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ControllingFoodservice Costs

Forecasting and Budgeting

Chapter 2

Learning ObjectivesAfter completing this chapter, you should be able to:

• Explain the purpose of budgets and forecasts.

• List and describe the forecasting methods used by restaurant and foodservice managers.

• Describe types of budgets.

• Identify the purpose of the income statement.

• Describe how to prepare food and labor cost budgets.

• Explain the importance of variance and its use in operations.

Chapter 2 Forecasting and Budgeting

THE IMPORTANCE OF BUDGETS AND FORECASTSAdvantages of Budgets

Disadvantages of Budgets

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THE FORECASTING PROCESSForecasting Customer Counts

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Forecasting Revenue

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TYPES OF BUDGETSLong-Term versus Short-Term Budgets

Fixed versus Flexible Budgets

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INCOME STATEMENTS

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Restaurant and FoodserviceIncome Statement

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Prime Cost and Other Expenses

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Reporting Periods

Reviewing the Income Statement

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THE BUDGETING PROCESSBudgeting RevenueSales Forecasts for a New Establishment

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Budgeting ExpensesFood and Beverage Costs

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Labor Costs

Other Expenses

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Budgeting ProfitHow to Calculate a Break-Even Point

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THE BUDGET AS A CONTROL TOOL

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Assessing Results

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Taking Corrective Action

Chapter 2 Forecasting and Budgeting - Summary

1. Explain the purpose of budgets and forecasts.

• Forecasting uses historical information and knowledge of external factors to predict future results.

• These forecasts are used to build a budget.

• Forecasting usually takes past numbers and builds in a certain additional percentage to account for growth.

• A budget is a plan that shows how managers expect to obtain and use resources to achieve the objectives of the business.

Chapter 2 Forecasting and Budgeting - Summary

2. List and describe the forecasting methods used by restaurant and foodservice managers.

• There are two major forecasting methods that are used by restaurant and foodservice managers.

• The percentage of sales method forecasts cost of sales and labor cost relative to expected revenue.

• The simple markup method forecasts sales and expenses by adding the expected growth rate to last year’s figures.

Chapter 2 Forecasting and Budgeting - Summary

3. Describe types of budgets.

• Budgets may be long or short term, and cover a whole operation or only one business segment.

• The main budget for most restaurant and foodservice operations is the operating budget.

• This budget presents a plan for revenues and expenses for a period of time.

• Most operations will find a four-week cycle to be the most useful.

• However, budgets must be examined cyclically for accuracy and to find areas in which to improve.

• Budgeting for shorter cycles, such as a week or a month, should be fairly accurate, while yearly budgets and five-year plans will need to be adjusted to accommodate changing or unexpected conditions.

Chapter 2 Forecasting and Budgeting - Summary

4. Identify the purpose of the income statement.

• Actual spending and revenue data are used to create an income statement to compare with the budgeted target numbers.

• The difference between the two figures is called a variance.

• Variances may be caused by factors that are outside managers’ control, such as economic conditions or stronger than expected demand.

• However, managers should make every effort to attempt to meet their target, or adjust the budget to better reflect current conditions.

Chapter 2 Forecasting and Budgeting - Summary

5. Describe how to prepare food and labor cost budgets.

• Food and labor costs should include historical trends when establishing budgets.

• Managers should analyze trends for differences between as purchased and actual cost.

• If there is a decrease in utilization factor for food items, managers need to identify the reasons for a loss (i.e., shrinkage, theft, spoilage, etc.).

• When budgeting labor, managers should first assign wage rates for both part-time and full-time employees.

• Next, total labor cost for full-time and part-time employees should be calculated.

• Since benefit costs of full-time employees are higher, managers should carefully adjust schedules of employees based on meal times, menu complexity, and service level.

Chapter 2 Forecasting and Budgeting - Summary

6. Explain the importance of variance and its use in operations.• When actual results differ from budget projections, that difference is called a variance.

• A variance may be positive or negative.

• A significant variance is a sign that a manager may need to take corrective action to address the problem.

Chapter 2 Forecasting and Budgeting - Summary

Key Terms:Break-even point The minimum amount of sales an establishment must generate to cover all costs.

Budget A plan that indicates an operation’s financial objectives or financial standards.

Budgeting process The way managers go about developing a budget, which is a process of both planning and control.

Capital expenditure budget A budget that allows an establishment to plan for the replacement of high-cost equipment that wears out, and to purchase new types of equipment that may come on the market.Controllable profit The profit amount that reflects only those line items over which a manager has any influence or control.

Cost of sales The cost of the food and beverage products to a given operation.

Chapter 2 Forecasting and Budgeting - Summary

Key Terms continued:

Fixed budget A budget that is based on a certain level of sales revenue; expense estimates for food, labor, and other costs are then calculated based on that level of sales.

Flexible budget A budget that is based on several possible levels of sales activity, also known as a variable budget.

Forecasting Making future predictions about the budget based on current situations and trends.

Income statement A document that reports an operation’s sales, expenses, and profits or losses for a period of time, such as a month, a quarter, or a year.

Long-term budget A budget from one year to five years in the future.Operating budget A formal one-year operating plan to achieve the financial goals of an organization.

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Key Terms continued:

Percentage of sales method A method that involves estimating expenses for a future period as a percentage of the sales forecast.

Return on investment (ROI) Profit resulting from specific investments made in an operation.

Sales forecast The process of using historical information and knowledge of external factors to predict future sales.

Short-term budget A budget planned for a week, a month, or a quarter.Shrinkage Decrease in the weight of purchased meat because of cooking or trimming.

Simple markup method A markup method based on expenses being increased by a predetermined amount, normally a percentage of the previous year’s expense.

Chapter 2 Forecasting and Budgeting

Key Terms continued:

Utilization factor The percentage of an amount of a food item served to a guest.

Variance The difference between actual results (i.e., sales) and targeted or budgeted results.

Chapter 2 Forecasting and Budgeting

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