The budget or annual plan will detail the operational direction of an operational unit and the expected financial results. The techniques used in managerial accounting will show how close actual performance was when compared to the budget, while providing the information needed to make changes to operational procedures or the budget.
This will ensure that the operation achieves the goals of the financial plan. It is important to note that the budget should not be a static document.
It should be modified and fine-tuned as managerial accounting presents data about sales and costs that affect the direction of the overall operation.
Purpose of the Budget in Foodservice
The budget is developed to help achieve future goals. In effect, the budget tells what must be done if predetermined profit and cost objectives are to be met. In this respect, an attempt is made to modify the profit formula. With a well-thought-out and attainable budget, the profit formula would read as follows:
Budgeted Revenue – Budgeted Expense = Budgeted Profit
To prepare the budget and stay within it assures predetermined profit levels. Without such a plan, guessing about how much to spend and how much sales to anticipate becomes necessary. The effective foodservice operator builds the budget, monitors it closely, modifies it when necessary, and achieves the desired results.
Rationale for Budgeting in Agricultural Foodservice
Despite the fact that some operators avoid budgets, they are extremely important. The rationale for having and using a budget can be summarized as follows:
- It is the best means of analyzing alternative courses of action and allows management to examine these alternatives prior to adopting a particular one.
- It forces management to examine the facts regarding what is necessary to achieve desired profit levels.
- It provides a standard for comparison essential for good controls.
- It allows management to anticipate and prepare for future business conditions.
- It helps management to periodically carry out a self-evaluation of the organization and its progress toward its financial objectives.
- It provides a communication channel whereby the organization’s objectives are passed along to its various departments.
- It encourages department managers who have participated in the preparation of the budget to establish their own operating objectives and evaluation techniques and tools.
- It provides management with reasonable estimates of future expense levels and serves as an instrument for setting proper prices.
- It identifies time periods in which operational cash flows may need to be augmented.
- It communicates to owners and investors the realistic financial performance expectations of management.
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Types of Budgets in Foodservice Operations
Budgeting is best done by the entire management team, for it is only through participation in the process that the whole organization will feel compelled to support the budget’s implementation. Foodservice budgets can be considered as one of three main types:
1. Long-Range Budget for Agricultural Expansion
The long-range budget is typically prepared for a period of three to five years. While its detail is not great, it does provide a long-term view about where the operation should be going. It is also particularly useful in those cases where additional operational units may increase sales volume and accompanying expense.
Assume, for example, that a corporation has entered into an agreement with an international franchise company to open 20 BBQ outlets in malls across Nigeria and Ghana.
A new store will be opened approximately every month for the next four years. To properly plan for revenue and expense in the coming four-year period, a long-range budget for the company will be needed.
2. Annual Budget for Seasonal Agricultural Operations
The annual or yearly budget is the type most operations think of when the word budget is used. As it states, the annual budget is for a one-year period or, in some cases, one season. This would be true, for example, in the case of a summer camp that is open and serving meals only while school is out of session and campers are attending.
It is important to remember that an annual budget need not follow a calendar year. In fact, the best time period for an annual budget is the one that makes sense for the operation.
A college foodservice director, for example, would want a budget that covers the time period of a school year, that is, from the beginning. For a restaurant whose owners have a fiscal year different from a calendar year, the annual budget may coincide with either the fiscal year or the calendar, as the owners prefer.
It is also important to remember that an annual budget need not consist of 12 one-month periods. While many operations prefer one-month budgets, some prefer budgets consisting of thirteen (13) 28-day periods, while others use quarterly (three-month) or even weekly budgets to plan for revenues and costs throughout the budget year.
3. Achievement Budget for Short-Term Agricultural Planning
The achievement budget is always of a shorter range, perhaps a month or a week. It provides current operating information and, thus, assists in making current operational decisions.
A weekly achievement budget might, for example, be used to predict the number of gallons of milk needed for this time period or the number of waiters to be scheduled on Friday night. To establish any type of budget, the following information must be available:
- Prior-period operating results
- Assumptions of next-period operations
- Goals
- Monitoring policies
Prior-Period Operating Results for Budget Planning
It is important to note that income (P&L) statements at the end of the year are necessary if any meaningful profit planning is to be done. Foodservice unit managers who do not have access to their operating results are at a tremendous managerial disadvantage; operational summaries and the data that produced them must be available. Because past operations are known, the assumptions section of the planning process can now be addressed.
Operational Assumptions for Next-Period Planning
If a budget with enough strength to serve as a guide and enough flexibility to adapt to a changing environment is to be prepared, the assumptions that will affect the operation must be factored in.
While each management team will arrive at its own conclusions given the circumstances of the operation, the following assumptions regarding next year can be made:
- Food cost will increase by 3%.
- Labour costs will increase by fifty percent.
- Other expenses will rise by 10% due to a significant increase in utility costs.
- Revenue received for all meals served will be increased by no more than 1%.
- Occupancy of 80% of facility capacity will remain unchanged.
These assumptions can be established through discussions with suppliers and union leaders, operational records, and, most importantly, the sense of the operation itself. In the commercial sector, when arriving at assumptions, operators must consider new or diminished competition, changes in traffic patterns, and national food trends.
At the highest level of foodservice management, assumptions regarding the acquisition of new units or the introduction of new products will certainly affect the budget process. As an operator, items 1, 2, and 3 are predicted independently, while a supervisor would provide input about items 4 and 5. Given these assumptions, operating goals for the next year can be established.
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Establishing Operational Goals for Foodservice
Given the assumptions made, actual operating goals for the coming year can now be determined. They will be established for each of the following areas:
- Meals served
- Revenue
- Food costs
- Labour costs
- Other expenses
- Profit
All budgets must be modified, or the expenses associated with increased sales will soon exceed budgeted amounts. Effective managers compare their actual revenue to that which they have projected on a regular basis.
It is clear that an increase in operational revenue should dictate proportional increases in variable expense budgets, although fixed expenses, of course, need not be adjusted for these increases. For those foodservice operations with more than one meal period, monitoring budgeted sales volume may mean monitoring each meal period.
Some foodservice operators relate revenue to the number of seats available in their operation. As a result, they sometimes budget based on sales per seat, the total revenue generated by a facility divided by the number of seats in the dining area(s).
Since the size of a foodservice facility affects both total investments and operating costs, this can be a useful number. The formula for the computation of sales per seat is as follows:
Total Sales ÷ Available Seats = Sales per Seat
When sales volume is lower than originally projected, management must seek ways to increase revenue or reduce costs. As stated earlier, one of management’s main tasks is to generate guests, while the employee’s main task is to service these guests to the best of his or her ability.
There are a variety of methods used for increasing sales volume, including the use of coupons, increased advertising, price discounting, and specials.
Expense Analysis in Foodservice Operations
Effective foodservice managers are careful to monitor operational expenses because costs that are too high or too low may be a cause for concern. Just as it is not possible to estimate future sales volume perfectly, it is not possible to estimate future expenses perfectly, since some expenses will vary as sales volume increases or decreases.
To know that an operation spent N800 for fruit and vegetables in a given week becomes meaningful only if the sales volume for that week is known. Similarly, knowing that N500 was spent for labour during a given lunch period can be analyzed only in terms of the amount of sales achieved in that same period.
To help make an expense assessment quickly, some operators elect to utilize the yardstick method of calculating expense standards so determinations can be made as to whether variations in expenses are due to changes in sales volume or other reasons such as waste or theft.
Developing Yardstick Standards for Food in Agricultural Operations
To illustrate the yardstick method, consider the case of Joseph, who operates a college cafeteria during nine months of the year in a small southeastern city. Joseph has developed both revenue and expense budgets. His problem, however, is that variations in revenue cause variation in expense.
This is true in terms of food product, labour, and other expenses. As a truly effective manager, he wishes to know whether changes in his actual expenses are due to inefficiencies in his operation or to normal sales variation. To begin his analysis, Joseph establishes a purchase standard for food products using a seven-step model:
- Divide total inventory into management-designated subgroups, for example, meats, produce, dairy, and groceries.
- Establish the money value of subgroup purchases for the prior accounting period.
- Establish sales volume for the prior accounting period.
- Determine the percentage for the purchasing naira spent for each food category.
- Determine the percentage of revenue naira spent for each food category.
- Develop weekly sales volume and associated expense projection. Compute % cost to sales for each food grouping and sales estimate.
- Compare weekly revenue and expense to projection. Correct if necessary.
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