1. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Users of Financial Information Owners – want to monitor the restaurant’s financial condition Investors – want to know about the “health” of their investments Creditors – want to know the likelihood that debt owed by the restaurant can be repaid Managers – need financial information to make important decisions OH – 8.1

2. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.2 Crystal’s Balance Sheet (1/31/XX) ASSETS Current Assets Cash on Hand$ 20,000 Cash in Bank 15,000 35,000 Inventories: Food$ 13,000 Beverages 7,000 Supplies 5,000 25,000 Total Current Assets $ 60,000 Fixed Assets Land$ 125,000 Building 450,000 Furniture/ Fixtures/ Equipment 80,000 Uniforms, China, Glass, Silver 15,000 Total Fixed Assets $ 670,000 Total Assets$ 730,000 Crystal’s Balance Sheet

3. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.3 LIABILITIES AND OWNER’S EQUITY Current Liabilities Accounts payable Food $ 15,000 Other 5,000 20,000 Notes (short-term) payable 85,000 Accrued expenses Salaries and Wages 10,000 Taxes 3,000 Interest 1,000 Utilities 1,000 15,000 Income Taxes: Federal and State 5,000 Total Current Liabilities 125,000 Long-term debt 255,000 Deferred income taxes 10,000 TOTAL LIABILITIES 390,000 Owner's Equity Partner #1 170,000 Partner #2 170,000 Total Net Worth 340,000 TOTAL LIABILITIES AND OWNER'S EQUITY $ 730,000 Crystal’s Balance Sheet

4. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Current Ratio and Solvency Ratio OH – 8.4 Current Ratio= Current Assets = $ 60,000 =.48 Current Liabilities = $ 125,000 Solvency Ratio= Total Assets =$730,000 =1.87 Total Liabilities $390,000

5. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.5 CRYSTAL'S INCOME STATEMENT 1/31/XX REVENUES % Food $ 95,000 66.4 Beverage 48,000 33.6 Total Revenues 143,000100.0 COST OF SALES Food 28,500 30.0* Beverages 12,000 25.0* Total Cost of Sale 40,500 28.3 Gross Profit 102,500 71.7 OPERATING EXPENSES Salaries and Wages 43,000 30.1 Benefit allocation 10,000 7.0 Marketing 5,000 3.5 Utilities 3,000 2.1 Administrative expense 4,500 3.1 Maintenance and repair 3,000 2.1 Taxes/ Insurance 3,000 2.1 Depreciation 7,000 4.9 Total Operating Expense 78,500 54.9 Operating Income 24,000 16.8 Interest 2,750 1.9 Income before Income Taxes 21,250 14.9 Income Taxes 5,000 3.5 NET INCOME 16,250 11.4 *Percentages for food and beverage expenses (cost of sales) are calculated by dividing the cost of food or beverages by the food or beverage revenues. Percentages for all other expenses are calculated by dividing the expense by total revenues. We will discuss calculations more in depth later in this chapter.

6. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Activities That Impact a Restaurant’s Cash Position OH – 8.6 Activity Decrease Cash Increase Cash Additional purchases of food or beverage inventories Repayment of long-term or short-term loans Increase in accounts receivables Equipment or other assets are purchased Loans are received Food or beverage inventories are reduced in size Assets are sold Accounts receivables decrease

7. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Activities That Affect Cash Flow Operating Activities –Revenues generated from food/beverage sales and the expenses required to generate them –When revenues exceed expenses, operating activities generate cash. When expenses exceed revenues, cash levels are reduced Investing Activities –When assets like land and buildings are purchased with cash, cash levels decrease –When assets are sold for cash, cash levels increase Loan (Financing Activities) –When loans are received, cash is increased. As loans are repaid, cash levels decline OH – 8.7

8. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.8 Crystal's Statement of Cash Flows Year Ended 20XX Net Cash From Operating Activities Net Income (from income statement) $ 125,000 Depreciation$ 84,000 Decrease in accounts receivable 6,000 Increase in inventories (5,000) Increase in accounts payables 2,000 87,000 Net cash flows from operating activities 212,000 Net Cash From Investing Activities Sale of old equipment 5,000 Purchase of new equipment (45,000) Net cash flows from investing activities (40,000) Net Cash From Loan (Financing) Activities Payment on long-term loans (55,000) Partner’s disbursements Partner A (50,000) Partner B (50,000) Net cash flows from loan (financing) activities (155,000) Net increase in cash during 20XX $ 17,000 Cash at Jan 1 st 20XX 15,000 Cash at Dec 31 st 20XX $ 32,000

9. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 The Operating Budget Is Critical It requires managers to consider the future financial impact of external events. It challenges managers to recognize the importance of revenue when projecting expenses and allows them to prioritize competing revenue demands. It creates a standard against which to compare actual and budgeted performance. It helps managers establish an appropriate menu pricing structure. It communicates a realistic estimate of future financial results so owners can evaluate the restaurant as an investment. OH – 8.9

10. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Five-Step Revenue Forecasting Process OH – 8.10 Step 1: Step 2: Step 3: Step 4: Step 5: Review revenue records from previous years Evaluate relevant changes in the restaurant's internal environment Evaluate relevant changes in the restaurant's external environment Estimate impact of price changes on revenue Estimate long-term effect of menu changes on revenues

11. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Examples of Restaurant Expenses Food Beverage Labor Uniforms Dry cleaning Linen and linen rental China Glassware Silverware Kitchen utensils Cleaning supplies Paper supplies Menus and wine lists Extermination services Flowers and decorations Music and entertainment Selling and promotion costs Sales representative services Real estate taxes Personal property taxes Travel expense for solicitation Telephone Postage Advertising Outdoor signs Civic and community donations Electric bulbs Waste (garbage) removal Stationery and business cards Data processing costs Insurance Commissions on credit card charges Bank charges Repairs and maintenance Gardening and grounds maintenance Other municipal taxes Franchise fees OH – 8.11

12. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.12 If the budget for landscape services is $1,000 for a given month and if the actual expenditure is $1,150, the variance ($1,150-$1,000 = $150) may be expressed as a dollar amount ($150) or as a percentage of the original budget: Actual Expense (-) Budgeted Expense = Variance Percentag Budgeted Expense In this example, the computation would be: $1,150 (-) $1,000= 15% variance $1,000 The variance is negative because it is unfavorable to the restaurant. Calculation of Budget Variance

13. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Four-Step Revenue Forecasting Process OH – 8.13 Step 1: Step 2: Step 3: Step 4: Compare actual results to budget Identify areas of significant variance Determine cause(s) of the variance Take corrective action, if appropriate

14. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.14 CRYSTAL'S INCOME STATEMENT January, 20XX Actual%Budget% REVENUES Food Revenue $ 85,00070.8 $ 91,00069.5 Beverage Revenue 35,00029.2 40,00030.5 Total Revenues120,000 100.0131,000 100.0 COST OF SALES Food 32,600 38.4 31,85035.0 Beverages 9,660 27.6 10,00025.0 Total Cost of Sales 42,260 35.2 41,85031.9 Gross Profit 77,740 64.8 89,15068.1 OPERATING EXPENSES Salaries and Wages 39,700 33.1 39,43030.1 Benefit Allocation 8,875 7.4 9,150 7.0 Marketing 4,000 3.3 4,585 3.5 Utilities 2,810 2.3 2,750 2.1 Administrative Expense 4,410 3.7 4,060 3.1 Maintenance and Repair 2,100 1.8 2,750 2.1 Taxes/Insurance 2,700 2.3 2,750 2.1 Depreciation 6,420 5.4 6,420 4.9 Total Operating Expense 71,015 59.3 71,89554.9 Operating Income 6,725 5.5 17,25513.2 Interest 2,620 2.1 2,620 2.0 Income Before Income Taxes 4,105 3.4 14,63511.2 Income Taxes 1,273 1.1 4,585 3.5 NET INCOME 2,832 2.3 10,050 7.7

15. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 OH – 8.15 Impact of Revenue Variation on Fixed and Variable Expenses Budget ImpactIf Actual Revenue Greater Than Budgeted If Actual Revenue Less Than Budgeted Fixed Expenses In DollarsNone As a Percentage of RevenueDecreasesIncreases Variable Expenses In DollarsIncreasesDecreases As a Percentage of RevenueMay fluctuate* *100% variable expenses increase or decrease in direct proportion to revenue increases or decreases. In actuality, however, most expenses have at least a partially-fixed component. Therefore, as revenue increases, variable expense percentages may actually decline. Similarly, when revenue fails to meet budget, some increases in the variable expense percentages will likely result.

16. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 All About Profits Profit as Percentage of Revenue Profit in Dollars Return on Investment OH – 8.16 Remember that the manager “banks” profit dollars not profit percentages.

17. Restaurant Operations Management: Principles and Practices© 2006 Pearson Education, Inc. Ninemeier/HayesUpper Saddle River, NJ 07458 Factors That May Make Operating Budget Revisions Necessary OH – 8.17 1.The opening of a major and direct competitor. 2.The closing of a major and direct competitor. 3.Opening, by the same or different ownership, of an identical restaurant in the market area of the restaurant. 4.A significant and long-term or permanent increase or decrease in the price of major menu ingredients. 5.Significant and unanticipated increases in fixed expenses such as utilities, insurance or taxes. 6.A management change that significantly alters the skill level of the management team. 7.Unplanned-for road construction that significantly affects consumer’s abilities to reach the restaurant. 8.Natural disasters such as floods, hurricanes or severe weather that significantly affect forecasted revenues. 9.Significant changes in the restaurant’s operating hours. 10.Permanent changes in service style that appreciably affect labor cost. 11.Changes in financial statement formats and/or bases for allocation of financial resources. 12.Significant changes in variable costs that offset revenues. 13.The loss of especially skilled or talented employees.