Forecasting and Budgeting Chapter 2 Forecasting and Budgeting

Learning Objectives • Explain the purpose of budgets and forecasts. After 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.

The Importance of Budgets and Forecasts Advantages of Budgets Improves interdepartmental communication Provides for a common goal Provides accountability Establishes a measurable target Provides a control tool Considers both internal and external influences Disadvantages of Budgets Preparation and implementation time Confidentiality Forecasting Support Control

The Forecasting Process Forecasting Customer Counts

Forecasting Revenue

Types of Budgets Long-Term versus Short-Term Budgets Capital budgets and Operating budgets are long-term Short term budgets are for a week, month or quarter Fixed versus Flexible Budgets Fixed – based on a specific level of sales Flexible – variable based on several possible levels of sales

Income Statements Revenue – Expenses = Profit

Restaurant and Foodservice Income Statement

Prime Cost and Other Expenses

The Budgeting Process Step 1 - Budgeting Revenue Sales Forecasts for a New Establishment

Step 2 - Budgeting Expenses Food and Beverage Costs Calculate using the Percentage of sales method or the Simple markup method Percentage of sales method is based on determining your SALES FORECAST first Then apply the your target percentages to the sales to arrive at your budgeted costs per category Simple markup method is based on previous expenses being increased or decreased by a determined %

Labor Costs Other Expenses

Budgeting Profit How to Calculate a Break-Even Point Determine the fixed and variable expenses Subtract the variable cost % from 100% to get the gross profit margin % Divide the fixed expenses by the gross profit margin % to get the break even point

The Budget as a Control Tool

Assessing Results Determine the variance and the tolerance at which point action must be taken

Taking Corrective Action

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.

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.

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.

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.