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Thursday, May 30, 2013

Should You Use Last Year or Budget in the Profit and Loss Statement?

Most accounting programs produce comparative reports using pre-built templates. Restaurant operators need a compass to guide them through the year's tremendous number of ups and downs. Two excellent comparisons are the most popular profit and loss statement formats: Current Year/Last Year (or Prior Year) and Current Year/Budget.

My strong preference is to use Current Year/Budget. The reason I prefer this format is the implicit need to actually construct a budget. Most budgets actually begin with the previous year's figures.

Many companies work on next year's budget at the end of the third quarter (or slightly earlier). They use the results from current year's operations as the foundation for the budget. By making educated guesses for the remaining months in the current year, they obtain a full year profit and loss estimate.

All budgets should address every line in the P and L. For restaurants, the most important number in the budget is revenue. At a minimum, you should break the revenue into food, beverage and other.  Beverage revenue may be more detailed with Beer, Wine, Liquor and Soft Drinks sub-totals in the beverage total. 

If possible, I recommend using both Revenue - Food Catering and Revenue - Beverage Catering for restaurants with significant catering volume.

Cost of goods sold is a very important budget issue.  Food cost and beverage cost are prime costs. QSR and Fast Casual concepts with a high percentage of take-out business should also include disposables in their cost of goods sold.

Direct labor is a high profile item for 2014 budgets.

The federal health care affordability laws will impact direct labor expenses when they go into effect next year. Companies are grappling with issues involving the total number of employees, percentage of part-time employees, seasonal hiring quotas, etc. Because of the magnitude of the health care legislation, comparisons to prior year will not be as effective as comparison to budget.

When you begin getting the budget team prepped this summer, try to get a head start on many key issues: do we have a strategy for company health insurance coverage? what will the additional cost be to offer health care to valued employees who are not covered now? do we need to raise menu prices to cover these costs?

If you decide to retain talented people by offering a top flight health care plan, the premium cost can be used in salary negotiations. Most uninsured or under-insured employees will gladly take a pass on this year's salary bump once they know the cost of their premiums.

If menu prices are required, you need to calculate the impact on check averages, covers and total revenue. Restaurant diners have recently spent less in reaction to increases in fuel costs, higher payroll taxes and slower income growth. Of course, restaurants could benefit from their customers having more disposable income due to their own benefit from new company health care coverage in 2014.

Newly covered people who had been struggling to pay for individual health care premiums will see increases in their income net of taxes and health care premiums.Some uncovered self-employed individuals will have to cover themselves or pay a higher tax.

Understanding your customer base is critical.

Higher menu prices should translate into a lower cost of goods sold %. If you felt the impact of health care coverage could raise your labor costs by 10% and your current labor costs are 30% of sales, you need to budget for a 3% sales increase just to break even.

If your cost of goods sold is 33%, you would expect a decline of 1% since 33% divided by 1.03 is 32%. Again, you would need to carefully budget all expense categories (every line on your profit and loss statement). I'm using the prime costs and revenue figures because of their relative impact on the bottom line.

I see 2014 as a great year to shift from a current year vs. prior year statement format to a current year vs. budget format.

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