YOU WANT TO STAY IN BUSINESS? LEARN HOW TO USE ONE OF THESE…
One of the most important tools in restaurant accounting for effectively managing food cost is a Declining Budget. Think of a Declining Budget like the gas tank in your car; simple to understand and you need to pay attention to it if you want to keep making forward progress. When used properly, a Declining Budget can be one of the best tools for stabilizing your costs as well as increasing your cash flow. In order to grasp how a Declining Budget is used, we must first identify the two factors that are vital to understand if we’re going to be successful – restaurant sales (revenue) and product pricing.
Factually, restaurant revenues are variable. Many restaurants obtain their revenue from multiple revenue centers with Dining Room, Bar, Catering, Banquets and Retail as the most common. Each week, the sales from these revenue centers can vary widely based upon seasonality, weather, holidays, sporting events, construction and new competition. Product pricing, unfortunately for most operators, also fluctuates tremendously based upon seasonality, availability, purchase quantity, quality, as well as total purchases made with a specific vendor. Added to the instability is the fact that products have varying shelf lives (the length of time a product can remain on the shelf before it spoils), which can range from one day for produce to indefinite for items such as paper supplies. The bottom line is that you’re somewhat set up for a failure before you even begin to spend whatever money you have in your bank account.
It’s easy to budget how much you’re going to spend (and ultimately make) when both the revenue you bring in and the product costs are static, but let’s be real here, that’s simply not the nature of the game. In the world we wish we lived in, wouldn’t it be great if we knew that we were always going to pull in $20,000 in sales, but only had to spend $5,000 to make enough products necessary to bring in those sales? If it were that easy, 75% of restaurants probably wouldn’t fail in their first two years, and we’d be able to set aside a fixed amount of money for other expenses or savings and know our profit before we even made a sale.
Well, in the world we DO live in, our sales for the last four weeks can easily decline by reason of the weather, the holiday season, and the new Vegan Wine Bar that just opened up around the corner.
THAT’S $13,500 WE’RE OFF IN REVENUE FROM THE FIRST WEEK THROUGH THE FOURTH WEEK.
Using the same example above, what happens if we spend the same amount of money buying our product each week, without knowing that we should reduce it based on the sales?
WE’VE JUST OVERSPENT BY $14,500 IN ONE MONTH!
So now you’ve overspent by a pretty large sum. According to Murphy’s Law, what do you think happens next? Your Sales Tax Payment to the Department of Revenue is due, and you either have to reach into your pocket for the difference, or you get to make the friendly “I’ll pay you next month call.” At that moment you realize that the interest on amounts owing to the State and Federal agencies is borderline usury (REALLY HIGH, for those playing the home game). Sucks huh? Not to mention the other 30 plus things that could easily go wrong and leave you reaching into your lint-filled pockets looking for a buck or two. Needless to say you’re broke faster than a 21 year old at a Vegas night club.
Ok now, enough with the reality check. If you’ve made it this far then you’ve clearly got the right attitude to avoid the disasters illustrated above. Ultimately, using a Declining Budget gives you the ability to keep one eye on the fluctuation in your sales, and the other on how much you’ve spent IN RELATIONSHIP TO THOSE SALES, which, if used daily, supports keeping your variable spending in line with your fluctuating sales.
IN THE EXAMPLE ABOVE WE ARE STATING THE FOLLOWING:
- We have an estimation in total revenue for the week of $39,133.00.
Of that total revenue, 80% ($31,306.40) is food, and 20% ($7,826.60) is beverages.
- We would like our food cost to be 33% of our revenue ($10,331.00).
This is the total amount that you get to spend based on your estimated revenue multiplied by the estimated cost of food. Beverage is calculated in the same way.
If you look at the GL column, each food related purchase category (produce, dairy, meat, seafood etc.) has a forecasted dollar amount based on its percentage of cost. For example, produce is 2.5% of the estimated 33% total food cost. This means that based on $39,133.00 in estimated weekly revenue, you can allot $782.66 to spend on produce.
OK I GET THE SETUP, NOW HOW DOES IT DECLINE?
Each day, your sales are updated and your purchases are recorded. The total purchases are summarized and subtracted against the forecast, resulting in an available amount to spend. To continue the example above, you have $782.66 to spend on produce. Let’s say Monday you spend $53.59; this leaves you $729.07 left to spend for the week.
WHAT HAPPENS WHEN I SPEND MORE THAN I’M ALLOWED TO SPEND?
You shouldn’t go over your limit; however, when you do, it typically means one of a few things:
- Is your revenue forecast accurate? You need to pay attention to your daily sales and make adjustments, and not doing so could place you in a real bind. For example, if you notice that you are having a busier-than-usual week and you don’t adjust your spending, you may not order enough product to satisfy all of your hungry guests.
- Are your targets reasonable? Can you really run a 33% food cost when you’ve been averaging 38%? It is absolutely necessary to be realistic in your expectations. Targeting too low won’t allow you to spend enough on product to be able to services your forecasted sales (even when they are accurate).
- You have the Gallon of Gas Syndrome. You’ve forecasted your revenue properly, you’re ordering the correct amount of product, and you’re still overspending. So what gives? The Gallon of Gas Syndrome simply means you can only go so far with what you have. Remember, product prices are volatile – especially on produce, dairy, meat and seafood; they change weekly, so staying disciplined and following a Declining Budget will enable you to notice pricing fluctuations on key items within a week, versus say, almost never. In turn, this will allow you to work with your vendors proactively on procuring the highest quality products while sticking to your budget.
OK, THIS IS GREAT! NOW HOW DO I GET A DECLINING BUDGET?
Well our obvious answer is to call us at RSI. Copious amounts of effort go into the automation for a Declining Budget – Invoices are imported automatically from your vendors (which track pricing volatility), projected spending is automatically updated on your orders, and finally, your forecast is measured based upon previous weeks’ averages. Most importantly however, is that we have a team of Restaurant Accountants and Operations Training and Education Specialists who have all worked in the industry available to assist you… YOU ARE NOT ALONE!!!
VERY COOL, WHERE OR HOW DO I PRACTICE?
Check out the declining budget below… it will you started and will give you a sense for what you’ll need to start taking charge of your finances.