Report Format - Food Cost Control

Sir,
I need the proper format for costing. Can you send it to me.
Thanks & regards,
Jayanta

Back in May 2006, I posted a series of articles to help explain both the format of the period food cost results and the impact of each component. The report format varies for hotels and resorts with more than one profit center. When you have central purchasing and transfers of both stock items and batch recipe items, you need a more complex approach. It helps to start with a matrix.

The rows of the matrix are the formula components. You would have a column for each profit center (including the central purchasing - warehouse operation). The transfer activity should net to zero for the entire operation (i.e. transfers in equal transfers out). In theory, central purchasing & control's revenue and usage should be zero. All cost should flow to the operating units. We can evaluate each profit center's performance (as a % of revenue) and use the statistics to explain overall performance.



[Click on the matrix for a larger view.]

The goods available for use number is exactly the same as the simple formula. The beginning inventory plus purchases equals goods available. Usually, purchasing is done centrally and the profit centers will have very little purchasing activity.

Transfers out of the commissary to the units should closely track purchases since food is perishable. When net commissary transfers are far less than purchases, par stock levels should be modified to prevent future over stock conditions.

The commissary equals goods available plus the net transfer activity minus the ending inventory. We should see zero or a very small usage amount. A negative result would indicate a error in your data entry.

Each profit center's usage is simply the beginning inventory plus net transfers minus ending inventory. Divide the usage by the revenue to find the usage as a % of sales.

Setting Food Cost Priorities

I was asked this question at a job interview and hope that I got them right. What is your take on this question?

Food quality control, food cost control and personnel supervision are three important responsibilities of this position. Please prioritize these in order of importance and provide your reasons.

Thanks!

I would put these three important responsibilities in the following order:
1. Personnel supervision is number one because people make the entire business model work. It's impossible to hit your objectives if you are lax with supervision.
2. Food quality control would be my second priority because quality drives sales. You can hit every other number in a restaurant and if the quality is low you're in danger. So now we have qualified, well supervised staff producing high quality menu items.
3. Let's make some money now that our guests are happy with the service and food quality. Food cost control will help insure proper portion control, lower waste, optimal stock levels (freeing cash frozen on your shelves), and optimal blend of ingredient price and quality.

On the quality issue, it's often possible to meet the food quality control and food cost control objectives simultaneously. I shop at Whole Foods for many items due to family allergies. They have a private label called 365. The 28 ounce can of the 365 label canned peeled whole tomatoes costs $1.39 here in Virginia. This is a premium over other local markets. You may pay as little as $1.09 for the same size can. When you cost the canned products by the tomato, the Whole Foods 365 label comes up a winner. Each can averages 12 tomatoes. Some of the cheaper brands have only 7 or 8 tomatoes and plenty of water or tomato juice.

Would you rather pay $1.39 for 12 tomatoes or $1.09 for 7.5 tomatoes? You pay 25% more when you buy the cheap brand.

This analysis is 100% tomatoes to tomatoes. The size is almost identical.

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.