Chapter 9 - Analyzing results using the income statement.This chapter presents the following content: Introduction to financial analysis, uniform system of accounts, income statement (USAR format), analysis of sales/volume, analysis of food expense.
Chapter 9 Analyzing Results Using The Income Statement © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 reports related to the operation of a foodservice facility are of interest to management, stockholders, owners, creditors, governmental agencies, and often, the general public © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 managers can record sales, expenses, and overall financial condition The uniform systems of accounts are guidelines, not a mandated methodology © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Income Statement (USAR) The Income Statement The income statement, referred to as the profit and loss (P&L) statement, is a summary report that describes the sales achieved, the money spent on expenses and the resulting profit generated by a business in a specific time period Each operation’s P&L statement will look slightly different © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Income Statement (USAR) The income statement (USAR) can best 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 9.1 Joshua’s Income Statement (P&L) Joshua’s, Inc Last Year versus This Year Last Year SALES: Food Beverage Total Sales © 2011 John Wiley & Sons COST OF SALES: Food Beverage Total Cost of Sales GROSS PROFIT: Food Beverage Total Gross Profit OPERATING EXPENSES: Salaries and Wages Employee Benefits Direct Operating Expenses Music and Entertainment Marketing Utility Services Repairs and Maintenance Administrative and General Occupancy Depreciation Total Operating Expenses Operating Income Interest Income Before Income Taxes Income Taxes Net Income Prepared By: M Chaplin, CPA Modified By: L Dopson, Ed.D $1,891,011 415,099 2,306,110 % 82.0% 18.0 100.0 This Year $2,058,376 482,830 2,541,206 % 81.0% 19.0 100.0 712,587 94,550 807,137 37.7 22.8 35.0 767,443 96,566 864,009 37.3 20.0 34.0 1,178,424 320,549 1,498,973 62.3 77.2 65.0 1,290,933 386,264 1,677,197 62.7 80.0 66.0 641,099 99,163 122,224 2,306 43,816 73,796 34,592 66,877 120,000 41,510 1,245,383 27.8 4.3 5.3 0.1 1.9 3.2 1.5 2.9 5.2 1.8 54.0 714,079 111,813 132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 1,400,769 28.1 4.4 5.2 0.3 2.5 3.5 1.4 2.8 4.7 2.2 55.1 253,590 86,750 166,840 11.0 3.8 7.2 276,428 84,889 191,539 10.9 3.3 7.5 65,068 101,772 2.8 4.4 76,616 114,923 3.0 4.5 Food and Beverage Cost Control, 5th 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller The Income Statement (USAR) The income statement is an aggregate statement – summary The details can be found in supporting schedules. © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 9.2 Direct Operating Expenses Schedule Type of Expense Uniforms Laundry and Linen China and Glassware Expense $ 13,408 40,964 22,475 % of Direct Operating Expenses 10.15% 31.00 17.01 Silverware Kitchen Utensils Kitchen Fuel Cleaning Supplies Paper Supplies Bar Expenses Menus and Wine Lists 3,854 9,150 2,542 10,571 2,675 5,413 6,670 2.92 6.92 1.92 8.00 2.02 4.10 5.05 1,803 9,014 3,604 132,143 1.36 6.82 2.73 100.00 Exterminating Flowers and Decorations Licenses Total Direct Operating Expenses Notes Expense is higher than budgeted because china shelf collapsed on March 22 Expense is lower than budgeted because the new wine supplier agreed to print the wine lists free of charge © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 % © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 9.11 Joshua’s P&L Labor Cost Labor Cost Salaries and Wages Employee Benefits Total Labor Cost Last Year $641,099 99,163 740,262 % of Total Sales 27.8% 4.3 32.1 This Year $714,079 111,813 825,892 % of Total Sales 28.1% 4.4 32.5 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Labor Expense Make 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Labor Expense This year’s projected labor cost is computed as follows: This Year’s Sales x Last Year's Adjusted Labor Cost Percentage = This Year’s Projected Labor Cost Increases in payroll taxes, benefit programs, and employee turnover all can affect labor cost percentage © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 www.restaurant.org) 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Figure 9.12 Joshua’s P&L Other Expenses Last Year % of Total Sales This Year % of Total Sales Other Expenses Operating Expenses (excluding salaries and wages, and employee benefits) Direct Operating Expense Music and Entertainment Marketing Utility Services Repairs and Maintenance Administrative and General Occupancy Depreciation $122,224 2,306 43,816 73,796 34,592 66,877 120,000 41,510 5.3% 0.1 1.9 3.2 1.5 2.9 5.2 1.8 $132,143 7,624 63,530 88,942 35,577 71,154 120,000 55,907 5.2% 0.3 2.5 3.5 1.4 2.8 4.7 2.2 Nonoperating Expenses Interest Income Taxes $86,750 65,068 3.8% 2.8 $84,889 76,616 3.3% 3.0 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Profits Profit percentage using the profit margin formula is as follows: Net Income Total Sales © 2011 John Wiley & Sons = Profit Margin Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Profits Profit margin is also known as Return on Sales, or ROS. For the foodservice manager perhaps no number 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. © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Profits While it is not possible to state what a “good” ROS figure 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 % © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Analysis of Profits Perceptive foodservice operators now clearly recognize that profits, planet, and people all benefit from an operation’s green commitment “Planet friendly” management yields many positive financial outcomes for businesses, as well as for the health of the local communities they count on to support them Buying local (minimize transport costs and environmental impact) creates relationships with those who produce food and keeps money flowing through a local economy, resulting in a healthier community and reduced health care costs © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Technology Tools This chapter introduced the concept of management analysis as it relates 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Technology Tools The best programs on the market will: Analyze operating trends (sales and costs) over managementestablished time periods Analyze food and beverage costs Analyze labor costs Analyze other expenses Analyze profits Compare operating results of multiple profit centers within one location or across several locations © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller Technology Tools Interface with the facilities point of sales (POS) system or even incorporate it completely Red flag areas of potential management concern 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th 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 © 2011 John Wiley & Sons Food and Beverage Cost Control, 5th Edition Dopson, Hayes, & Miller ... 320,5 49 1, 498 ,97 3 62.3 77.2 65.0 1, 290 ,93 3 386,264 1,677, 197 62.7 80.0 66.0 641, 099 99 ,163 122,224 2,306 43,816 73, 796 34, 592 66,877 120,000 41,510 1,245,383 27.8 4.3 5.3 0.1 1 .9 3.2 1.5 2 .9 5.2... = Meats? ?and? ?Seafood? ?Cost? ?% Food? ?and? ?Beverage? ?Cost? ?Control, 5th Edition Dopson, Hayes,? ?& Miller Figure 9. 7 Joshua’s P&L Food Expense Schedule Last Year Food Sales % of Food This Year Sales $1, 891 ,011... © 2011 John Wiley & Sons Food? ?and? ?Beverage? ?Cost? ?Control, 5th Edition Dopson, Hayes,? ?& Miller Figure 9. 4 Joshua’s P&L Sales Variance Sales Food Sales Beverage Sales Total Sales Last Year $1, 891 ,011 415, 099 2,306,110