Finding Your Way Through The Recession

My readers have sent me a number of questions regarding the impact of lower revenue on budgeted profit. Most of these questions come from people who are front line oriented like chefs, f&b controllers and owners. They want to know how to project profits given a drop in sales and they want to know how to answer questions about NOI, EBITDA, EBITDAR, etc.

Generally, cash is king and this is especially so in a recession.

The financial people want to focus on cash flow. Typically, the quickest way to generate cash is a bank loan. Banks are not freely loaning money right now. The second quickest source of cash is paying suppliers slowly. This can be costly in the long-term. Most companies struggling to meet payrolls and quarterly tax payments have found their cash flow threshold. As sales continue to drop they have a cash crunch. These companies start layoffs, slow down payments to suppliers and other tactics in order to meet payroll, rent and taxes.

So how do you calculate the impact of a sales drop? If sales decline $10,000 or $100,000 or even $1,000,000, how does that affect your cash flow. If you are an owner, you need to look at NOI (Net Operating Income) and add back depreciation and amortization [EBDA]. You don't have any corporate colleagues to share the pain so it doesn't make any sense to add back interest, taxes [EBITDA] and rents [EBITDAR].

Let's say your current net operating income plus depreciation and amortization equals 30% of revenue. If you drop $10,000 in revenue and maintained your percentage targets for costs and expenses, you would put $3,000 less in the bank account. The same statement ratio on $100,000 would eliminate $30,000 of cash flow and $300,000 for a $1 million drop.

How do you make up for these shortfalls? You need to put the drop in relationship to your original budget. If you dropped $100,000 from $2 million to $1.9 million, the $30,000 equals 1.58% of $1.9 million. You need to trim about 1.6% from your variable costs (food, beverages, direct labor, supplies, etc.). You multiply the sales % drop by the profit % (30% X 5.26%). I use the $1.9 million instead of $2.0 to calculate my sales drop % because I need to know how to adjust current operations. In my current numbers, I don't have the extra $100,000 in revenue.

If you absolutely hate working with numbers, use the sales drop of 5% and multiply by the 30%. You'll get 1.5% and this will be close. Make it 2% to be safe.

These figures can vary tremendously as the sales drop as a % of budgeted sales increases. Some operators are experiencing drops of 20% in revenue. If you had a $5 million restaurant turn into a $4 million business, you'd be in the 20% club. Perhaps your average entree is in the $25 to $40 range. What do you need to do to survive?

You would be looking for a cost cut of 7.5%. WOW! That is huge. I'm expecting you have already cut costs to the bone and were projecting a break even year. In the short run, many operators in this position are selectively cutting management positions.

Trying to find the $300,000 bottom line short fall in food cost % is probably tantamount to slicing your own throat. If you had your food cost % in line and can't increase menu prices (which may be out of the question for many of you) a 7.5% drop is tough. Cutting portions to achieve a 7.5% of sales drop would certainly be perceived by your patrons. Operators are cutting fat from their staffs to make up most of these shortfalls. A $300,000 cut means 5 key people making $50,000 plus benefits.

For the companies growing sales at this time, your hiring woes will come to a screeching halt. There are plenty of well qualified professionals looking for work this quarter.

Number Crunching For Non-Accountants

I joined your site because I need help on self training in figuring out how to successfully manage my kitchen. I've been in this Industry for a while now, I know a lot about cooking and procedures, however, I'm in a position right now that requires me to manage all aspects of running a profitable kitchen. I can cook a steak to perfection and build complex recipes, supervise, hire and fire.....but number crunching and being responsible for food cost control and budgeting, well, looking over things, its a little more complex and overwhelming than I figured?? Would you be able to give me some pointers on simplifying the process.

A black and white of this business in one simple word is "pub" its clientele is regulars that have been swinging through the same doors for years now, however, the new owners have renovated it into a new "restaurant/bar" and are marketing it towards that atmosphere with a capacity of exactly 135 people.

Now, the menu is appetizers, two salads and a few entrees. I'd say 25 menu items tops.

I've shown the owners that I'm up for the challenge but proving that I can do this means I need a crash course in Business Mathematics, and I failed math twice during school. I really don't know where to start but I know it has something to do with inventory, food cost and budgeting.

Please help.

Chef

I would start with a simple approach. Take your steaks and create a simple control sheet. Everyday you can write down the number of steaks at opening, purchased, butchered, sold and the number at the end of the day:

Steak Control Sheet

Date:

Beginning Count(+)________________

Purchased(+)______________________

Butchered(+)______________________

Sold(-)___________________________

Ending Count(-)___________________

Over/Short________________________


When you add the purchased and butchered to your beginning and subtract the sold and ending counts, you should get a result of zero. Do this everyday! You will know where every steak went and why.

Keep your menu focused and build slowly on popular items. Make up sheets for all your popular center of the plate items. Call 2 or 3 companies who can supply these key items and give the business to the supplier with the best service, quality and prices.

Question About Spoilage

I stress to upper management the need to factor spoilage (excess / overproduction of food discarded each day) into our cost of food summary. I am told that since it is already expensed, that it doesn’t need to be considered. What are your thoughts on this subject and do you have any document or archive that discusses this topic.

Thank you,
Carlo M.

Spoilage should be closely monitored to make sure it stays in check. From the general ledger accounting perspective, the food cost is equal to purchases net of inventory change. Food disposed of in the garbage gets expensed just like the food consumed by guests. Your food cost results will improve if spoilage is kept to a minimum.

The main cause of spoilage is forecast errors. Forecasting of purchases and production involve demand estimates, inventory checks and safety factors. Waste tends to be higher when the menu requires highly perishable fresh fish and chicken. Management needs to weigh the cost of running out of an item vs. the cost of waste due to over stocking an item.

Often, the safety factor may be too large when ordering a perishable item. If you keep records of the spoilage, you will spot problems quicker. Chronic waste can be prevented with 10 minutes of effort each day. Simply keep a log of all items disposed of for any reason. Note the item name (ingredient or recipe), quantity wasted, cost and reason.

Once you start keeping a record of the waste, you will see trends and make adjustments. These adjustments will help you lower your cost of goods sold over time.