{"id":362,"date":"2019-06-24T18:55:24","date_gmt":"2019-06-24T18:55:24","guid":{"rendered":"https:\/\/opentextbc.ca\/basickitchenandfoodservicemanagement\/chapter\/operating-budgets-and-income-statements\/"},"modified":"2024-11-07T21:50:43","modified_gmt":"2024-11-07T21:50:43","slug":"operating-budgets-and-income-statements","status":"publish","type":"chapter","link":"https:\/\/opentextbc.ca\/basickitchenandfoodservicemanagement\/chapter\/operating-budgets-and-income-statements\/","title":{"raw":"Operating Budgets and Income Statements","rendered":"Operating Budgets and Income Statements"},"content":{"raw":"An operating budget is management\u2019s plan for generating revenue and incurring expenses over the time of the budget. Operating budgets are usually in effect for a fiscal year, but they are subject to alterations if anticipated revenues or costs change markedly from what was projected.\r\n\r\nIn the following section, it is assumed that there are records from previous years that can be used to create an operating budget. When a business first starts up, the operating budget is based upon a careful analysis of the market and the expertise senior management brings with them to the new enterprise from other jobs in the food service industry. Creating a first budget is beyond the intent of this book.\r\n\r\nA budget is developed by calculating projected sales, determining required profit levels and fixed expenses, and calculating food costs.\r\n
\r\n

Example 43: Sales\/Cost\/Profit Equation<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nProfit can only occur when sales exceed the break-even point. That is,\r\n\r\nprofit = sales \u2212 costs\r\n\r\n= sales \u2212 (labour + food costs + overhead)\r\n\r\nor\u00a0 sales = labour + food costs + overhead + profit\r\n\r\n<\/div>\r\n<\/div>\r\n[pb_glossary id=\"410\"]Overhead[\/pb_glossary]<\/strong> is a fixed cost. Your rent payment usually is the same regardless of the level of your sales. Labour costs are semi-variable costs. As was explained earlier, some labour costs are constant and must be paid even if sales do not meet expectations while other labour costs are the result of increases in sales.\r\n\r\nSince labour costs are not truly fixed, the variable part of the cost of labour can be manipulated in times of poor sales by cutting back on paid hours, introducing shift changes, and even laying off personnel. Personnel working in the food industry often learn how flexible their hours can become in times of poor sales!\r\n\r\nHoped-for profit can be treated as a fixed cost. Often, profit is considered to be that which is left over after all costs have been paid. However, more and more businesses try to treat profit as an expense that should be met.\r\n\r\nWith the exception of some labour costs, only the cost of food is truly a variable cost in the cost\/profit equation because the amount of food purchased is directly influenced by the amount of food sold by the establishment.\r\n\r\nBy determining overhead, labour, and profit costs, you can calculate optimum food costs by subtracting all the other costs from projected total sales. This relationship can be seen by manipulating the sales equation presented above (sales = labour + food costs + overhead + profit) into food costs = sales - (labour + overhead + profit).\r\n

Planning for a Profit<\/h1>\r\nThe first step in planning for a profit is to determine how much return the investor or company needs. The restaurant business is considered a risky investment. Some people make a lot of money; more people go broke. If people can earn 10% by investing their money in safer investments, investors will expect to earn more than this as they have a chance of losing all their money.\r\n
\r\n

Example 44<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nA restaurant owner has put up $100 000. The owner wishes to have a profit of 15%. The cost to the restaurant for the use of this money is:\r\n\r\ncost (profit) = principle \u00d7 interest rate\r\n\r\n= $100 000 \u00d7 15%\r\n\r\n= $100 000 \u00d7 0.15\r\n\r\n= $15 000\r\n\r\n<\/div>\r\n<\/div>\r\n

Calculating Other Costs<\/h1>\r\nRemember, fixed costs include rent, heat, light, and other overhead costs. For this discussion, assume the restaurant has been in business for a number of years and last year the overhead costs amounted to $55 000. These costs have been increasing at about 5% per year.\r\n
\r\n

Example 45: Projected Food Cost<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nThe projected fixed cost for next year will be:\r\n\r\nnew overhead cost = old overhead cost + increase in overhead cost\r\n\r\n= $55 000 + (5% of old cost)\r\n\r\n= $55 000 + (0.05 \u00d7 $55 000)\r\n\r\n= $55 000 + ($2750)\r\n\r\n= $57 750\r\n\r\n<\/div>\r\n<\/div>\r\nThe semi-variable cost of labour can be treated in much the same manner. Assume that last year labour costs were $75 000 which was an increase of 5% over the previous year. Other indicators suggest that labour costs will increase about the same for the coming year.\r\n
\r\n

Example 46: Projected labour cost<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nThe projected labour cost for next year will be:\r\n\r\nnew labour cost\u00a0 = old labour cost + increase in labour cost\r\n\r\n= $75 000 + (5% of old cost)\r\n\r\n= $75 000 + (0.05 \u00d7 $75 000)\r\n\r\n= $75 000 + ($3750)\r\n\r\n= $78 750\r\n\r\n<\/div>\r\n<\/div>\r\n

Calculating Projected Sales Levels<\/h1>\r\nTo forecast sales it helps to have a past record on which to base projections. Assume such records are available and the last year sales were at $225 000. It is thought sales can be increased by 10% this year.\r\n
\r\n

Example 47: Projected sales<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nnew sales level\u00a0 = old sales level + increase in sales level\r\n\r\n= $225 000 + (0.10 \u00d7 $225 000)\r\n\r\n= $225 000 + $22 500\r\n\r\n= $247 500\r\n\r\n<\/div>\r\n<\/div>\r\n

Calculating Food Costs<\/h1>\r\nTo calculate food costs, use the equation derived previously.\r\n
\r\n

Example 48: Food costs<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nfood costs = sales \u2212 (labour + overhead + profit)\r\n\r\nIn the example being developed, food costs are:\r\n\r\nfood costs\u00a0 = sales \u2212 (labour + overhead + profit)\r\n\r\n= $247 500 \u2212 $78 750 \u2212 $57 750 \u2212 $15 000\r\n\r\n= $96 000\r\n\r\n<\/div>\r\n<\/div>\r\nIf all the expenses are to be met, the restaurant should not spend more than $96 000 in food costs. From this amount, the restaurant must generate $247 500 in sales.\r\n

Cost Percentages<\/h1>\r\nOnce all the costs have been determined (predicted), it is fairly easy to determine cost percentages. In the example under discussion, the cost percentage can be determined using the basic cost percentage equation below.\r\n
\r\n

Example 49<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\ncost %\u00a0 = cost \u00f7 sales\r\n\r\nlabour cost % = labour cost \u00f7 sales\r\n\r\n= $78 750 \u00f7 $247 500\r\n\r\n= 0.318\r\n\r\n= 31.8%\r\n\r\noverhead cost % = overhead cost \u00f7 sales\r\n\r\n= $57 750 \u00f7 $247 500\r\n\r\n= 0.233\r\n\r\n= 23.3%\r\n\r\nprofit %\u00a0 = profit \u00f7 sales\r\n\r\n= $15 000 \u00f7 $247 500\r\n\r\n= 0.0606\r\n\r\n= 6.1%\r\n\r\nfood cost % = food cost \u00f7 sales\r\n\r\n= $96 000 \u00f7 $247 500\r\n\r\n= 0.3878\r\n\r\n= 38.8%\r\n\r\n<\/div>\r\n<\/div>\r\nThe information gathered above can be used to generate a projected budget.\r\n

Calculating Projected Sales<\/h1>\r\nPast sales figures are collected from monthly up-to-date income statements and from the audited budget of the previous year. The past sales should be carefully analyzed to see if any trends are emerging. For example, if sales have been falling in the last quarter, you want to ask why, as the drop in revenue may be a sign of continuing trouble in the new fiscal year.\r\n\r\nThe assumption is usually made that growth in the past year will mean growth into the new year. This is probably true but only if the conditions of the new year are thought to be nearly the same as the past year. If a new restaurant is going in across the street, if the local mill is going to lay off 150 workers, if previously untaxed food is going to be subjected to a sales tax, or if the minimum wage is going to be increased and you depend on help paid at or near that level, past growth records may mean very little. Equally important are positive changes in the community. For example, an excellent review from a restaurant critic can have a huge impact on business that was not counted in your projections.\r\n\r\nIf possible, compare the monthly food sales of last year with its corresponding sales for the previous year. Again, this is only possible if the restaurant has been in business a few years. Such a comparison is shown in Figure 31.\r\n
\r\n

Figure 31: Sales comparison year over year<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Sales comparison year over year<\/caption>\r\n
Month<\/th>\r\nSales This Year<\/th>\r\nSales Last Year<\/th>\r\nDifference<\/th>\r\nPercentage Change<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
January<\/td>\r\n$20 925<\/td>\r\n$19 020<\/td>\r\n$1 905<\/td>\r\n10%<\/td>\r\n<\/tr>\r\n
February<\/td>\r\n$21 390<\/td>\r\n$19 810<\/td>\r\n$1 580<\/td>\r\n8%<\/td>\r\n<\/tr>\r\n
March<\/td>\r\n$22 090<\/td>\r\n$19 725<\/td>\r\n$2 365<\/td>\r\n12%<\/td>\r\n<\/tr>\r\n
April<\/td>\r\n$23 020<\/td>\r\n$21 320<\/td>\r\n$1 700<\/td>\r\n8%<\/td>\r\n<\/tr>\r\n
May<\/td>\r\n$23 030<\/td>\r\n$21 730<\/td>\r\n$1 300<\/td>\r\n6%<\/td>\r\n<\/tr>\r\n
June<\/td>\r\n$23 950<\/td>\r\n$21 780<\/td>\r\n$2 170<\/td>\r\n10%<\/td>\r\n<\/tr>\r\n
July<\/td>\r\n$23 715<\/td>\r\n$21 365<\/td>\r\n$2 350<\/td>\r\n11%<\/td>\r\n<\/tr>\r\n
August<\/td>\r\n$23 720<\/td>\r\n$21 200<\/td>\r\n$2 520<\/td>\r\n12%<\/td>\r\n<\/tr>\r\n
September<\/td>\r\n$23 320<\/td>\r\n$20 710<\/td>\r\n$1 610<\/td>\r\n8%<\/td>\r\n<\/tr>\r\n
October<\/td>\r\n$25 110<\/td>\r\n$22 900<\/td>\r\n$2 210<\/td>\r\n10%<\/td>\r\n<\/tr>\r\n
November<\/td>\r\n$24 830<\/td>\r\n$22 200<\/td>\r\n$2 630<\/td>\r\n12%<\/td>\r\n<\/tr>\r\n
December<\/td>\r\n$24 900<\/td>\r\n$21 240<\/td>\r\n$3 660<\/td>\r\n17%<\/td>\r\n<\/tr>\r\n
Totals<\/td>\r\n$279 000<\/td>\r\n$253 000<\/td>\r\n$26 000<\/td>\r\n10%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n<\/div>\r\n \r\n\r\nThe sales picture looks bright in Figure 31. Management could probably safely assume that next year the growth will continue. They would then draw up an estimated monthly sales chart.\r\n\r\nThe monthly projections can be used in the next fiscal year to track sales in relation to the projection. For example, if sales in January are significantly less than the projection, is it time to worry, or can the loss be picked up next month? That is the type of question management has to be constantly asking.\r\n\r\nA monthly projection is shown in Figure 32. Last year\u2019s sales are increased by 10%, which is the total percentage change in sales as reflected in Figure 31. Less conservative managers might be tempted to project a greater percentage increase based on the steady growth since June. However, it is usually best to err on the side of caution as it tends to be easier to handle excess income than it is to handle income shortfalls. But, if sales do increase dramatically, management should be prepared to redraw the budget.\r\n
\r\n

Figure 32: Sales projections based on previous year's growth<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Sales projections based on previous year\u2019s growth<\/caption>\r\n
Month<\/th>\r\nSales This Year<\/th>\r\nIncrease by 10%<\/th>\r\nProjected Sales<\/th>\r\n<\/tr>\r\n<\/thead>\r\n
January<\/td>\r\n$20 925<\/td>\r\n$2 090<\/td>\r\n$23 015<\/td>\r\n<\/tr>\r\n
February<\/td>\r\n$21 390<\/td>\r\n$2 140<\/td>\r\n$23 530<\/td>\r\n<\/tr>\r\n
March<\/td>\r\n$22 090<\/td>\r\n$2 210<\/td>\r\n$24 300<\/td>\r\n<\/tr>\r\n
April<\/td>\r\n$23 020<\/td>\r\n$2 300<\/td>\r\n$25 320<\/td>\r\n<\/tr>\r\n
May<\/td>\r\n$23 030<\/td>\r\n$2 300<\/td>\r\n$25 350<\/td>\r\n<\/tr>\r\n
June<\/td>\r\n$23 950<\/td>\r\n$2 400<\/td>\r\n$26 350<\/td>\r\n<\/tr>\r\n
July<\/td>\r\n$23 715<\/td>\r\n$2 370<\/td>\r\n$26 085<\/td>\r\n<\/tr>\r\n
August<\/td>\r\n$23 720<\/td>\r\n$2 370<\/td>\r\n$26 090<\/td>\r\n<\/tr>\r\n
September<\/td>\r\n$22 320<\/td>\r\n$2 230<\/td>\r\n$24 550<\/td>\r\n<\/tr>\r\n
October<\/td>\r\n$25 110<\/td>\r\n$2 510<\/td>\r\n$27 620<\/td>\r\n<\/tr>\r\n
November<\/td>\r\n$24 830<\/td>\r\n$2 490<\/td>\r\n$27 320<\/td>\r\n<\/tr>\r\n
December<\/td>\r\n$24 900<\/td>\r\n$2 500<\/td>\r\n$27 400<\/td>\r\n<\/tr>\r\n
Totals<\/td>\r\n$279 000<\/td>\r\n$27 910<\/td>\r\n$306 910<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n<\/div>\r\n<\/div>\r\n

Determining Profit Levels and Costs<\/h1>\r\nAgain, the best plan is to analyze past costs and see if they can be lowered and to determine if the profit level must be adjusted. Costs tend to go up, but fixed costs may stay at the same level as in the previous year while some controllable costs might actually decline after careful analysis.\r\n\r\nCosts include the following:\r\n