© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Chapter 9 Analyzing Results Using The Income Statement

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Main Ideas  Introduction to Financial Analysis  Uniform System of Accounts  The Income Statement (USAR)  Analysis of Sales/Volume  Analysis of Food Expense  Analysis of Beverage Expense  Analysis of Labor Expense  Analysis of Other Expense  Analysis of Profits  Technology Tools

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Introduction to Financial Analysis  Documenting and analyzing sales, expenses, and profits is sometimes called cost accounting, but more appropriately is know as managerial accounting to reflect the importance managers place on this process.  Recording and summarizing financial data vs. analyzing data  Financial statements related to the operation of a foodservice facility are of interest to management, stockholders, owners, creditors, governmental agencies, and often, the general public

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Uniform System of Accounts  The National Restaurant Association has developed the Uniform System of Accounts for Restaurants (USAR). The USAR seeks to provide a consistent and clear manner in which to record sales, expenses, and overall financial condition.  The uniform system of accounts attempts to provide operators guidelines rather than mandated methodology.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller The Income Statement (USAR) The Income Statement  The income statement, often referred to as the profit and loss (P&L) statement, is the key management tool for cost control.  Each operation’s P&L statement will look slightly different.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller The Income Statement (USAR)  The income statement (USAR) can better be understood by dividing it into three sections: gross profit, operating expenses, and nonoperating expenses.  These three sections are arranged on the income statement from most controllable to least controllable by the foodservice manger.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller The Income Statement (USAR)  Each revenue and expense category on the income statement can be represented both in terms of its whole dollar amount, and its percentage of total sales. All ratios can be calculated as a percentage of total sales except the following: –Food Costs are divided by food sales –Beverage Costs are divided by beverage sales –Food Gross Profit is divided by food sales –Beverage Gross Profit is divided by beverage sales

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller The Income Statement (USAR)  The income statement is an aggregate statement – summary.  The details can be found in supporting schedules.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Sales/Volume  Overall sales increases or decreases can be computed using the following steps: 1.Determine sales for this accounting period 2.Calculate the following: this period’s sales minus last period’s sales. 3.Divide the difference in #2 above by last period’s sales to determine percentage variance.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Sales/Volume  There are several ways a foodservice operation experiences total sales volume increases. These are: 1.Serve the same number of guests at a higher check average 2.Serve more guests at the same check average 3.Serve more guests at a higher check average

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Sales/Volume  The procedure to adjust sales variance for known menu price increases is as follows: Step 1.Increase prior period sales (last year) by amount of the price increase. Step 2. Subtract the result in Step 1 from this period’s sales Step 3. Divide the difference in Step 2 by the value of Step 1.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Food Expense  A food cost percentage can be computed for each food subcategory. For instance, the cost percentage for the category Meats and Seafood would be computed as follows: Meats and Seafood Cost Total Food Sales = Meats and Seafood Cost %

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Food Expense  Inventory turnover refers to the number of times the total value of inventory has been purchased and replaced in an accounting period.  The formula used to compute inventory turnover is as follows: Cost of Food Consumed Average Inventory Value= Food Inventory Turnover

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Food Expense  The average inventory value is computed as follows:  Be sure that a high inventory turnover is caused by increased sales and not by increased food waste, food spoilage, or employee theft. Beginning Inventory Value + Ending Inventory Value 2 = Average Inventory Value

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Beverage Expense  Beverage inventory turnover is computed using the following formula: Cost of Beverages Consumed Average Beverage Inventory Value = Beverage Inventory Turnover

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Beverage Expense  If an operation carries a large number of rare and expensive wines, it will find that its beverage inventory turnover rate is relatively low.  Conversely, those beverage operations that sell their products primarily by the glass are likely to experience inventory turnover rates that are quite high.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Beverage Expense  Similar to the method for adjusting sales, the method for adjusting expense categories for known cost increases is as follows: Step 1.Increase prior-period expense by amount of cost increase. Step 2.Determine appropriate sales data, remembering to adjust prior period sales, if applicable. Step 3. Divided costs determined in Step 1 above by sales determined in Step 2 above.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Beverage Expense  All food and beverage expense categories must be adjusted both in terms of costs and selling price if effective comparisons are to be made over time.  As product costs increase or decrease, and as menu prices change, so too will food and beverage expense percentages change.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Labor Expense  When total dollar sales volume increases, fixed labor cost percentages will decline.  Variable labor costs will increase along with sales volume increases, but the percentage of revenue they consume should stay constant.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Labor Expense  When you combine a declining percentage (fixed labor cost) with a constant one (variable labor cost), you should achieve a reduced overall percentage, although your total labor dollars expended can be higher.  Declining costs of labor may be the result of significant reductions in the number of guests served.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Labor Expense  Salaries and wages expense percentage is computed as follows: Salaries and Wages Expense Total Sales = Salaries and Wages Expense %

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Labor Expense  Adjustments – COLA (Cost of living adjustment), or raise.  Adjust both sales and cost of labor using the same steps as those employed for adjusting food or beverage cost percentage and compute a new labor cost as follows: Step 1.Determine sales adjustment Step 2. Determine total labor cost adjustment Step 3.Compute adjusted labor cost percentage.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Labor Expense  This year’s projected labor cost is computed as follows:  Increases in payroll taxes, benefit programs, and employee turnover all can affect labor cost percentage. This Year’s Sales x Last Year's Adjusted Labor Cost Percentage = This Year’s Projected Labor Cost

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Other Expense  For comparison purposes, use the Restaurant Industry Operations Report published by the National Restaurant Association and Prepared by Deloitte & Touche (can be ordered through  For operations that are a part of corporate chain, unit managers can receive comparison data from district and regional managers who can chart performance against those of other operators in the city, region, state, and nation.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Profits  Profit percentage using the profit margin formula is as follows: Net Income Total Sales=Profit Margin

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Profits  Profit margin is also knows as Return on Sales, or ROS. For the foodservice manager perhaps no figure is more important than the ROS.  This percentage is the most telling indicator of a manager’s overall effectiveness at generating revenues and controlling costs in line with forecasted results.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Profits  While it is not possible to state what a “good” return on sales figures should be for all restaurants, industry averages, depending on the specific segment, range from 1% to over 20%.  Some operators prefer to use operating income as the numerator for profit margin instead of net income. Thus is because interest and income taxes are considered nonoperating expenses and thus, not truly reflective of a manger's ability to generate a profit.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Analysis of Profits  Profit variance % for the year can be measured by the following formula: Net Income This Period – Net Income Last Period Net Income Last Period = Profit Variance %

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Technology Tools  This chapter introduced the concept of management analysis as it related to sales, expenses, and profits.  In this area, software is quite advanced and the choice of tools available to help you with your own analysis is many.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Technology Tools  The best programs on the market will: 1.Analyze operating trends (sales and costs) over management-established time periods. 2.Analyze food and beverage costs. 3.Analyze labor costs. 4.Analyze other expenses. 5.Analyze profits. 6.Compare operating results of multiple profit centers within one location or across several locations.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Technology Tools 7.Interface with the facilities point of sales (POS) system or even incorporate it completely. 8.Red flag areas of potential management concern. 9.Evaluate the financial productivity of individual servers, day parts, or other specific time periods establish by management. 10.Compare actual to budgeted results and compute variance percentages as well as suggest revisions to future budget periods based on current operating results.

© 2008 John Wiley & Sons Hoboken, NJ Food and Beverage Cost Control, 4th Edition Dopson, Hayes, & Miller Summary  Introduction to Financial Analysis  Uniform System of Accounts  The Income Statement (USAR)  Analysis of Sales/Volume  Analysis of Food Expense  Analysis of Beverage Expense  Analysis of Labor Expense  Analysis of Other Expense  Analysis of Profits  Technology Tools