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Saturday, March 31, 2007

Benefits of Proper Accounting

I realize most operations today have rigid accounting standards and excellent cash controls in place. In my corporate days, we tracked all cash daily from every unit. Using budgets and an automated accounting system, we closely tracked all changes in expected revenue and expenses. When I left this environment and started my consulting business, I sent out marketing materials to over 500 restaurant owners in the New York metro area. Some of my earliest clients had archaic accounting systems.

In these early consulting projects, I helped restaurant owners setup a chart of accounts, general ledger, balance sheet and income statement on several low cost accounting programs. I suspected some of these clients had "off the books" activities. I encouraged each of the operators to declare all revenue to the local and federal governments.

One of the owners asked me to help him out with a complete accounting makeover. He was breaking even and his cash flow was erratic. The restaurant was busy on weekends and weekday business was improving slightly. He had hoped to be saving a little for retirement as the business improved. Unfortunately, he continued to draw on his savings each month. I decided to review the entire control system for all working capital accounts.

Cash was not being deposited each day on a routine basis. Daily revenue and cash reports were not completed 20% of the time. Employees received a payroll check for their regular earnings but they were paid for overtime in cash. Certain suppliers were paid in cash. The owner also went to the produce markets early in the morning to save money. The cash used to pay the overtime pay and food supplies was deducted from revenue. I explained the serious risk he was taking with this approach. Further, I told him I suspected he had a thief in his operation. His poor accounting records served as a mask for the thief.

He believed he was saving a huge tax bill. I explained the total saved on each unreported dollar was 20% (sales tax, employers FICA, FUTA and SUTA) since he was breaking even. The total of this activity was 10% of his volume. Taking his view, I explained "the benefit" was 2% of sales. He actually believed it was 10%. I convinced him to rework his records, report the revenue, payroll and expenses properly and setup a system of cash management.

In the first 45 days, we discovered the thief and the owner was in shock. His "most loyal employee" was ripping him off for $5,000 per month (cash).

There are many issues involved in this project. The owner was jeopardizing a growing business with first year revenue of $1,200,000. He wrongly believed he was saving $120,000 by hiding revenue and expenses. In reality, he was losing $60,000 a year in cash (or 5% of volume). The $24,000 in unpaid sales tax, FICA, FUTA and SUTA payments represented a paltry return for this monumental risk.

He took my advice and paid all government agencies their proper fees. His business began producing a steady and growing cash flow. Since he now was showing a profit, the bankers loaned him money at rates far below the 15% his credit card company charges. His cash flow turned positive and he started saving $10,000 per month.

Monday, March 19, 2007

Signs of Theft

Some people can feel when they are getting ripped off by someone inside. Trust your gut. If you have a strong suspicion there is a thief the problem is probably already chronic. Set and bait the traps.

One of my first assignments involved catching two thieves with their hands in the cookie jar. The first suspect was the closing bartender and the second was the closing chef. My client was sure the food cost was out of control. He felt the bartender was guilty of treating his friends to expensive wine.

Prices on shrimp and crab were dropping steadily in this restaurant with a New Orleans themed menu. A new vendor had joined the competition and prices at the Fulton Seafood Market were trending lower. The food cost percentage was steadily climbing to an unacceptable level.

Portions were very straight forward for both of these key items. The popular Jambalaya called for 6 pieces of Shrimp 16/20. Crab meat was only used in crab cakes (1/4 pound per cake). The Micros 2700 POS system was programmed for two crab menu items - a single cake appetizer and a two cake entree portion. The Jambalaya was only available as an entree.

If you run into a period when vendors are discounting prices on high volume purchase items, food cost should be in decline. This poor performance could not be blamed on the market. I had the owner go count the crab and shrimp. He gave me the phone number of the modem hooked to his POS system and I installed the polling package on my computer.

Based on recent sales activity, there were plenty of shrimp for the weekend. The freezer had 5 blocks of 5 pounds each. Since we were out of crab, an order was placed for 20 pounds. So the available portions were 75 Jambalaya and 80 crab cakes. Sales counts for the weekend were 44 Jambalaya and 72 crab cakes (30 apps and 21 dinners). I called the owner on Monday morning and asked him to count the shrimp and crab. He reported no shrimp and 7 crab cakes in the freezer.

I prepared the report for him to use in the discussion with the chef. After being confronted with the numbers, the chef responded. He told the owner he had donated two blocks of shrimp to a popular local charity. The owner knew the president of the association personally and began to dial his number. The chef stopped him and admitted to the theft. He was replaced and the food cost fell in line.

There were zero sales recorded on the Micros for an expensive California Merlot (the entire week). A fresh case had only 5 bottles instead of 12. The bartender said his friend asked him to charge his account for the week. He drank one bottle a night on each night. The friend would come by soon once he cashed his paycheck. The owner let it fly. I protested but he said bar sales were way up since this person had started. His friend started paying and still drank his nightly bottle.

Friday, March 09, 2007

Preventing Food Cost Surprises

In my recent article, The Number One Cause of High Food Cost , I singled out improper ordering as the primary cause of high cost. If I'm right about the cause, the wise operator should spend more quality time on placing food orders. Since many of the tasks involved in placing an order with a vendor are time consuming and analytical, many operators spend their energy reducing the amount of time spent in this activity.

Initially, the time saved is put to good use in other key management areas. Once two or three months have passed, the time savings will generate less of an impact. Distractions will fill the time slot and the savings benefit will wane.

I'd like to see the same amount of time spent in a better fashion. You are already spending this time and it's built into your routine. If you spent the time more wisely, a significant benefit could be achieved.

Food cost surprises can be dramatically reduced. Better forecasts and tighter par levels can reduce inventory levels and the resulting spoilage. Spend most of the time forecasting demand and restrict weekly purchases to 30% of expected sales. Your inventory levels will decline (assuming you've been running a food cost percentage over this threshold). After several weeks, recalculate the necessary par levels for all key items.

As you fill more of your time allotment with this activity, your cost improvements will generate excitement. Forecasting will become a game everyone looks forward to participating in each week. Your actual food cost percentage will tend to be closer to the ideal cost target. Adjust the 30% figure above to the long term food cost target.

You may find a few extra hours. Effective bidding can produce major savings and innovations. Take some of the time and review your purchase specifications for all key items. A fresh look at these issues will have lasting results. Tiny changes in specifications can often produce big profits.

In addition to my 100% free Food Cost Control Blog, I have started a second resource which will be offered for a limited time for $100 per year. This online resource will include many posts like Slow Day vs. Busy Day. These articles will not be typical on the free blog. I'll be posting the following articles in the Linear Regression Techniques Group this month over in the new area:
Slow Day vs. Busy Day, Peak vs. Off-Peak, Manning Chart Analysis, Baseline Sales Projections, and Flexible Teams. Click below to join!

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Friday, March 02, 2007

Number One Cause - Revisited

I received an email from a reader with some excellent points. His focus is on menu item pricing and he makes a great argument for solving food cost percentage issues before they materialize:


Great article, sort of. One problem though, you have only identified the problem, not solved it.

Food Cost's initial controlling point is Menu Item Pricing. It took me years to come to grips with this. Being afraid to "raise" prices is the most overrated fear a restaurant operator may have. Raising prices allows an operator to pay the staff better, make capital improvements and ultimately create a cleaner, better run and more profitable entity. Are customers as sensitive to pricing as we make them out to be? What is the threshold, is $9.99 too much for that salmon dip with pita chips? Obviously each market is different, but customers are MUCH more tolerant today of higher prices(Starbucks is getting nearly $5 for a cup of coffee. God bless them, because they set the table for it to be okay.).

At the end of the day is it really worth being in business if you can't charge enough to cover your overhead and make a profit?

My company has confidence in its menu item choices, thus allowing us to charge the maximum. If a company is still struggling to "make food cost" after being in operation for six months, and a comprehensive breakdown on each menu item cost was performed (prior to opening) giving the concept a food cost spread % that when plugged into a proforma provides a theoretical profit, then step 2 (Management/Operations) must be initiated to discover the culprit. My theory though is, most restaurants never understand Step 1! I have an entire manual written on Step 2.

John M. Stout
Bagel Bagel Franchise Systems, Inc.

Hopefully, we'll get some more feedback on this angle. Proper ordering requires a well designed recipe model and accurate forecasts. Many operators run without standard recipes or pro formas. It's a big mistake.

Last May, I ran a series of articles which "decomposed" the entire food cost percentage calculation. In the article, I stated:
Too much attention is placed on inventory accuracy. Most people miss the finer points of determining their food cost percentage. Clearly, the sales figure which dominates the formula should take center stage. A very close second is the purchases figure.

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