGY—COSTS, SALES–DISCUSS BASIC COST CONTROL FORMULAS

PURPOSE OF COST CONTROL

1. Manage labor costs2. Manage inventory3. Make a profit

Costs = Expenses incurred in production of food & beverage.

Includes all outlays even if they don’t produce revenue

-spoilage-free merchandise-inefficient labor

PURPOSE OF COST MANAGEMENT

“In a study in Columbus, Ohio, Professor H.G. Parsa of Ohio State University, tracked new restaurants and found that in the first year, 26% closed. Another 19% closed the second year, and 14% the third. Collectively, 59% of new restaurants closed those three years. By the way, the "failure" rate wasn't very different between franchised restaurants – 57% — and independent restaurants – 61%.”

USAToday

More than 2/3’s of all foodservice establishments that fail in the first

three years, fail in year one. A. Asch

“Average” profitability in the foodservice business is 3-7%. National Restaurant Assoc.

Management’s job includes—

1. Planning 2. Organizing 3. Directing

4. Controlling

1. Planning Who is the Customer?

-Who will frequent your establishment?-What will be their expectations?-How will they drive your business?

Determine Your Objectives -profit

-customer retention-promoting a cause

Planning

Long-term vs. Short-term Budgeting Scheduling Facility Design Menu Adjustments Future Expansion Plans Vendor Selection

2. Organization

Labor

-Hiring good people

-Scheduling

-Workflow

3. Directing

Directing personnel is the most time consuming job of management

Delegation

Hiring competent personnel

4. Controlling Develop standards that are measurable

Assessment and adaptationIf met: If not met:Continue to monitor Reassessment of standard

Corrective measuresAdded trainingDisciplinary action -verbal -written -dismissal

TERMINOLOGY--COSTSFixed Costs —those that don’t fluctuate when volume changes

RentInsuranceManagement salariesDepreciationSome taxes

Variable Costs —those that are tied to the volume of business

Cost of GoodsHourly labor

A portion of FC must be covered by each unit sold. If volume increases, the amount covered by each unit decreases.

Fixed Cost $1,0001,000 units sold $1.00 per unit5,000 units sold $ .20 per unit Variable Costs1,000 units sold $1.00 per unit5,000 units sold $1.00 per unit

TERMINOLOGY - COSTS

Controllable Costs—costs that can be increased or decreased within a short time frame

-cost of foods-labor costs

Non-controllable costs—costs that are unchangeable in the short term

-rent-management costs-federal tax withholdings-depreciation

TERMINOLOGY - COSTS

Forecasted Costs—costs management expects to incur in the future

-standardized recipes=COGS costs-union contracts= labor cost

Actual Costs—true cost of doing business based on day-to-day business activity

TERMINOLOGY - COSTS

Average Costs —total costs/total unit quantity

$Revenue/Covers=$Average Cover $Total Labor/Hours Worked=$Avg. Labor per Hour Overhead Costs —costs other than food,

beverage & labor

Rent, utilities, insurance, maintenance, linens, etc.

TERMINOLOGY—SALES

Total Sales —all sales that contribute to a particular business or category.

Sales by Category —sales broken down by

specific menu classification -Entrees, appetizers, desserts, soups, etc.

TERMINOLOGY - SALES

Average Sales=Total Sales/an individual selling unit; used for control and forecasting

Sales by serverSales by shiftSales by meal period (i.e. average lunch sale)

Sales Mix—percentage an item contributes to the total; used

for forecasting and scheduling

Steak Sales/Total Sales=%Sales Mix for Steak

IMPORTANT FORMULAS$Food Cost / $Food Sales = %Food Cost $Food Sales x %Food Cost = $Food Cost $Food Cost / %Food Cost = $Food Sales $Labor Cost / Total Sales = %Labor Cost $Total Sales x %Labor Cost = $Labor Cost $Labor Cost / %Labor Cost = $Total Sales

TERMINOLOGY

Depreciation—the cost of wear and tear as a result of doing business

-This is a deductible tax allowance and lowers taxes owed

-Commercial depreciate over 15 years

ESTABLISHING STANDARDS

• QUALITY, QUANTITY, COST STANDARDS• $FOOD COST• % FOOD COST• OPERATING BUDGETS & P&L STATEMENTS• MAKE VS. BUY ANALYSIS

ESTABLISHING STANDARDSStandards are based on the target audience. Training is the best way to ensure standards will be met

Three areas in which standards are necessary:

1. Quality —every employee and product should meet your pre-determined standard for quality

2. Quantity—every food/beverage item must have a size/quantity spec

3. Cost/Price—what do you expect to pay each worker; what will each ingredient/product cost you

Food Cost and Labor Cost contribute +/- 60% of Total Cost for foodservice establishments

$Food Cost = $Opening Inventory + $Purchases – $Closing Inventory

%COGS = $Food Cost / $Food Sales

Other items to consider:

+Transfers in—wine coming in from the bar = a cost -Transfers Out—food sent to the bar for happy hour =a credit (a

reduction) -Employee meals—generally accounted for on a separate line

item (i.e. employee benefits) -Promotional Expenses—give-a-ways used to generate good will =

a credit (a reduction) -Grease Sales—value of used grease = credit

CALCULATING $COGSALES $1,100OP $500PURCHASES $1,000CLOSING INVENTORY $400TRANSFERS IN $100TRANSFERS OUT $200EMPLOYEE MEALS $300PROMOTIONS (AT RETAIL, 30%COG) $150

$COGS (CF)

If sales are $7,500, with 25%COG for food and 10%COG for beverages, where beverages equal 50% of sales, what are $COG for Food & Beverage?

% COGS and Labor generally operate at opposite ends of the spectrum

Low High Example%COG %Labor Voltaire%Labor %COGS McDonald’s

Major reasons for restaurant failure:

--Inability to control costs

--Inability to control the flow of goods through the operation

--Failure to control revenue

U. S. Chamber of Commerce Statistics:

“30% of all business failures are due to theft”

“Theft accounts for 1-2% of gross sales annually.” “Hospitality profits could be increased by 3-7% if theft were eliminated.”

Cost Control Budgets

OPERATING BUDGET

The budget written to forecast sales and expenses for a particular period of time.

PROFIT & LOSS STATEMENT

The statement that compares ACTUAL sales and expenses to those forecast in the Operating Budget for the same period.

Operating Budget

Revenue:Sales-$COGSGross Profit%GOG

-Expenses:Labor Costs+BenefitsTotal Labor

Operating Expenses:-Rent-Utilities-Marketing-Depreciation-Other Expenses

Net Profit before Taxes-Taxes

After-tax Profit

Make vs. Buy Analysis

Considerations:

Quality—will quality meet your standards if you buy from an outside source?

Cost—does the cost savings justify going outside?-how much will you save on COG?-will you underutilize current labor?-can you cut labor cost by going outside?-are energy savings significant?

What does one portion cost to make?

-Cost standard recipe -consider utilization of trimmings/waste

-Add in labor cost

-Divide by # of portions produced

-Compare vs. outsourced pricing

USING TECHNOLOGY TO IMPROVE CONTROLS

1. Guest-driving technology-comfort (i.e. in-room temperature control systems)-enjoyment (i.e. wireless access)-cost savings (i.e. self checkout, “smart card”, internet reservations)

2. Cost Controls-Inventory control systems

3. Increase Sales/Control Revenue-POS systems for FOH

4. Reduce Labor Cost-Hi-tech equipment (standardized interfaces); less labor/less skilled labor

Farm to Table

-Genetically modified foods—enhanced yield-Process control—enhanced shelf life and lower costs through more rapid processing

Supply Chain ManagementIntegrated systems that oversee food chain from supplier to end user

-supplier-manufacturer-wholesaler-restaurant/retailer-end user

Reduce inventoryReduce carrying costs

Purchasing & Warehouse Operations

Integrated Purchasing---volume discounts for multi-unit operations

Computer generated perpetual inventory Warehouse organization--easy access and reduced labor “Trade show” web sites-- new product information Temperature and Climate Control

Scanners/Barcode Inventory Systems

Production Moist/Dry Heat Ovens—reduce shrinkage Programmable Cook Times—HAACP critical control analysis Recipe Conversion Nutritional Analysis Menu Making Software—allow operation to take advantage

of specials/overstocks Production Cost Analysis—aids in menu pricing

Increased Sales Web sites for greater exposure Computerized Reservations Self Order Kiosks for fast foods Centralized Take-Out sends orders to the nearest store

to reduce delivery costs POS generates reports by server to allow analysis of cash

received and productivity

DOWNSIDE OF TECHNOLOGY

Reduction in the number of entry-level jobs-much of foodservice has been on-the-job training

Small business can’t afford/can’t compete Departments/Businesses are becoming obsolete

-reservations department-bookkeeping