Controlling Costs; The processes…. Gilbert Noussitou 2006

Question: Answer: Food Cost % What Should the Food Cost % be? The difference between the Contribution Margin and the Selling Price Selling Price – all costs – profit = Food Cost Gilbert Noussitou 2006

Food Cost % Ratio of product cost compared to selling price Portion Cost Selling Price Cost Markup also known as the cost factor 100 Cost % Cost Markup = Selling Price Portion Cost or Gilbert Noussitou 2006

Food Cost %: What should it be? Staff Costs 32% Operating Expenses 18% Occupancy Costs 11% Desired Profits 12% Total Contribution Margin 73% Sales 100% Food Cost 27% Gilbert Noussitou 2006

Potential Profitability More important than food cost is profitability. Every menu item must generate its share of income to paid for all other costs and profit. Referred to as: contribution margin or gross profit Contribution Margin is the difference between the product cost & the selling price. Gilbert Noussitou 2006

Profitability The larger the contribution margin is, the larger the amount of funds available to operate the business & the larger the net profit will be Regardless of the food cost %, items with the largest contribution margin are the most profitable Sales – Cost of Sales = Gross profit Gross Profit = Contribution Margin (C.M.) Gilbert Noussitou 2006

Contribution Margin Item Food Cost Selling Price F.C. % C.M. Chicken Sandwich $1.25 $4.65 27% $3.40 Fish Burger $2.20 $6.50 34% $4.30 Steak Sandwich $3.10 $7.75 40% $4.65 Gilbert Noussitou 2006

The Profit Myth In most peoples mind; Revenue – Expenses = Profit In other words, profits are what ever is left after expenses have been paid. Profits should be treated as a must be paid item just like rent is. Then the formula becomes: Revenue – Required Profits = Allowable Expenses In this case, the only way to survive is to manage expenses properly!!! Gilbert Noussitou 2006

The BUDGET A budget is a plan for operating a business expressed in financial terms or a plan to control expenses and profit in relation to sales. A budget is a tool used with performance reports to coordinate, evaluate and control operations in accordance with the goals specified in the BUDGET plan. Cont… Gilbert Noussitou 2006

The Budget (cont.) Budgeting provides and organized procedure for planning and for development of standards of performance in numerical terms. Planning, coordination and control are the three primary objectives of Budgeting. Budgets provide basis for control but they must be planned and implemented by all operational personnel within the organization.

Steps in Planning a Budget 1st Step: Budget Sales 2nd Step: Budget Expenditures 3rd Step: Budget Cash Flow 4th Step: Budget Capital Expenditures 5th Step: Compile Forecast Income Statement Gilbert Noussitou 2006

Control Point Flow Chart Menu Planning  Purchasing Receiving Storing Issuing Preparing Cooking Holding Serving    ☺ Guest Satisfaction & Profit Target☺ Control Point Flow Chart Control the processes, not the end result!!! Gilbert Noussitou 2006

Establish standards: (Standards = expected level of performance) COST CONTROL PROCESS Establish standards: (Standards = expected level of performance) Measure actual results of operation Compare actual results to standards Identify corrective action Select corrective action Review corrective action Gilbert Noussitou 2006

There are five main standards related to cost control Food Cost Controls There are five main standards related to cost control Standard Product Specifications Standard Recipes Standard Yields: Ratio of useable product to total weight before processing Standard Portions Count – ladle – scoop – bowl – weigh – etc. Standard Portion Cost Always resulting from the 4 previous standards!!! Gilbert Noussitou 2006

Yield & Cost Calculations Effective Standards: are an accurate reflection of desired results based on market expectations encouraging excellence are reasonable & challenging are specific & measurable allow slight flexibility to encourage creativity & challenge include feed back (in control system) Gilbert Noussitou 2006

PROBLEM: FOOD COST IS TOO HIGH!? POSSIBLE SOLUTIONS: Reduce dollar value of food in each sale Increase revenue from each sale Reduce inefficiency in handling food Change (review) the menu Gilbert Noussitou 2006

Cost Controls Use of Leftovers Normal waste is costed and sold Abnormal waste is used but not sold Proper planning is essential THE BEST WAY TO USE LEFT-OVERS IS…… NOT TO HAVE ANY! What is the best way to use leftovers? EVERYTHING YOU BUY MUST BE SOLD  Gilbert Noussitou 2006

Is that a cost control measure? Taking Inventory; Is that a cost control measure? Gilbert Noussitou 2006

THE FORMULA FOR FOOD COST CALCULATION OPENING INVENTORY $11,000.00 PLUS PURCHASES (less credits) + $40,000.00 MINUS CLOSING INVENTORY - $9,000.00 EQUALS COST OF FOOD SOLD (or used) = $42,000.00 Sales are $120,000 Food Cost % = (cost) $42,000.00 x 100 = 35% (Sales) $120,000.00 Gilbert Noussitou 2006

Example #1 January February March Opening inventory $5,779.97 $5,897.13 $5,247.91 Purchases + $9,749.31 $8,999.19 $8,191.18 TOTAL COST (available for sale) = $15,529.28 $14,896.32 $13,439.09 Closing Inventory - $5,897.13 $4,697.98 FOOD COST (used) = $9,632.15 $9,648.41 $8,741.11 Cash sales $18,992.89 $16,707.84 $14,838.86 Staff meals (sold) + $1,997.99 $1,679.13 $1,571.99 Charges (sold to other departments) + $1,421.13 $1,213.97 $903.06 TOTAL SALES = $22,412.01 $19,600.94 $17,313.91 Food cost percentage 42.98% (43) 49.22% (49) 50.49% (50) Gilbert Noussitou 2008

Example #2 January February March Opening inventory $5,779.97 $5,897.13 $5,247.91 Purchases + $9,749.31 $8,999.19 $8,191.18 TOTAL COST (available for sale) = $15,529.28 $14,896.32 $13,439.09 Closing Inventory - $5,897.13 $4,697.98 TOTAL COST OF FOOD (used) = $9,632.15 $9,648.41 $8,741.11 Staff meals (sold at cost) - $1,997.99 $1,679.13 $1,571.99 Charges (inter-departmental & Mgmt) - $1,421.13 $1,213.97 $903.06 TOTAL FOOD COST (actually sold) = $6,213.03 $6,755.31 $6,266.06 SALES $18,992.89 $16,707.84 $14,838.86 Food cost percentage 32.71% (33) 40.43% (40) 42.22% (42) Gilbert Noussitou 2008