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 costs

2. Manage inventory
3. 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 adaptation

If met: If not met:
Continue to monitor Reassessment of standard
Corrective measures
Added training
Disciplinary action
-verbal
-written
-dismissal
 TERMINOLOGY--COSTS
Fixed Costs —those that don’t fluctuate when volume changes
 
Rent
Insurance
Management salaries
Depreciation
Some taxes
 
Variable Costs —those that are tied to the volume of business
 
Cost of Goods
Hourly labor
A portion of FC must be covered by each unit sold. If volume
increases, the amount covered by each unit decreases.

 
 
Fixed Cost$1,000
1,000 units sold$1.00 per unit
5,000 units sold$ .20 per unit
 
 
Variable Costs
1,000 units sold$1.00 per unit
5,000 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 server
Sales by shift
Sales 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 STANDARDS
Standards 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 $COG
SALES $1,100
OP $500
PURCHASES $1,000
CLOSING INVENTORY $400
TRANSFERS IN $100
TRANSFERS OUT $200
EMPLOYEE MEALS $300
PROMOTIONS (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
-$COGS
Gross Profit
%GOG
 
-Expenses:
Labor Costs
+Benefits
Total 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 Management
Integrated systems that oversee food chain from supplier to end user
-supplier
-manufacturer
-wholesaler
-restaurant/retailer
-end user
 
Reduce inventory
Reduce 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