Chapter 13 Management of Financial Resources. Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River,

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Presentation transcript:

Chapter 13 Management of Financial Resources

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Users of Financial Statements Groups who need financial data: Owners – keep track of their investment Boards of directors – determine the effectiveness of managers supervising the daily operation Managers – assess the daily and long-term success of their decisions Creditors – lend money or goods on credit to the operation

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Users of Financial Statements Groups who need financial data: Employees – assess the company’s ability to meet wage and benefit demands. Governmental agencies – taxation and regulation Financial analysts- desire information about a firm for their own or a client’s purpose

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Key Aspects of Accounting Auditing – an independent review of accounting records. Cost accounting – determination and control of cost. Financial accounting – report of transactions for an organization and the periodic preparation of various reports from these records. Managerial accounting – uses historical and estimated financial data to assist in daily operations and in planning future operations.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Generally Accepted Accounting Principles (GAAP) Principles underlying preparation of financial statements Provide consistency to the preparation of financial statements.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Business Entity Concept Business enterprise is separate from the person or persons who supply its assets, and the financial records of each are distinct Fundamental Accounting Equation Assets = Liabilities + Owner’s Equity.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Going-Concern Concept Assumption that a business will continue to operate for an indefinite period of time Money as a Unit of Measure Business transactions are recorded as dollar amounts Cost Principle Transactions are recorded in dollars at the time of the transaction

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Cash Basis of Accounting Transaction recognized at time of cash inflow or outflow Accrual Basis of Accounting Transaction recognized when revenues earned and expenses incurred Matching Revenues and Expenses matching revenues with all applicable expenses during the accounting period in which they occur

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Depreciation Allocation of costs of a fixed asset over the estimated useful life of the asset. Adequate Disclosure Disclosure of data believed essential to reader’s understanding of financial statement.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Accounting Principles Consistency Principle Use of same accounting method from one period to another Materiality Principle events or information accounted for if they “make a difference” to the users of financial statements Conservatism moderation in recording transactions and assigning values

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Basic Financial Statements Balance sheet – statement of assets, liabilities or debts, and capital or owner’s equity at a given time or at the end of the accounting period. Income statement – financial report that presents the net income or profit of an organization for the accounting period.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Assets Resources of a company. Current assets – cash and all assets that will be converted into cash in a short period of time, generally 1 year. Fixed, or long-term, assets – permanent assets acquired to generate revenues for the business. Accumulated depreciation – loss of value over the expected life of a fixed asset.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Liabilities Debts of a company. Current liabilities – items that must be paid within a period of 1 year, including accounts payable for merchandise, accrued expenses, and annual mortgage payment. Fixed, or long-term, liabilities – obligations that will not be paid within the current year.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Owner’s Equity Money value of a company in excess of its debts that is held by the owners. Profit-oriented ownership types: Proprietorship – business owned by a single individual. Partnership – business owned by two or more people. Corporation – business incorporated under the laws of the state with ownership held by stockholders.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Income Statement Gross profit – determined by subtracting cost of goods sold from sales or revenue. Net profit or loss – determined by subtracting expenses from gross profit.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Cost of Sales Inventory at beginning of period$ XXX + Purchases during the period +XXX Total value of available food$ XXX – Inventory at end of period –XXX Cost of goods sold during period$ XXX

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Tools for Comparison and Analysis Use a variety of tools to analyze financial data Ratio analysis Trend analysis Common-size statements Break-even analysis Operational indicators help managers understand financial information and compare performance to earlier periods

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Standards of Comparison Internal standards of comparisons – review of current performance in relation to: Budgeted performance Past performance Preestablished department standards External standards of comparison – review of performance in relation to similar operations or comparisons with industry performance.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Ratio Analysis Analysis of financial data in terms of relationships. Ratio – a mathematical expression of the relationship between two items. Common ratio – x to y ( x : y ) Percentage Turnover – number of time x must be “turned over” to yield the value of y ( y / x ). Per unit basis – dollars per unit

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Ratio Analysis

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Liquidity Ratios Indicate the organization’s ability to meet current obligations (ability to pay bills when due). Current ratio – relationship between current assets to current liabilities. Acid-test ratio – (quick ratio) current liabilities are measured against cash and other assets readily convertible to cash.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Solvency Ratios Used to examine an establishment’s ability to meet long-term financial obligations and its financial leverage. Relationship between: Total assets and total liabilities Liabilities and equity (debt to equity ratio) Liabilities and assets (debt to asset ratio)

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Activity Ratios Examines how effectively an organization is using its assets. Inventory turnover ratio – the number of times the inventory is used up and replenished during a period.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Profitability Ratios Measures an organization’s ability to generate profit in relation to sales or the investment in assets. Profit – (net income) a monetary amount of income remaining after all expenses have been deducted from income or revenue. Profitability – relative measure of the profit-making ability of an organization.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Profitability Ratios Profit margin – assesses overall financial efficiency. Return on equity – measures adequacy of profits in providing a return on owners’ investments.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Profitability Ratios Return on assets - measures management’s ability to generate a return on the assets employed in generating revenue.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Operating Ratios Success of the operation in generating revenues and in controlling expenses. Performance indicators: Analysis of revenue mix Average customer check Food cost percentage Labor cost percentage Food cost per customer Meals per labor hour Meals per full-time equivalents Labor minutes per meal

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Trend Analysis A comparison of results over several periods of time.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Common-Sized Statements Financial statements where data is expressed as percentages for comparing results from one accounting period to another. Comparisons with industry performance are facilitated by expressing the financial statements in percentages.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Break-Even Analysis Break-even point - point at which total revenue equals total cost No profit, no loss

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Break-Even Analysis Fixed costs (FC) – costs required for an operation to exist, even if it produces nothing. Variable costs (VC) – costs that change in direct proportion to the volume of sales. Semivariable – costs that cannot be clearly classified as either entirely fixed or entirely variable (labor, maintenance, and utilities). Contribution margin – ratio of variable cost to sales subtracted from 1.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Break-Even Analysis

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Cost-Volume-Profit (CVP) Analysis Used to determine the volume required for a given level of profit.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Budget A plan for operating a business expressed in financial terms To control expenses and profit in relation to sales

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Types of Budgets Operating budget – Includes sales or revenue, changes in pricing, profit objectives, expenditures, and labor. Capital budget – includes improvements, expansions, and replacements in building, equipment, and land. Cash budget – detailed estimate of anticipated cash receipts and disbursements during the budget period.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Budgeting Concepts Fixed budget – prepared at one level of sales or revenues. Incremental budget – projecting changes for the ensuing year in relation to the current budget. Flexible budget – adjustments are made to various levels of operation or sales; useful in operations with varying sales or revenues throughout the year.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Investment Decisions Capital expenditure – requests for renovation of space or the purchase of supplies/equipment valued at more than $5,000. Payback period – indicator of time it will take to recover the money invested in a particular project or piece of equipment. Time value of money – concept that money has a differing value over time.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Net Present Value (NPV) Present value of expected future cash inflows and outflows related to a capital expenditure. Requires: Initial investment –amount the organization will need to spend to renovate a space and/or purchase a piece of equipment. Expected income – (cost savings) amount a foodservice director expects to have earned or saved each year as a result of this capital investment.

Foodservice Organizations, 5th edition Spears & Gregoire ©2004 Pearson Education, Inc. Upper Saddle River, New Jersey Net Present Value (NPV) Requires: Cost of capital – the minimum return a company expects on an investment. Discounted cash flows – factors used to discount a future cash flow to a current value based on cost of capital percentage figures.