Restaurant Variance Analysis

Do you find your restaurant’s operating results unsatisfactory? Do the profits turn out to be diminished compared to what you had anticipated? It’s time you took a closer look at the operations scenario and figure out what’s making those numbers shrink. Variance analysis is one of the most powerful and practical tools at your disposal to investigate the deviations between the budgeted and actual results.

It goes without saying that restaurant owners prepare budgets from time to time for both the fixed costs and variable costs. The budgeted cost is then topped with a percentage markup to arrive at the selling price of the items on the menu. It is when the actual costs deviate from the budgeted that there is a variation between the budgeted and the actual profits. The variation could be either positive or negative. Let’s take a look at the following example.

Let us consider that your restaurant had expected to serve 1400 meals this week with an average bill of £30. That makes your budgeted sales £42,000. However, you ended up serving 1450 meals with an average bill of £32. Hence, you made an actual sale of £46,400. The difference between the actual sales and budgeted sales is called the variance. In this case, there is a positive revenue variance of £4,400 because the actual sales exceed the budgeted, which is a good sign.

The sales variance of £4,400 can be split into two parts; £1500 and £2,900 based on the idea of volume variance and price variance. The positive sales variance of £1500 is the result of the rise in volume by 50 meals at the rate of £30. On the other hand, the £2 increment in the anticipated average bill of £30 for all the 1450 meals resulted in the positive sales variance of £2900.

Similarly, if the actual sales fall short, there would be a negative sales variance, which could be a cause for concern if there is a major and consistent decline or stagnancy over a longer period. This is when you would need to analyze the variance. By that we mean, finding out what went wrong and why?

There could be several reasons the actual outcomes diverge from the anticipated ones. Particularly in the restaurant industry, one or more of the following factors are commonly responsible for the sales variance.
– Unforeseen fluctuations in the occupancy rate
– Varying bill sizes
– Deviation in the actual cost of labour from the budgeted affects both the cost variance and profit variance.
– Deviation in the actual procurement cost of ingredients from that budgeted affects both the cost variance and profit variance etc.

Whenever there is a negative sales variance, any increased costs can take up a major proportion of the sales revenue, thereby eating into the profits.

When do you analyze the variances?

The one very intriguing characteristic of variances is that not all of them are subject to examination. It depends on how significant or abnormal a variance is. For example, you accounted for cost of a specific quantity of the ingredients for the week to be £12,000. However, there was a rise in the prices of certain ingredients and you had to pay £13,000. The additions £1,000 spent on ingredients might not be as significant and hence, you might give it a pass.

However, if you continue to pay increased prices over the long run, you might need to analyze the variance in the cost of procurement. Renegotiating the prices of the commodities in question with your supplier would be the most sensible thing to do. If that doesn’t work out well, you could try looking for another supplier. However, make sure you do not compromise the quality of the ingredients. Some restaurateurs would also consider raising the prices of the specific items on the menu using the dearer ingredients.

Let’s not ignore the fact that the variance in the occupancy rate and cost of labour can occur alongside. The percentage aggregate variance could have a major impact on the profits. Therefore, it could be detrimental to your business to disregard a variance for analysis if you think its percentage is negligible.

So let’s face it, guesswork is risky. Conducting variance analysis on a regular basis is the practical and feasible method to prevent yourself from losing track of all the costs and deviations. We hope this write up helped you understand how vital the tool of variance analysis is when you want to establish the cause of discrepancies and implement corrective measures.

Previously we had shared an insightful write-up about efficient inventory management practices. In the upcoming article, we would discuss the winning strategies for pricing the items on your restaurant’s menu. Stay tuned!

Restaurant Inventory Management

In the current era of entrepreneurship, the food and beverage industry is making a lot of heads turn. Every so often we get to see a shiny, new restaurant opening its doors to the foodies in town. However, we all know that running a restaurant is not all unicorns and rainbows. It requires a strong business sense and consistent meticulousness to survive and grow.

Needless to say, the labour cost constitutes the major portion of the operating cost of a restaurant. The inventory cost sums up to be the second largest segment. The labour cost is a fixed cost. The cost of inventory is something that you can control to avoid wastages. Through this write-up, we aim to explain to you how crucial it is to have stringent inventory management policies in place, and how the implementation of these measures or the lack thereof can make or break your restaurant business.

Let’s take a look at some of the best restaurant inventory management practices that your business could embrace to minimize wastage and maximize profitability.

1. Prepare a Timetable

It is very important that you prepare a timetable for taking inventory and follow it consistently. For example, if you count your inventory on Mondays, stick to it. Fix a time for doing inventory to avoid any variations, like in the morning or at night. You cannot accomplish the task with precision if there is work in progress. Taking inventory before the restaurant opens or after it closes, are the best times to account for inventory. In addition, avoid doing the inventory when new stock is being delivered.

2. Set the Frequency

The frequency of doing inventory shall vary from one item to another, depending on their nature and frequency of ordering. The one thing that we can say with the utmost surety is that taking inventory only on a monthly basis is not good practice. In the restaurant industry, you often place orders on a weekly basis. Therefore, take weekly inventory of such items to keep a tab on their availability and rate of usage. Similarly, account for the items you order every day on a daily basis.

3. Follow the FIFO Method

FIFO stands for First In, First Out. It means using up the old stock before moving on to the new one. Most items in the restaurant storeroom are perishable. To avoid wastage, they must be used before they go bad. It also depends how well you forecast the demand of the items before you decide on the ordering quantity.

4. Systematic Arrangement

We cannot emphasize enough how crucial it is, the way you arrange items in your restaurant’s storeroom. The staff responsible for taking the inventory should be trained to follow the routine arrangement of the stock on the shelves to efficiently implement the FIFO technique. The older stock should occupy the front row on the shelves for being readily accessible. Once these items are used up, the next batch of inventory should be moved to the front, as we go. Do not forget to declutter your storeroom by taking the expired items off the shelves.

5. Make it a Two-Person Job

Assigning the responsibility of keeping track of the inventory to two employees is a great idea. The two in-charges could do the inventory separately and compare their results to see if there is any discrepancy. Having said that, it reduces the odds of you missing the inconsistencies, both current and probable.

6. Use Technology to Your Benefit

The market is flooded with a wide range of inventory management software. You could try them and find out which one fits your needs the best. Why we emphasize so much on accuracy is the fact that your inventory records have an impact on the Profit and Loss statement. Any incorrect details would skew the final picture of the profitability of your business, thereby jeopardizing it in the long run. The inventory count sheets you prepare using the program would not only help you track your stock levels but also reveal consumption trends of the various items across the timeline. The trend proves useful in forecasting the demand of such items to arrive at a precise ordering quantity.

7. Standardization is the Key

As highlighted earlier, the solution to a sound restaurant inventory management system is consistency, which comes from standardization. Standardize the units used for quantifying each item in stock, be it measure of weight or number of items. To reduce errors and increase the swiftness of the process, it is necessary that the same employees do the inventory every time.

We are sure that once you put these ideas into practice, a significant wave of positive change would come your way. You would notice reduced incidences of wastage, pilferage, and spoilage, which ultimately culminate into enhanced profitability. We hope you found this information practical and realistic. In our upcoming post about restaurant operations we would talk about variance analysis and product costing, stay tuned.

Cash Flow

Many business owners I talk to don’t have a problem growing their business, they have a problem managing that growth.

Often when a business grows rapidly without being prepared it can lead to strains on the owner’s time, stretched resources, unhappy and disengaged employees and pressure on the finances of the business.

Put simply, sometimes high growth businesses are too successful for their own good, or should I say that’s how they appear, when in all reality this can be managed before getting into cash flow difficulties.  Sometimes the peculiar situation arises whereby a successful business appears to really be struggling financially when they don’t need to be.

What follows is some practical guidance for businesses of all sizes and in all industries for managing their cash flow.

Cash Flow Fundamentals

First and foremost it’s crucially important to understand how the cash flow of a business works.  This is not the same as the profit a business makes.  It is absolutely possible for a profitable business to go bust if they don’t manage their cash properly.

At the most basic level, cash flow is the difference between cash coming in to the business and cash going out of the business. It’s that simple right?  Well, not exactly, some attention is required to maximise cash inflow and minimise cash outflow.

To ensure that cash flow is optimised we can concentrate on 3 key areas for maximum effect.  These being Inventory, Accounts Payable (or Creditors) and Accounts Receivable (or Debtors).  Let’s have a look at each in turn.

  1.    Inventory

The purchasing of stock which will be re-sold at some time in the future, possibly as it is or possibly after some adaptation, has the potential for tying up your cash.  If a business has its money invested in stock sitting in a warehouse then this can’t be spent on other things which may be of more immediate benefit to the business.  Not to mention that the longer that stock is held increases the risk of waste, theft or obsolescence.

Only enough inventory should, therefore, be kept to fulfil firm orders unless the item is something which can be used in many product lines as this could increase response time to customer orders.  The management of stock will require an effective supply chain but only that which is required imminently should be kept on hand.  Keeping large amounts of inventory can mean increased costs associated with storing, managing and securing that inventory.

  1.    Accounts Payable

As a general rule of thumb, paying suppliers as late as reasonably possible will positively impact cash flow.  Businesses large and small can take advantage of maintaining an effective and lean accounts payable function.

Where suppliers invoice on credit try to pay as close to the due date as possible, if you have a good reputation for paying on time you may also be able to negotiate extended credit terms meaning that your money stays with you for longer. Occasionally suppliers offer discount incentives for early payment, you should weigh up the benefit of the reduced cost against the benefit of extended payment terms at a higher amount.  It very much depends on each individual situation and would need to be balanced against how much cash you have and whether your cash receives any interest invested anywhere else.  If you’re short on cash you would probably be better not paying earlier than necessary.

A cautionary note, however, would be that not paying suppliers on time regularly can lead to reputation damage, supply chain interruption and withdrawal of credit facilities.  This is not a position you want to find yourself in if you already have cash flow worries and will certainly make managing growth harder than it should be.

  1.    Accounts Receivable

If selling to a customer on credit the first step before anything would be to determine the risk of selling to them by checking their credit history, whilst no guarantee it should reduce the risk of default on invoice payments.  If a prospective customer has a history of non-payment then you need to determine whether you want the sale more than you want the money in the bank…the two are not the same thing.

Quite the opposite of accounts payable, the aim in accounts receivable is getting paid as quickly as possible.  One way of doing this would be to reduce payment terms for as long as your customers will accept this.  Another very effective way of getting paid on time is making it as easy as possible for customers to do so. There are a variety of ways that this can be done from electronic invoicing to accepting other payment methods or offering incentives.

In addition to all of the above, consideration should also be given to the selling price of products based on how complex they may be to create and deliver, so that you charge commensurate with the complexity involved.

One of the larger costs that businesses often incur is staffing, it’s always important to review workload and determine up to date and realistic staffing requirements- perhaps hiring staff to work in support functions is not the best option, that’s where specialist professional services companies come in.

On a final note it’s important to realise that often the business owner’s time is not best spent managing the day-to-day cash flow, that’s where accounting and bookkeeping businesses such as Sanay can help.

Having good financial management is a must for any business. In addition to preparing and understanding your budget, it is also essential that you monitor your cash flow.  If you don’t manage it well, you can run out of cash to pay the bills.  Pan Am Airlines, for instance, was once a high-flying brand.  But it is now gone and whilst the underlying reasons are complex these led to cash flow problems and the company ultimately ran out of cash.

What Could Go Wrong and the Things You Can Do to Manage Cash Flow Better

1. Not Following GAAP

GAAP or the Generally Accepted Accounting Principles is an accounting methodology that, amongst other things, helps keep track of the “money in and money out.”  If you don’t follow this system, your company will be running blind.

What you can do: Implement these standards to ensure your company has reliable accounting information that you can use to base your financial decisions on.

2. Counting Profit Before Collecting Payments

You may have sent the invoice.  But did you receive the payment?  Sometimes, customers tend to stretch pay periods.  As a result, you may see the top line figure, without knowing if they’ve actually paid you and then find out you don’t have the cash you thought you had.

What you can do: Have a system in place that lets you collect payments on time as agreed. In this way, your receivables are in balance with your payments.

3. Disregarding Cash Obligations

One of the most common mistakes by business owners is that they don’t prioritise bills and other liabilities.  These can easily accumulate and become hard to manage, which may ruin your cash flow.

What you can do: Pay bills regularly, take advantage of agreed credit periods and make sure that you are monitoring the money that goes out and tracking the money coming in.  Use the accounts payable module of an accounting system to help track payables and schedule payments.

4. Having Unnecessary Expenses

Many businesses spend money on unnecessary things, such as certain staffing costs.  They often miscalculate their true personnel costs, how many people they need and how much they should pay them.

What you can do: Before you go through hiring an employee for a certain job, look into outsourcing.  For instance, instead of hiring a bookkeeper, why not outsource it to a dedicated provider of these services.  This can significantly reduce your overall expenses.

5. Undercharging for your Products and Services

It’s easy to think that you can charge less to beat your competitors to the sale. But it’s not necessarily realistic, unless you are guaranteed to receive a significantly higher volume of sales.

What you can do: Perform competitive analysis to explore how much you can charge your customer for a particular service/product while still being competitive.

6. Ignoring Where your Money is Going

It’s easy to be blind as to where your money is going if you don’t have a budget or an investment plan.  If you don’t have a clear plan it’s easy to lose sight of what your income is being spent on.

What you can do: Create a solid plan to help you spend more wisely. In this way, you will be better prepared for unexpected expenses and big future purchases.

There are other things that can go wrong that may leave you with no operating cash.  You can enhance your cash flow in a number of ways, like improving debt collections, managing inventory, controlling interest and bank charges etc.  It is critical to ask for help from a business adviser or your accountant as early as possible.  Remember that issues with cash flow can indicate operational problems that require your attention.

Do you want to learn more about how Sanay can help you manage your cash flow to facilitate growth in your business? Schedule a free consultation today!

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