Cost Control & Budgeting Best Practices

Posted by: Seva Procurement on Apr 24, 2014 at 5:48 pm |

If you have been in food service or hospitality management for a while, you have probably come across the cliché about managing a shift like a duck swims in water.  The adage goes something like this: from above, a duck seems to effortlessly glide along the water, but if you look below the surface, you will see the duck feverishly paddling his little legs to navigate about.  The lesson of the metaphor is that the hospitality and food service manager should have a similar style.  While to the guests and staff the manager should look as if he is just floating around calmly working the shift, underneath this cool exterior, the restaurant or hotel manager should be hard at work strategically supporting and controlling the direction of the operation.

I open the article with this cliché because I think the same lesson could be applied to another facet of the hospitality and food service industry–restaurant and hotel financial management.  Seva Procurement often encounters resistance when attempting to facilitate adoption of common financial best practices with independent and regional hospitality operators.  Running successful shifts and producing happy guests is a difficult job, but one that all successful operators excel at.  Unfortunately, this is not enough to produce a profitable business.  Just like successful shifts take hard work, running a profitable business also takes dedication–neither happy guests nor strong income statements happen on their own or by accident.  We recognize that many independent and regional operators prefer that their focus remains on daily operations and that they do not want to manage from the office or from a spreadsheet–often feeling that this focus is what differentiates them from national chain operators.  While the importance of being engaged in operations and present during shifts is absolutely critical, it is not a substitute for strategic financial analysis and planning.  Our recommendation is that even the most engaged operator needs to actively adhere to financial management best practices, even if this aspect of his daily routine goes unnoticed by everyone else–like the duck that seems to just effortlessly glide along the water.

The intricacies of financial management make it impossible to execute this role through gut reactions and “in the moment” decisions.  While the intuition of a seasoned operator is critical in achieving profitability goals, this intuition must be harnessed through the use of commonly accepted financial best practices if optimum profitability and performance is to be achieved.  The remainder of this article will attempt to highlight a few key reasons to adopt these best practices, as well as to provide a free excel spreadsheet that can be used for sales projections, budgeting, declining budgets and performance review.

1) The practice of budgeting provides a high-level picture of the financial performance of an operation and allows the operator to understand how a change in one cost or revenue area affects the overall financial picture.  It is important to realize that we are talking about relationships between expenses within an operation, not simply looking at each financial factor in a vacuum.  For example, a rising food cost when examined as an isolated trend may evoke concern.  What if this trend is examined in relation to other financial factors, however?   Maybe there was a shift in the product mix towards higher priced items with a higher contribution margin, or maybe there was a menu change that had the same effect.   The result of either of these may be a higher price point, resulting in a higher food cost, but more bottom line profit.  In that case, maybe the higher food cost is desirable!  But what if this higher price point, which produces more per guest profit, actually reduced the number of overall guests, reducing total revenue and profit?   Maybe the new menu requires more staff to execute, increasing labor costs and negating any benefit from the higher contribution margin.  This is just one of many scenarios that could occur on any given day in the hospitality or food service industry.  So, while any seasoned manager could give a thumbs up or down on any financial indicator when examined in a vacuum, it gets much more complicated when trying to understand the financial relationship among each indicator and quantify the result if budgets are not utilized.

2) Another fundamental benefit of budgeting is that it forces operators to make tough business decisions by prioritizing expenses.  This is a benefit often overlooked among operators, causing them to forego budgeting.  Their thought process goes something like this:  “I don’t need to budget because I only spend what I need to.”  Budgets, however, are not designed to differentiate daft decisions from smart ones.  Budgeting is a process of prioritizing expenses based on financial realities, regardless of whether each expense when examined on its own seems to be justifiable.  The truth is, each expense, examined in a vacuum, may very well have seemed like a good expense, but when the overall impact on the bottom line is understood, it becomes much easier for operators to prioritize and eliminate expenses or to creatively uncover alternative solutions that reduce the initial expense.  One of the ways this is achieved is through the use of declining budgets, as you will see in the attached budgeting spreadsheet.

3) Budgeting also provides valuable insight and data to help operators make decisions about future business initiatives.  Should you open for breakfast?  Should you build a patio?  Should you expand the kitchen?  Should you renovate the restaurant?  All of these could be great ways for operators to improve their businesses, but investing in such initiatives can create huge financial burdens if they fail to perform as expected.  Through the use of budgeting, break-even and ROI analyses can be completed that will better define the necessary components of achieving success when looking to undertake such initiatives.  Again, the benefit of budgeting in these scenarios is that it looks at the relationship of a given initiative on each of the other expense and revenue areas, rather than judging the merits of a project in a vacuum.

4) Budgeting also creates objective goals that can be easily communicated to the entire management team and staff to ensure everyone is working in concert.  The benefit of setting specific, measurable goals has long been understood.  When it comes to budgeting and countering negative financial trends, it is much better to provide specific, quantifiable goals than to provide vague direction.  For example, setting a weekly labor cost goal of 15% will have a much more significant impact than telling the team to “do better on labor.”  The objective goals used in budgeting also makes the process of performance review much easier and can create a sense of competition among motivated managers that are determined to “hit the number.”

5) The budgeting process often can improve service and operational consistency.  As a goal of budgeting is to get a picture of the financial future, operators can use this knowledge to plan accordingly.  Specifically, operators can allocate for future expenses ahead of time to ensure that they are able to meet the needs of the operation while maintaining consistent profitability.   Too often, mostly in corporate operations, we find businesses that fail to accurately budget and, therefore, overspend at the beginning of a financial period, forcing the drastic cutting of staff and supplies at the end of the period to try and hit the established financial goal.  With proper budgeting, however, operators should be able to consistently and continuously deliver on operational needs while maintaining financial performance goals.

6) Lastly, Seva Procurement sometimes works with operators that see value in budgeting for new businesses, but not those that have been around for a long time.  Their thought is that they have continuously honed and sanded each facet of their operation over the years so that it is always running at maximum efficiency.  This might be true if restaurants operated in a vacuum.  Instead, restaurants and hotels operate in an ever-changing environment.  From labor cost and food cost to economic pressures and political influences, the external environment can drastically alter the financial performance of even the most well run business.  The extent of these influences on profitability is often difficult to quantify or understand unless actual performance is gauged against established budgets based on previous financial history.

These are only a few of the reasons that Seva Procurement recommends that operators adopt budgeting as a financial best practice.  To help those interested in pursuing this practice, you can download a free budgeting program here that will enable you to execute sales forecasting, budgeting, declining budgets and performance analysis.