Yearly Budgeting

Budgets are a critical component to the successful operation of any business. This workbook will help you understand the relationship between sales, costs, and bottom line profit. This workbook will also project future growth and the breakeven point of the business.

Budgeting
The first step in the budgeting process is to estimate projected sales. This estimation needs to be made in a logical fashion and is not as simple as "making up a number". For example, if the check average for lunch is anticipated to be $9 per person, management must make an educated guess as to how many people per day the restaurant will serve at lunch. If the estimate is 40 on Monday, 60 on Tuesday, 80 on Wednesday, 120 on Thursday and 150 on Friday, with only 60 on Saturday and 20 on Sunday, the total is 530 customers for lunch. At a check average of $9 per plate, the total lunch sales for the week would be $4,770. This calculation also needs to be done for dinner sales, bar sales, off-peak hours (such as 2 p.m. to 5 p.m.), and late night. If there is a separate room for small parties or banquets, sales for that part of the business also need to be projected. This information should be entered into the appropriate box on the "Budget Questionnaire" tab. Once sales have been projected, the percentage cost of each sales category must be calculated and entered in the appropriate box. NOTE: All of the following dollar figures and projected percentages are to be entered in their appropriate boxes on the "Budget Questionnaire" tab.

Fixed and Variable Costs
This section discusses how cost areas are defined and calculated for budgeting. Costs are either fixed, variable, or a combination of the two. These costs are defined as follows:

Fixed costs are recurring costs that do not fluctuate with volume.
Variable costs are defined by a percentage of sales and the associated dollar cost is directly impacted by sales volume.
Combination costs are calculated as a fixed dollar cost in addition to a percentage of sales. For example rent might be paid to a landlord as a fixed dollar amount plus a percentage of the gross sales.

Fixed costs include:

Rent or mortgage payment - negotiated and contracted.

Property taxes - may change from year to year, but the assessed value as determined by the town or city tax department will not fluctuate within the year,

Insurance costs - determined at the beginning of the year,

Management payroll exclusive of bonus,

Contracted maintenance,

Utilities,

Loan payments - not based on sales volume, and

Equipment lease payments- contracted and not subject to volume influence.

Variable Costs
Once the fixed costs are filled in, the variable costs need to be entered. It must be noted that some costs can be considered either fixed or variable, depending on how a restaurant operator chooses to budget. For instance, advertising can be budgeted as a fixed dollar amount to be spent monthly. If this is the case, then the cost is fixed. However, if the amount spent on advertising is a percentage of sales volume, then the cost is variable and the dollar amount fluctuates depending on sales.

Variable costs include:

Hourly labor and associated costs including payroll taxes,

Operational expenses,

Equipment repairs,

Building repairs,

Advertising,

Credit card expenses, and

Projected managers' bonus earnings.

Operational Expenses
Operational expenses are those expenses constantly incurred in business operations, such as linens, paper supplies, dishwasher chemicals, plate and glassware replacement, etc. These expenses as stand-alone items do not account for large chunks of the budget, but combined can add up to 6-8% of total sales.

The next step is to budget operational expenses. Refer to the tab labeled Fig. 5-4 Operational Expenses. This worksheet is designed to help managers understand and account for operational expenses, which can easily get out of control. Because each of these cost areas might be insignificant on their own, managers tend to neglect them. In column B, the percentage of sales budgeted on the operational expense budget should be entered. If the entry is a fixed dollar cost, the dollar amount is entered as such. The total dollar amount of operational expenses is entered as one line item on the main budget for each month.

All of the information from the budget questionnaire is extracted into the worksheet tab labeled Fig. 5-3 Budget and entered into the appropriate location. Open the "Fig. 5-3 Budget" tab and the budget for the year is automatically displayed.

Break-Even Sales Point
The break even sales point of a business is an important concept and number to understand. This figure is automatically calculated and can be viewed by clicking on the Break-Even Point worksheet tab. The break-even point is the sales volume the restaurant needs to generate to reach a point where neither a profit nor a loss is realized. This number is merely the business's survival point where bills can be paid but no profit is generated. If sales fall below this number, the restaurant will need a cash injection just to pay the bills and keep afloat. Knowing the break-even point will assist a business owner in making investment and marketing decisions and will assist in the site selection process discussed earlier. The break-even point is not the only consideration in any decision, but is a valuable tool that assists an owner in making clear decisions for the future.

To calculate the break-even point, the business's fixed and variable costs need to be determined. There are several ways to calculate the break-even sales point. The formula that will be used for this calculation is:

S = Fixed Costs (in dollars) + Variable Expenses (as a percentage of net sales)
Where S is the break even sales volume

To determine sales necessary to produce a specific net profit, simply enter the desired profit in the box marked Enter Desired Operating Income. The new minimum sales level will be calculated and displayed in the box marked Sales to Produce Desired Operating Income.

The other information provided is Projected Margin of Safety and Projected Profit Margin Ratio. This information is automatically calculated from information already entered. The Actual figures are determined when actual sales are entered.

Pro Forma
Pro forma is a projection of profitability into the future. To develop these profit and loss projections use the worksheet tab labeled Pro Forma Questionnaire.

Follow the instruction on the sheet and enter the percentage increase for the next four years. The Fig. 5-8 Five-Yr Pro Forma worksheet tab will extract the data from the first year's budget in the Fig. 5-3 Budget tab, and the projected increases from the Pro Forma Questionnaire tab, and will calculate the sales and expenses for the first five years of business.

Sales and Labor Projection
The worksheet tab labeled Fig. 5-5 Sales and Labor Forecast assists management in writing effective, cost efficient schedules. Overstaffing or understaffing the restaurant can have a negative impact on the success of the restaurant. Overstaffing results in high labor cost and can affect morale through lower tips for front of the house employees. Understaffing results in poor service and therefore, unsatisfied customers. To effectively use this tool, daily sales projections must be made and an employee schedule must be written and the labor cost for each employee must be calculated.

During the opening phase of a restaurant, it will probably be difficult to project sales with any accuracy. However, a trend will develop in a short time. Projected sales are entered in the corresponding box under the day of the week. Sales for each category (food, wine, etc.) will be calculated by multiplying the daily sales projection by the category percentage that was entered in the budget questionnaire. (If the budget worksheet is not being utilized, simply enter the category percentage in the appropriate box.)

The cost for each position is entered under the day of the week in the box corresponding to the position (e.g. on Monday, enter the cost of the cooks in the corresponding box).

The worksheet will calculate the percentage of the labor cost and management can compare the projected cost to the original budgeted cost for labor. If the cost is more than the budget, management can make scheduling adjustments prior to posting the schedule.

Food Cost Tracking
The Fig. 5-7 Food Cost Projection worksheet tab helps the chef or kitchen manager track food spending. This work sheet does not take into account inventory levels, which is necessary to determine actual food cost. However, the worksheet will compare purchases to sales, which will help control costs and uncover possible food cost issues. If, over the course of three to five weeks the percentage of food purchases compared to food sales exceeds projected food cost, a problem may exist. This can be discovered without conducting an actual food inventory.

Start at page one and enter the first date above the day of the week.

List each purveyor from which the kitchen will make purchases.

Enter the food cost objective of the restaurant in the appropriate box.

The projected food sales for each day will be calculated from two other worksheets:

Budget Questionnaire
Fig. 5-5 Sales & Labor Forecast
When filling out the budget questionnaire, an entry was made to determine the percentage of overall sales that will be derived from the sale of food. On the Sales & Labor Forecast, a projected sales entry was made for each day of the week.

The "Fig. 5-7 Food Cost Projection" tab will calculate the projected food sales for each day.

From this information, a calculation is made as to how much may be spent on purchases and is displayed in the box labeled "Weekly Allowance at the Beginning of the Week". This helps the kitchen manager in planning purchases for the week.

Sales are entered in the "Sales Report" worksheet tab and this information is extracted by the "Actual Sales" row on the worksheet. (Make sure the entry is made to the corresponding day and week. If the first day of the month is a Saturday, sales on the Sales Report must be entered on the first Saturday of Week 1)

On the "Fig. 5-5 Food Cost Projection" tab, enter daily purchases from each purveyor under the corresponding day.

The program will automatically adjust the amount of money the kitchen manager has to use to make purchases and display that amount in the box marked "Left To Spend". This is adjusted in accordance with daily sales and food purchases. If sales are higher than projected, the amount left to spend will increase. If the sales are lower than projected, than the amount left to spend will decrease.

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