Managing Financial Resources FCS 387

The Purpose of Budgeting What is a budget? The organization’s business plan expressed in financial terms. Based on mission, goals, and objectives A good budget makes sure resources are being used to accomplish the overall purpose of the organization.

Types of Budgets Master Budget Consists of an operating budget, capital budget, cash budget and a budgeted balance sheet. Cash Budget Project when funds will be available and when they can be spent. Budgeted Balance Sheet Statement of assets and liabilities based on budget estimates.

Operating Budgets Incremental Budgets Based on the previous years budget Advantages: Easy to prepare Based on accurate records Disadvantages: Not responsive to change

Operating Budgets Zero-based budgets Based on estimated need for the coming year, without relying on last year’s budget Manager must justify every dollar of proposed spending Historical data is acceptable if it can be justified

Operating Budgets Zero-based budgets Advantages: Make organizations responsive to environment Force organizations to examine their structures and processes in order to eliminate waste and redundancy Disadvantages: Difficult and costly to prepare Organizational politics and manager bias

Operating Budgets Fixed Budgets (Static budget) Funds are allocated for the entire fiscal year. Can be applied to either incremental or zero- based Advantages: Provide managers with goals for financial performance Disadvantages: Not enough flexibility to be responsive to changes in the volume of work

Operating Budget Variable Budgets (Flexible budget) Expenses will vary in response to actual production, volume, or revenues Advantages: Designed to be flexible so organizations can react to change Disadvantages: More reactive than predictive Many organizations can’t respond quickly

Preparing an Operating Budget Cost Center Revenue Center Profit Center

Parts of an Operating Budget Revenue Budget Projection of the income of an organization Written only for revenue centers Two steps: Project the volume of goods or services Set the price Considerations: Revenue from other sources No guarantee that all the money that is billed will be collected

Parts of an Operating Budget Expense Budget Deals with all anticipated costs Prepared for every department including cost centers Sub-budgets Labor, material, overhead, other expenses

Labor Easy to project Direct labor costs Related to actually doing work Straight-time pay, overtime Indirect labor cost Benefits May not be included in labor budget Parts of an Operating Budget

Direct Material Budget The estimate of cost for raw materials to be used in the production of goods. Food and related goods Overhead Expenses associated with the operation of a facility May or may not be included in a departmental operating budget Parts of an Operating Budget

Capital Budgets Projects spending on items that are costly and durable such as land, buildings, and major pieces of equipment. Organizational system for allocation of funds Submit proposals

Steps For Preparing a Capital Budget Determine what capital goods are needed Prioritize the items on the list of needs Estimate the cost for each proposed capital expenditure Prepare the capital budget requests, including justification and cost data Submit the proper paperwork to formalize the request

Controlling Costs Table 17.1 Material Management Workflow Workforce Facilities Maintenance Management of Utilities Risk Management

Financial Reports Operating Statement (Performance report) Compares actual fiscal performance to the budget Variance Analysis Prepared by managers to account for any deviation from the budget

Profit and Loss Statements Shows net profits or losses Income (sales) Less:Cost of food sold Equals:Gross profit Less:Labor, overhead, and operating expenses Equals: Net profit or Loss Financial Reports

Balance Sheet Summarizes assets, liabilities, and owner’s equity. Prepared by the accounting department Consolidated Balance Sheet Consolidates data from multiple years into one statement. Financial Reports

Cost of Goods Sold (COGS) Food cost Cost of all foods and beverages used producing menu items Cost of Goods Sold = raw food cost Calculated two ways: Total cost of all foods used during a given time period The cost of one portion or menu item

Cost of Goods Sold Calculating COGS: Conduct an inventory at the beginning and end of desired period Day, week, month, quarter, or year Maintain records of all purchases Generally, supplies, tools, and non-food items are not included

Discussion Question A fast food restaurant wraps every sandwich it sells in a sheet of wax paper. This paper costs $21.00 per Should the inventory of wax paper be included in the cost of goods sold? Why?

Calculating COGS Practice: The total value of food inventory on December 1 is $7,600. The restaurant purchases $2,300 worth of food during December and inventory on January 1 is worth $5,600. What is the COGS during the month of December?

Calculating COGS Value of Food Inventory at Beginning of Period PlusValue of Food Purchased During Period MinusValue of Inventory at End of Period Cost of Goods (Food) Sold

Calculating COGS Practice: ($7,600 + $2,300) - $5,600 = $4,300 Management can use COGS to compare with the dollar value of sales for the same period

Food Cost Percentages Food Cost Percentage Ratio of costs to sales Practice: COGS for December was $4,300. If the food sales for December totaled $10,750, what is the food cost percentage for the month?

Food Cost Percentages Cost of Food Sold Food Sales x 100 = Food Cost Percentage Practice: $4,300/$10,750 =.40 = 40%

Food Cost Percentages By itself a single food cost percentage is meaningless Compare with other months of the same year Compare with same month of previous years Compare with similar food service operations There is no perfect food cost percentage

Food Cost Percentages Calculated on individual menu items: If the food items in a sliced turkey sandwich cost $2.80 and the sandwich sells for $5.25, what is the food cost percentage? $2.80/$5.25 = 53% How will you reduce this percentage?

Food Cost Percentages Practice: Calculate the food cost percentage for an operation with annual sales of $540,000. The physical inventory at the start of the year listed foods on hand valued at $23,000; the year end inventory listed foods valued at $17,000. Purchases during the year totaled $235,000.

Food Cost Percentages Practice: COGS: $23,000 + $235,000 = $258,000 - $17,000 = $241,000 Food Cost Percentage: $241,000 / $540,000 =.446 = 45%

Menu Pricing Cost-Based Profit-Based Non-Cost-Based

Cost-Based Menu Pricing Food Cost Percentage Cost per Portion / Food Cost % = Selling Price Practice: Your manager has determined that food costs should be no more than 28% of sales. What should you charge for a bowl of onion soup if the recipe cost is $1.12 per portion? Selling Price = $1.12/.28 = $4.00

Cost-Based Menu Pricing Factor Pricing A multiplier is used to calculate menu prices 100 / Desired food cost percentage = factor Multiply the cost of each menu item by the factor to get the selling price Practice: What factor is used to set menu prices with a 28% food cost? 100 / 28 = 3.57

Cost-Based Menu Pricing Prime Cost Pricing Prime Cost = Food Cost + Direct Labor Prime Cost % = Food Cost % + Direct Labor % Prime Cost / Desired Prime Cost % = Selling Price

Practice The raw food cost for a rack of lamb is $7.50 and it takes a cook a total of 9 minutes to clean and trim it for service. If that cook is paid $8.50 per hour, what is the direct labor cost? What is the prime cost? Direct labor cost = $1.27 ($8.50 per hour = $0.14 per minute x 9 minutes) Prime Cost = $8.77 ($ $1.27) If the desired prime cost percentage is 48%, what is the selling price? Selling price = $18.27 ($8.77 /.48)