Investigation of Restaurant Finance - Essay Example

INVESTIGATION OF RESTAURANT FINANCE By Foundation Department Introduction Food is one of the basic need that human being need for survival. This has made hospitality to be one of the prominent industries all over the world. Many entrepreneurs have risen and are now investing in hospitality to earn their living. With this in mind, it is clear that to thriving in the hospitality sector is not a flaw. One has to come up with a way of attracting customers and inventing in cost effective activities. Keeping the factor of cost aside setting up a successful restaurant, let us say in California, will need to offer three time dishes (breakfast, lunch, and dinner). The restaurant has to offer high quality dishes as per cuisine menu because they are tested and people have gained trust to them. In this restaurant, range of products will be offered including, POSTRES and DESSERTS, ALA KARTA dishes, PLANTAINS and FRIED TANGS, HOT and cold salads, SANDWICHES’, BEVERAGES among other acceptable dishes as per cuisine menu. Having decided on what type of the restaurant is needed, the remaining part is getting the funds from most effective sources that will facilitate in any way possible to the success of the restaurant. Sources of funding This is a new business and sources of funding will be dependent on various factors of individual financial status. Financing will be most probably from these three sources, Personal saving – in this, someone needs to think of the idea in quite reasonable time and develop an account of saving towards the venture. The magnitude of saving depends mostly on the size of restaurant one want to start and one will save proportionately towards the venture approximated cost. This type of funding is most convenient because one is assured that the fund is there. One may also save with the intention of getting more finance from a financial institution that offer loans on the basis of saving in the account. One of the challenges of this form of financing is that it may take centuries before one accumulates enough funds to start off the venture. Bank loan- the second option available as a source of fund is acquiring loan at the bank. With bank loans, one can be able to acquire enough capital to start off at age. It also gives one ample time to repay the loan as per agreement. The challenge of this form of finance is that limited to the policy of the bank and in one case or another one may qualify under the policies, one may not be granted the funds. Some limiting factors in this form of finance are needed for a guarantor, the need for collaterals that can be taken to repay the loans and also one may be required to have saved with bank some amount and for a specific time. If one does not meet these entire requirements, automatically one disqualify from getting the loan. Franchising – I this form of finance, one get financier who will pay the full amount of ASSETS needed to be acquired and then the financed person pay some specific money periodically as agreed upon. This source of financing has great advantages, including reduced initial capital that one may not have and gaining value if the financier is well renowned and with good reputation. The disadvantage of this form of finance is that the financier will be on watch to see that the property is being utilized as agreed upon. Method of generating income After the restaurant is set and ready to function, bills and loans have to be paid. For this reason, fund to cater for operating expenses are needed. These sources include: Sales revenue – this includes some percentage of proceeds from sales being taken to cater for day to day operation of the business. For general business with no any other source of income, it is only from sale proceed it will get finance from. Some part of the sales are appropriated to be expensed and will always be taken to cover for operational expenses (In all instances, sales may be broken as expenses and the remainder being the profit.). Just in case the firm does not make any sales, it will be very difficult to survive in both short term and in the long term. Ploughing back profit- as we have seen above, sales proceed contain both portions of expense and profit. In this case, the restaurant may always maintain some part of profit over and above cost expenses percentage to cater for day to day operation just in case it fails to meet any sale at one time or another. Ploughing back profit ensures that the business does not spend extra money but only available cash. The likely cost to be incurred in running the restaurant. For any operating business, different cost is incurred in the production of the final service. They may either be direct, indirect or even factory overheads. The sensitivity of this cost varies from overhead being critical followed by indirect and finally direct cost as discussed below Factory overhead cost- these are cost that cannot be related directly to the production of services or product intended, but they play a very major role in the success of the business. These costs happen to be very important because the management might end up spending a lot of it unknowingly facilitating to a loss for the restaurant. These expenses in this case content will include repairing broken chairs, replacing broken utensils, fine in case of case precedent, among others. Indirect costs- these are cost that cannot be accredited directly to the final product. This is a cost paid to management who work hard to ensure that the service is produced, insurance paid by the company, taxes owed to the government among others. This cost cannot be located on single product rather it can only be attributed to the whole venture after completion. Direct cost- these are costs that can be pinpointed out in a single unit of product produced. They include material cost, labor cost, electricity cost used in cooking and equipment cost. This cost can be traced from the product at ease. Factors affecting gross profit percentage Gross profit is the difference between cost of sale and sales. Factors that will affect gross profit are the components of sale and those of cost of sale. They include: Sales variation Meeting and exceeding sales will read to increase in gross profit. On the other hand, the restaurant may fail to meet expected sales, which may lead to reduced gross profit to an extent of making gross sale. The factor that may contribute to variation of sale include external factor affecting the business (government policy, competition, natural factors) as well as well as internal factors (low motivation of marketers, the poor relation of hotel servants and customers, business culture)(Burgess, 2010:220) Variation of cost of materials The change in cost of raw material for example, food cost which is the major component of cost of sale will make the gross profit to increase if the material price decrease or leads to reduction of gross profit in case the cost of material increase. Another component attributable to the cost of sale is transport cost which it increase and reduction will affect gross profit proportionately Ways of calculating the selling price There many determinants that will determine the price of business product. In restaurant set up, we will base our discussion on three basic factors that will be necessary in determining the price of products (Attrill & McLane, 2006:330). They include: A competition based pricing: in this instance, it will be advisable for this restaurant management goes round other restaurant in the industry and get their rate of charge. He should charge the price in the range of other restaurants in the industry. He should can also charge lower prices than other restaurant if the cost of production allow in order to acquire more customer base. Cost based pricing- in this type of cost determination, the management will determine the cost of production and add expected overhead cost. After the cost estimation, management will determine the margin they need as profit and work out the value, for example, if the total cost of lunch dish is us dollar 20, and profit margin is 20%, then the selling price will be 120% of $20. Price based on customer or value based pricing –some customer believes that quality products come with expensive prices. Though he can be charging prices relative prices as per restaurants around the area, he may charge some special responding dishes special charge. Purposely, the management should look at what the customer wants to pay if it is considerable and fix the price as per demand. To conclude, before the management come up with the price, they should look at the effect it have to consumers, other firms and the firm itself. Record keeping is important because it will be base of price determination in the future Stock control method in the restaurant In the restaurant set up, stock control measure depends on the nature of the material. Most materials happen to be perishable or else when one material is opened, it stores period decrease. The following are some of stock control measures that can be tried to control stock in a restaurant set up. Set up minimum stock that should be available in store. Some products may not be available at the time of demand and hence their level should be maintained such that the stock should not fall below that level. If stock fall to that level, more products are ordered a situation known as re-order level. Continuous stock review. Too much stock will lead to high cost of maintaining a store, whereas emergency stock may lead the firm not to offer services if goods are not delivered in time. Stock review is important to make sure that stock is at equilibrium that will see the firm not spending more than the budget. This is called economic order quantity. Lead time- this is time between order and receiving the order. The stock which is in store should be enough to be used in that period First in First out – as said earlier, restaurant deals with materials, which are very perishable. This portrays that stock that was purchased first should be utilized first. Best ways to control cash flows in the restaurant Cash is the most critical component of any given firm and any slip, mistake may make the firm to go at a loss or even fail to meet its operating expenses following are some of cash control in this restaurant. Ensuring that all invoices are written and in duplicate. The clerk and cashier should be two different people who should be monitored on their move to avoid any relation that can promote them in stealing the firm’s cash. Ensuring that cash inflow exceeds cash outflow for availability of working capital. Negotiate for convenient dates of purchase payment from suppliers Pay cash that needs to be paid as per agreement, for example. Milk delivered daily. Reach out for payment by customers, which are due. They are mostly on outside catering. Avoid too much unmoving stock because they will tie out cash. Conclusion A management team should be on the look on how funds are being managed to ensure that bills and loans if there is are met. The management should work on cost reduction and look at ways of maximizing profit. Customers are key and are the bosses of the company, and hence they should be treated with great respect. Cash control is key and should be taken in sensitivity needed to ensure that no one benefit with it at the expense of the company. Finally, restaurant and the owner are two separate entities and the owner should account for any amount added into the business as capital increase and any drawing made as capital decrease. Task 2 Introduction The most useful financial statements that covers lots of business activities include the trial balance, profit and loss account and the balance sheet. To analyze them, let us focus on the case in the question and see how they affect the restaurant performance. Structure of trial balance Trial is an account used to record all balances of business account to ensure that the total debit and credit amount tally. It consolidates all journal balance at the end of the trading period. Though the debit balance and credit balance may tally, it should not mean that all accounts are entered correctly, they may be some errors, which may not be discovered by trial balance for example making entries in different account but of the same kind (Adams, 2006, p. 50). Assume that there was a payment of sundry expenses debited with £200 but entered on lighting expenses. The trial balance will still balance. As shown in the appendix, a standard trial balance should have three columns (opening balance column, adjusting column and finally the ending balance) Question B in appendix WORKING ON INCOME STATEMENT Cost of sale =purchases – closing stock (154870-16280) =138, 590 NOTES WORK 1 Interest due to a long term loan is 8/100 of 50000= 4000 Work 2 The tax due is 25/100 of earnings before tax (24043) =6010. 75 Total depreciation=10295 obtained as 10/100 of 11000+14400 (fixtures and delivery van) =2540 + 7755 (5/100 of (70100+85000) equipment and building ABC RESTAURANT INCOME STATEMENT FOR THE YEAR ENDING 30TH JUNE 2014 DETAILS SALES 265000 COST OF SALE 154870 GROSS PROFIT 110130 LESS EXPENSES RENT 23250 LIGHT AND HEATING 5300 TOTAL DEPRECIATION 10295 SALARIES AND WAGES 51400 INSURANCE 3600 SUNDRY 412 MOTOR RUNNING 4110 (97617) EARNING BEFORE TAX AND INTEREST LESS INTEREST (WORK 1) (4000) EARNING BEFORE TAX 8513 LESS TAX WORK 2 (2128.25) EARNING AFTER TAX 6384.75 Balance sheet Net equipment after depreciation 5/100 of 70100=3505 Net building after depreciation 5/100 of 85000= 4250 Delivery van after depreciation 10/100 of 14400=1440 Fixtures depreciation 10/100 of 11000=1100 ABC RESTAURANT BALANCE SHEET FOR THE YEAR ENDED 30TH JUNE 2014 DETAILS COST, VALUE ACCUMULATED DEPRECIATION NET BOOK VALUE ASSETS FIXED ASSETS EQUIPMENT 70100 3505 66595 BUILDING 85000 4250 80750 DELIVERY VAN 14400 1440 12960 FIXTURES 11000 1100 9900 TOTAL FIXED ASSETS 170205 CURRENT ASSETS OPENING STOCK 16280 DEBTORS 31300 CASH AT BANK 14590 INSURANCE ADVANCE 500 TOTAL CURRENT ASSETS 62670 TOTAL ASSETS 232875 EQUITY AND LIABILITIES CURRENT LIABILITIES CREDITORS 20680 RENT OWING 1250 TOTAL CURRENT LIABILITIES 21930 LONG TERM LIABILITIES LONG TERM LOAN 50000 FINANCED BY SHARE CAPITAL 132002 PROFIT 6384.75 TOTAL EQUITY AND LIABILITIES 210316.75  Purpose of budget According to Guilding (2002:267) for success of any business, having a budget of how money will be spent is very key. In this case of a restaurant, budget will be important because, It can be used to identify which component of material cost has been achieved as plan. It can also be used in transferring cash to any other cost component, for example, if floor fixed amount in the budget is not utilized fully and milk component needs some added cash due to its high demand, some amount will be taken from floor component to take care of milk component. Having budget forces firm to be accountable of all expenditure on various material cost component. A good budget account for expenditure and receipt and hence it will be a good measure of how the business is performing. Budget withdraws from the business the aspect of revenue versus expenditure of the business. It ensures that all cash are being accounted for when use and when received Question C (appendix) 1. Schedule for expected cash collection for month of September detail payment Collection for September SEPTEMBER July 5600 7/100 of 5600=392 392 august 5520 80/100 of 5520=4,416 4416 SEPTEMBER 8400 10/100 of 8400 =840 840 +9000+39000= TOTAL 53,648 The amount received in month of September is 53,648 but there is percentage expensed of three percent, which are not recovered. The total recovered for September is 5648, which is equivalent to 97% therefore 3% will be 174.68.which will appear in cash budget as expense for September. 2. Schedule for expected cash for purchases The amount payable on September will be 20/100 of 24000= 4800 Add remainder for august=15000 Total 19800 Notes on cash budget below W1 depreciation is not included in cash budget 13000- 4000= 9000 Balance cried down will be opening balance for September. 3. Cash budget for September detail September Cash b/d 5000 Receipt 53,648 Less expenses and payments Payment Bad debt Equipment purchase Administrative expenses Dividends Total 19,800 174.68 18,000 9,000 w1 3,000 (49974.68) Balance c/d 8673.32 Variance (labour, material and efficiency overhead). Labour variance- this variance is used to determine the difference between expected and actual labour used. Labour variance = (actual rate –standard rate)*actual hours. If actual rate is $10 and standard rate is $12, labour variance is favorable that is the rate that have been paid to employees is less that the planned rate. The restaurant should ensure that actual rate for employee’s compensation does not exceed the planned (favorable labour variance). Material variance- for material variance, the actual cost of purchasing the material should not exceed the standard cost set to purchase the same materials. Material variance = (actual price –standard price)* actual quantity. For example if the actual price of acquiring one unit of material is $3 and the standard price is $2.5, then material variance become un-favorable and it should be avoided. The management should look forward to ensuring that actual price of material does not exceed the standard set. Efficiency variance- for efficiency variance different component of cost are analyzed for example, labour efficiency variance = (actual hour –standard hours) *standard rate. If for example a work was to be done in 10 hours but it get to be done in 7hours, there is a great efficiency. Management should work to ensure that works are completed as scheduled as or even earlier than scheduled. Overhead variance- in this case, variances of cost that are not directly related to production are ascertained. Overhead variance = actual variable - (actual hours *variable actual rate). For expenditure overhead, the elements in bracket are the expected variable cost. Actual variable overhead should be less than the planned for an effective business. Conclusion According to Atkinson et al (2012:58), function of the restaurant the restaurant are favorable since it can be able to meet it operating expenses as illustrated by the cash budget. The restaurant also made a net profit in its operation meaning it is good to go. Task 3: Financial statement analysis In this chapter, discussion on factors arising from the facts of maintaining financial statements will be discussed. The performance comparison will be done using ratios in different instances, for example, liquidity ratio (current ratio and quick ratio) that compare current assets to current liabilities (Warren, Reeve, & Duchac, 2015, p. 87). Gross profit ratio and net profit ratio that compares and contrast income of various years. Leverage ratios that that compare proceed by finding, for example, debt to equity ratio. Others include inventory turnover and payable turnovers. We will compare different performance of the ABC restaurant for the year 2012 and 2013 Liquidity ratios: this ratio determines the flexibility of the firm to pay its operating expenses. One of the ratios used is current ratio=current ASSETS: current liabilities For example the Detail 2013 2012 Total current ASSETS $ 764.9 $ 757.6 Total current liabilities $1,416.4 $ 1,774.1 Current ratio (ASSETS: liabilities) 1.904 2.341 From the above information, the company was able to meet current expenses in both cases. In the year 2012 (2.341), they were in a better position to cater for expenses than in year 2013 (1.904). Leverage ratios: in this ratio, the value of a firm’s capital financed by the debt is determined. One of this ratio include debt: to equity ratio. Detail 2013 2012 Total long-term and short term debt 2,496.2 1,453.7 Total equity $2,059.5 $ 1,842.0 Debt ratio (total debt: equity) 1.212 0.78 The value of the firm capital increased from 0.78 in year 2012 to 1.212 in the year 2013. The acceptable ratio for using debt: ratio in determining firm value is 2:1, therefore in both cases, therefore it is still acceptable that ABC may use either equity or debt to finance their operations. Activity ratio: Another ratio is an activity ratio that consists of ratio like inventory turnover. They are used to determine the rate of sale of the firm. In the case of inventory turnover, several restaurants will analyze their rate of sale and then their performance may then be compared. An example of inventory turnover using ABC restaurant is for year 2013 and 2012is as illustrated below. Inventory turnover is calculated by comparing annual cost of goods to inventory The annual cost of goods sold: inventory. Detail 2013 2012 Cost of sale $6,661.0 $6,163.2 Inventory 356.9 $ 404.1 Annual cost of food: inventory 18times 15times As illustrated by the data, it is clear that the ABC restaurant improved in the sales they made in year 2013 as compared to year 2012 by three times (18-15). Recommendations Recommendation on the step forward toward improving restaurant performance based on the above analysed ratios. Avoid having dormant stock- as observed in liquidity ratios above; cash is needed to keep the business running. Just in case the money available is used to buy stock, which do not sell first and consumed much of the money, then the restaurant will not have cash to finance its day to day operations. Use ratios in determining source of funds- as per productive ratio on finance, the ratio of compared finance should not be more than 2:1. As described above by debt to equity ratio in case the ratio of debt to equity go past 2:1, the company should reconsider some other sources of finance like ploughing back profit and personal financing. Proper sales management: the rate of sale can be determined using a ratio like inventory turnover. The restaurant should use such ratio as explained above to improve on sale after comparing different periods. These ratios can be as well use in determining the performance of the firm by comparing ratio of different firms who publish their books of accounts. Maintain proper record on all transactions: to work out these ratios, data is needed on all the transaction that took place throughout the year. Data keeping in fact is backbone of success of any firm since faults can be discovered and be rectified. Application of advance technology in data taking and storing: it is clear that huge data need to be kept for the whole trading period. Interpreting this data will be more tiresome and costly if maintained manually. Some software’s like quick book and pestle may be used to take this data and analyzing will be I a blink of an eye. Department separation: as observed above, different data from different departments are used in determining the wellbeing of the firm. For example, if receipt and cash department are held by the same person, the highest probability is that receipt and cash will be manipulated and forced to tally at a lower figure such that the cashier who is the clerk benefit. Cost categorization Cost may be classified as either variable, fixed, or semi variable. In the case of restaurant case this cost will include Fixed cost- these are costs that do not change regardless of if the firm makes sales or do not make sales. These costs do not change even if more products to its range are produced. They include, Store cost, apartment cost, or field cost. Depending on which the restaurant is using, this rent do not change either the firm is producing or not. Others include licenses and insurance Variable cost- this are cost that changes with production. The more the production, the higher the cost. These costs include heating expense, material cost, water cost, electricity cost among others. This cost can be directly attributed to cost per unit of the product. Semi-Variable cost – these are costs that contain both fixed and variable cost. The fixed cost will always be there but the variable cost comes when the maximization of fixed cost is reached and superseded. For example assume that the restaurant pays electricity on prepaid basis, if the estimated fixed per day is US dollars 500(fixed) and during that one day food production go the expected limit, any more consumption of electricity will mean the restaurant paying more bill( variable part) Question E (question three in appendix) i. Contribution Contribution is the part of profit the firm is getting from each unit, which is given by: sales less cost = 7-3= $4 per item ii. The break-even point- this is the point where firm is able to meet it fixed cost and calculated as fixed cost divided by contribution or contribution margin Fixed cost/contribution= 6000/4= 1500 units (break-even point on volume) Break-even point on revenue is given by multiplying break-even point on volume by selling price per unit = 1500* 7=$10,500. How decrease or increase in cost of price affect the firm According to constrain theory, all factors of business must be controlled to increase firms profitability. For example if the above restaurant raises the selling price all other factors remaining constant, the firm is likely to make high profit if the demand of food does not go down. On other basis, the restaurant may decide to reduce the cost of production to increase the profitability of the firm. This will happen if the firm reduces the cost of production and reduce the selling price to attract more customer or else fail to reduce selling price to earn higher profit. Conclusion and recommendation based on profit and loss and break even analysis. From the above calculation on break even analysis of the new restaurant, it is clear that the firm is making a good profit as per contribution of $4 with selling price being $7. To recommend, the firm may increase it contribution per unit by reducing the cost of production and holding the selling price at $7 to avoid chasing the customer away. In addition, the firm may decide to reduce it contribution by lowering the selling price and as a result increasing customer base meaning that firm profit will remain to be high. Justification of recommendations As given by inventory turnover, cost of sale remained to be nearly the same and no of sales of inventory increased in year 2013 as compared to year 2012. Decrease in food prices as decreased in year 2013 making the firm make a lot of sale and hence high profit. References ADAMS, D. (2006). Management accounting for the hospitality, tourism and leisure industries: a strategic approach. London, Thomson Learning. ATKINSON, H. JONES, T. LORENZ .A & HARRIS. P, 2012. Strategic managerial accounting: hospitality, tourism & events applications. Oxford, Goodfellow. ATRILL, P., & MCLANEY, E. J. (2006). Accounting and finance for non-specialists. Harlow, Essex, Pearson Education. BURGESS, C. (2010). Essential financial techniques for hospitality managers. Oxford, Goodfellow Publishers. EDEXCEL, 2011. BTEC Level 4 HNC and Level 5 HND in Travel and Tourism Management Study Guide Harlow Pearson chapter 2. GUILDING, C. 2009. Financial Management for Hospitality Decision Makers. London: Routledge. WARREN, C. REEVE, J. & DUCHAC, J. 2015. Corporate Financial Accounting. New York: Cengage Learning Appendix Equity structure of ABC restaurant May 26, May 27, (In millions, except ratios) 2013 2012 CAPITAL STRUCTURE Short-term debt $ 164.5 $ 262.7 Current portion long-term debt - 350.0 Long-term debt, excluding unamortized discounts 2,501.9 1,459.1 Capital lease obligations 54.4 56.0 Total debt $2,720.8 $2,127.8 Stockholders’ equity 2,059.5 1,842.0 Total capital $4,780.3 $3,969.8 CALCULATION OF ADJUSTED CAPITAL Total debt $2,720.8 $2,127.8 Lease-debt equivalent 1,026.9 853.8 Guarantees 4.2 5.4 Adjusted debt $3,751.9 $2,987.0 Stockholders’ equity 2,059.5 1,842.0 Adjusted total capital $5,811.4 $4,829.0 CAPITAL STRUCTURE RATIOS Debt to total capital ratio 57% 54% Adjusted debt to adjusted total capital ratio 65% 62% Question b From the following trial balance of Restaurant after its first year’s trading, you are required to draw up an income statement and balance sheet for the year ending 30 June 2014, in order to evaluate these accounts and notes. Trial Balance as at 30 June 2014 £ £ Sales 265,900 Purchases 154,870 Rent 22,000 Lighting and heating expenses 5300 Salaries and wages 51,400 Insurance 4,100 Buildings 85,000 Fixtures 11,000 Accounts Receivable 31,300 Sundry Expenses 412 Accounts Payable 20,680 Cash at Bank 14,590 Equipment’s 70,100 Delivery Vans 14,400 Motor running expenses 4,110 8 % Long Term Loan 50,000 Share Capital 132,002 468,582 468,582 Additional Notes: a) Inventory at 30 June 2014 was £16,280 b) Corporation tax is 25% c) As at 30 June 2014, rent owing is £ 1,250 and £ 500 had been paid in advance for insurance. d) The interest on the long-term loan needs accruing for the year. e) Depreciation is to be provided for the year at the following rates: i. Delivery Van & Fixtures at 10% using straight line method. ii. Equipment’s & Building at 5% using straight line method. Required Prepare the income statement (profit and loss account) for the year ended 30 June 2014 and the balance sheet as at that date in accordance with IASs. Question c These are the information given for the restaurant for coming months. i. The cash balance at the beginning of September is £ 9,000. ii. Actual sales for July and August and expected sales for September are as follows: July August September Cash sales £ 19,000 £ 29,000 £ 39,000 Sales on account £ 5,600 £ 5,520 £ 8,400 iii. Sales on account are collected over a three-month period as follows: 10% collected in the month of sale, 80% collected in the following sale, and 7% collected in the second month following sale. The remaining 3% is uncollectible. iv. Purchases of inventory will total £ 24,000 for September. 20% of month’s inventory purchases are paid for during the month of purchase. The accounts payable remaining from Augusts’ inventory purchases total £ 15,000, all of which will be paid in September. v. Selling and administrative expenses are budgeted at £ 13,000 for September. Of this amount £ 4,000 is for depreciation. vi. Equipment costing £ 18,000 will be purchased for cash during September, and dividends totalled £ 3,000 will be paid during the month. vii. The company maintains a minimum cash balance of £ 5,000. An open line of credit is available from the company’s bank to bolster the cash position as needed. Required: (1) Prepare a schedule of expected cash collections for September (2) Prepare a schedule of expected cash disbursements for merchandise inventory purchases in September. (3) Prepare a cash budget for September. Indicate in the financing section any borrowing that will be needed during September. Read More