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Profit improvement programmes in food and beverage operations: a new technique of profit management
Profit improvement programmes in food and beverage operations: a new technique of profit management Richard Kotas Department of Hotel, Catering and Tourism Management, University of Surrey, Guildford, U.K.
For several years now the author has run profit improvement programmes (PIP) for food and beverage operations throughout the U.K. In the paper which follows he explains the underlying philosophy of PIPs, describes the methodology and demonstrates their success. Key words:
Food and beverage
profit
improvement
Food and beverage operations: the control legacy
operations - - are part and parcel of the system of budgetary control, where any set of planned results is substantially and typically based on actual results achieved during previous trading periods. An unfortunate effect of this approach to the control of profitability is, quite frequently, to perpetuate operational mediocrity and profit under-achievement f r o m one trading period to another. Where, therefore, a food and beverage operation requires a substantial improvement in profitability, it is obvious that neither the conventional controls nor the system of budgetary control are the sole instruments to employ.
The traditional - - and now generally accepted - approach to food and beverage control is based on the five-stage control sequence which reflects what is sometimes described (Kotas and Davis, 1981) as the 'catering cycle'. Each of the five stages of the catering cycle - - buying, receiving, storing and issuing, preparing and selling - - influences the level of gross profit currently achieved. Hence, in order to secure a fully comprehensive control system, it is essential to ensure that the repertoire of control techniques in operation covers all the five stages of the catering cycle.
Food and beverage operators who have run profit improvement programmes now recognise that, in addition to the conventional controls, this second, non-routine line of attack is required in order to secure an adequate improvement in profit levels. What, therefore, has emerged is a twopronged exercise in profit management consisting of:
The advantages of this traditional approach to the control of food and beverage operations are quite clear: it is logical in that it follows the natural sequence of events (buying, receiving, etc.); it is comprehensive - - if only with regard to the control of foods and beverages; finally, it is capable of producing all the essential data required within the context of a food and beverage management information system.
(a) the traditional food and beverage controls; (b) periodic PIPs - - ad hoc measures designed to secure additional permanent improvement in the profits of the business.
However, food and beverage control systems were originally developed several decades ago when labour was considerably cheaper. And it is not surprising, therefore, that many control systems in operation tend to concentrate almost exclusively on foods and beverages and pay inadequate attention to the control of payroll and other costs. The second and more important criticism that may be levelled against the traditional approach is this: food and beverage control systems - - particularly in the case of larger Int. J, Hospitality Management Vol. 2 No. 1 pp. 37-42 1983 Printed in Great Britain
control
PIPs: specific objectives The principal objectives of profit improvement programmes may be summarized as follows: To offer senior executives formal training in the latest control techniques and methods of profit improvement. • To give such executives an opportunity to •
37
0278-4319/83/010037-06503.00/0 (~)1983 Pergamon Press Lid
38
Richard Kotas
apply in food and beverage operations under their control some of the knowledge so gained. • To provide a suitable forum for the discussion of topics relevant to profitability. • To give such executives more insight into how their operations make a profit - - here the identification of the actual business orientation (Kotas, 1981) is essential, as the most effective m e t h o d of raising profits in marketoriented operations will differ considerably from the methods that should be employed in cost-oriented operations. • Finally, and most importantly, the major objective is to secure a higher level of profitability.
the PIP as an important contribution to the financial well-being of the company. In the majority of food and beverage operations there is a distinct annual trend in the volume of sales; and it is of great importance that the PIP is introduced at the right time of the year. In the case of seasonal food and beverage operations it is best to introduce the PIP well before the comm e n c e m e n t of the high season - - when business is relatively slack and when, therefore, senior executives are able to devote sufficient time to this kind of training. Typically, a PIP consists of three separate parts, as illustrated in Fig. 1.
Some organizational aspects One of the first major decisions that must be made relates to the choice of the PIP tutor. There are two possibilities here: a p r o g r a m m e tutor may be chosen from amongst the senior personnel of the c o m p a n y or, alternatively, an outside consultant of the right calibre may be employed. It is frequently found that it is difficult to select an appropriate executive from the company for at least two reasons. First, senior executives tend to be specialists: those responsible for operations may feel that they do not quite have sufficient knowledge of financial techniques to mount a satisfactory PIP. Conversely, those who have responsibility for finance and control often feel that their knowledge of food and beverage operations is similarly inadequate. Second, even the most c o m p e t e n t business executives are not necessarily effective teachers; and good teaching is particularly important during the first part of the PIP. A successful PIP must be related to the profit objectives of the c o m p a n y and, therefore, tailormade. The choice of the teaching material must, therefore, be established on the basis of extensive consultations between the p r o g r a m m e tutor and the directors of the company. Quite clearly, the right balance has to be struck between the teaching of new techniques and the appraisal of the specific techniques and control procedures used by the company. The p r o g r a m m e tutor - - w h e t h e r he is a member of the c o m p a n y or an outside consultant - must be given the right support. It is very desirable, therefore, that at least one or two directors as well as the financial controller/chief accountant should take a close personal interest in the PIP. More specifically, such individuals should attend all the training sessions, take part in the discussions and make it quite apparent that they regard
ir,tens;~,e ,b,or! c o u r s e ~ Oq pro~ltdbl;.ity
~ or 2 d@ys
PElf \ rn~rovement project I C: ~eek;
L ProJects
I or 2 d@ys
Fig. 1. Constituent parts of the PIP.
Short courses The first part of the PIP, the intensive short course, should normally last one full day - - most certainly not longer than two days. The principal objective of this first part of the PIP is to ensure that all participants are au Jait with the latest developments in relevant techniques of control and financial m a n a g e m e n t . Also it is important to ensure that all participants not only understand but also are able to apply such techniques to the specific nature of the food and beverage operation for which they are responsible. In order to secure the requisite degree of relevance, the p r o g r a m m e tutor should base most of his teaching on information received from the company. He will, therefore, have to have at his disposal typical profit statements for the various food and beverage units operated by the company. Finally, before a PIP is actually comm e n c e d the p r o g r a m m e tutor will have to be quite clear what business orientation should be given to the short course: should it be training relevant to a market- or cost-oriented operation? Once this aspect of business orientation has been decided upon, the appropriate t h e m e will have to manifest itself in all aspects of the short course as well as in the choice of profit i m p r o v e m e n t projects. Table 1
PIPs in food and beverage operations
39
shows an example of a recent short course for three separate groups of executives.
consultation with senior members of the company concerned.
It will be observed that, as the course shown in Table 1 is intended for senior managers, no provision is made for the treatment of routine control procedures, as it may be assumed that techniques such as methods of buying, standard recipes, volume forecasts and sales histories are not only known but are actually employed by the course participants. Also, it should be noted that the course has been designed for a revenue-oriented sector of the industry. It is for this reason that a high proportion of the time available has been devoted to aspects of revenue accounting.
In addition to the unit control profile it is worthwhile to prepare a company control profile, which summarizes all the individual profiles. The company control profile is a good indicator of the overall control strengths and weaknesses (Sizer, 1979); and points to the type of profit improvement project that should be chosen by the majority of course participants. An example of a simple company control profile is given in Table 3, and this shows the overall revenue control strengths and weaknesses with striking clarity. The control of gross profit margins is the strongest control feature. Both average spending powers and number of covers should be strengthened; and 'other procedures' - - which includes the monitoring of waiters' sales, sales histories, volume forecasts, etc. - - is an area which is badly neglected.
Each short course should end with the choice by each participant of a profit improvement project. This is a matter where, normally, discretion should be exercised by each participant concerned. However, some guidance should be given by the programme tutor on the most desirable type of project. It is for this reason that it is useful - - at some stage during the short course - - to ask each participant to prepare a unit control profile - - an example from a recent PIP is shown in Table 2. It will be observed that the main purpose of this particular control profile is to establish what specific revenue-oriented techniques are currently being employed. The example in Table 2 is, clearly, intended for a revenue-oriented operation; and was designed after adequate
Implementation of project As already suggested the individual profit improvement projects should reflect the current control needs of the company. There is, however, within this important constraint a great deal of scope for the imagination and ingenuity of each participant concerned. Participants should, however, be warned not to undertake projects which are unduly ambitious: a limited, fully c o r n -
Table 1. Example o f an intensive short course
Dates: Thursday-- 15, 22 and 29 January 1981 Time 9.15-10,30
Course content Cost behaviour. Break-even analysis. Introduction to revenue accounting. Profit sensitivity analysis
10.45-12.00
Techniques of revenue accounting. Monitoring sales volume. Sales mix management. Use of statistics and visual aids.
12.00-12.30
Unit control profile: revenue control,
12.30-14.00
Lunch
14.00-15.15
Control of labour costs: aspects of seasonality.
15.30-16.45
Syndicate w o r k - - practical applications of revenue accounting techniques.
16.45-17.30
Review of unit control profiles. Selection of profit improvement projects.
40
Richard Kotas
Table 2. Unit control profile
Revenue control
Control procedure Average sp ending p o wer (ASP) Are ASP figures recorded daily? Are ASP figures produced separately for food, beverages, etc? Are ASP figures produced for each selling unit? Are ASP figures charted to show trends?
Number of covers (NOC) Are NOC figures recorded daily? Are NOC figures produced daily for each selling outlet? Are NOC figures used for planning staff rosters? Are NOC figures charted to show trends?
Possible mark
Actual mark
1
1
2
2
1
1
1
0
5
4
2
2
1
1
1
0
1
0
3 Sales mix (SM) Are SM figures recorded daily? Are SM figures produced for food sales daily? Are SM figures produced for beverage sales weekly? Are overall SM figures produced for each selling outlet Are SM figures charted to show trends?
1 1 1 0 0
5
3
5
4
5
1
Gross profit (GP) Is actual food GP% calculated at least weekly? Is actual beverage GP% calculated at least weekly? Is GP% calculated in respect of each element of beverage sales at least weekly? Are GP margins charted to show trends?
Other procedures Is a weekly check kept on individual waiters' sales? Are formal sales histories maintained? Are waiting staff instructed (at least one hour per month) how to increase sales volume? Is a formal system of volume forecasting used?
PIPs in food and beverage operations
41
Table 3. Company control profile
quent weekly trading results of the two bars were as follows:
Control 3rocedure
OveraLl. company score I
2
/
Number of covers
/~
SaLes mix
o,~
Gross :)rofit Other )rocedures
4
3
Averoge spending )ower
•
/ e~
~ / -
pleted project is worth much more (both in terms of additional profit and the participant's sense of achievement) than one which looks grandiose and impressive but, somehow, never reaches completion within the time allowed. The time allowed for the completion of the projects needs careful consideration. Experience available so far indicates that three weeks is inadequate. Also the consensus of opinion is that three months would be too long a time - - as most participants would, in such circumstances, tend to do little during the first few weeks available. Six weeks, then, is the period of time that has emerged as the most appropriate; and most of the profit improvement projects tackled so far (the overwhelming majority of them were far from being trivial) have been such as to lend themselves to full completion during the six-week period.
Some recent projects
Net sales % Gross profit Cash gross profit Net profit Food merchandising
increase 12.5% decrease 0.8% increase 23.0% increase 36.7%
Participant CD was operating a busy popular selfservice buffet. It was clear from both observation and experience that the positioning of a particular food item had some effect on its sale; in other words, some parts of the total display area, the 'merchandising hot spots' promote sales more than other areas. He selected six popular, high gross-profit items, and their positioning on the display area was then changed over a period of time. The number of portions sold was monitored hourly. By the end of this experiment CD had a huge volume of data from which it was possible to decide on the most advantageous positioning of the six items concerned. The effect of this exercise may be summarized as follows: Sale of 6 experimental food items Food sales - - total Number of transactions Average spending power
increase increase increase increase
162.0% 15.2% 6.5% 8.2%
Basic control procedures Participant EF was managing a small, costoriented unit. His profit improvement project was 'to improve all basic control procedures'. He managed to achieve the following: (a) more frequent stock-taking; (b) more spot checks on food usage; (c) a complete re-appraisal of cooking methods; (d) he introduced visual aids to food control.
During the last few years a large number of profit improvement projects have been completed: some in small units employing fewer than 25 employees - - others in large units employing over 400 employees. In terms of sales volume, the smallest units had a turnover of about £400,000 p.a. whilst the largest ones were multi-million pound operations. Given below is an outline only of some of the projects completed.
During the six months following the intensive short course his gross profit percentage improved substantially and his net profit was doubled? (In this particular case profit under-achievement was due to a lack of basic controls; and a few relatively simple improvements were bound to produce truly impressive results.)
Price and net profit
Adjusting labour costs to sales volume
Participant AB was, amongst others, responsible for the operation of two public bars. He had a 'hunch' that if he reduced the price of spirits (doubles only) from £1.00 to £0.85, the increase in the sales volume would more than compensate the loss resulting from the lower price level. Halfway through the six-week period he introduced the new prices, having previously given this new arrangement sufficient publicity. In relation to the average figures for the first three weeks the subse-
Participant GH was responsible for a catering operation which included a restaurant, several bars and a self-service buffet. The latter was, over a long period, losing money at the rate of over £3000 per month. GH's profit improvement project was: 'to reduce the operating loss by the end of Month 4 and to operate profitably from Month 5.' In order to map out the strategy of profit improvement, he calculated the profit multipliers for his operation. From these it appeared that the
42
Richard Kotas
most fruitful approach was to replan the direct labour rosters and, in this way, secure a more sensible adjustment of labour costs to the daily pattern of business. By the end of Month 5 he had not quite reached his objective - - his loss was, however, only £200. Over the subsequent 6 months of trading his net profit averaged over £500. The conversion of a substantial monthly loss into a reasonable profit on this buffet made a considerable difference to the overall profitability of his total operation.
Presentation of projects Six weeks after the short course all participants return to report on the progress they have made. As already mentioned elsewhere it is in this paper, it is imperative that at least one or two directors and the financial controller attend this session - not only to be informed, but to demonstrate their support for the company profit improvement programme. Quite naturally, as projects vary considerably in nature and scope, it is difficult to decide how much time should be allotted to any one individual presentation. Experience tends to indicate, however, that, on average, one should allow at least half an hour per project; and this means that one can accommodate not more than eight projects a day. Such presentations are not, however, the sole purpose of the reporting-back session. As the conception, development and implementation of a project are being explained, it is u s u a l - and indeed desirable - - for participants to pose questions, ask for supplementary explanations and offer comments. It is for this reason that it is of the utmost importance to make provision for sufficient time to be available for general discussions, as these are at least as important as the presentations themselves. Thus, the learning process which commenced during the short course, and was then put to a practical test during the six-week period, continues throughout the day - - through question and answer, exchange of views and experience, etc. Inevitably, by the end of the day all those present (including the Programme Tutor!) felt that they had learnt more - - some considerably more - gained more insight into the determinants of profitability and, importantly, picked up more practical ideas on profit improvement methods.
PIPs: some principal advantages It seems appropriate to conclude this paper by listing some of the main advantages of this recently developed technique. These are as follows: • Profit improvement programmes are superior to conventional courses in that they provide an important link with practical profit performance. • The assessment of the benefits of training is always difficult; indeed a lot of training is an 'act of faith'. Profit improvement programmes result in benefits most of which may easily be quantified in terms of their impact on profitability. • The conventional type of course does not offer any guarantee of substantial, permanent benefits. A successful profit improvement programme constitutes a clear proof that the participant has both understood the theory and is capable of putting it into practice. Perhaps the greatest benefit of profit improvement programmes lies in their impact on executive attitudes (de Bono, 1978). After tackling one or two projects, a manager accepts that this kind of innovative action not only constitutes a profitable adjunct to conventional food and beverage controls, but is an integral part of his executive responsibility. A good project is the product not only of hard work: at the conceptual stage the most important ingredients are imagination and the will to innovate. No senior manager will normally complete a project on his own, and the involvement of less senior managers and, often, supervisors has further positive effects not only in terms of particular skills and techniques but, equally, innovative attitudes.
References Bono, E. de (1978) Opportunities. a handbook ~,~/ business opportunity search. Penguin, London. Fuller, J. (1975) Market Orientation in the Hotel and Catering Industry. In Kotas, R. (ed.) chapter 9. Surrey University Press, Guildford. Kotas, R. and Davis, B. (1981) [~od and Beverage Control, pp. 4-12. International Textbook Co, Glasgow. Kotas, R. (1981) PSA: use of profit multipliers in pricing decisions. Hospitality, June, pp. 27-35. Kotas, R. and Wanhill, S. (1981) PSA: its nature, significance and applications. International Journal of Tourism Management, September, pp. 176-188. Sizer, J. (1979) An Insight into Management Accounting, pp. 237-247. Pelican Library of Business and Management.
About the Author Richard Kotas is Senior Lecturer in Accounting at the Department of Hotel Catering and Tourism Management at the
University of Surrey, U.K. He is the author of numerous books and articles on aspects of accounting in the hotel and catering industry, and a consultant to the industry.
For several years now the author has run profit improvement programmes (PIP) for food and beverage operations throughout the U.K. In the paper which follows he explains the underlying philosophy of PIPs, describes the methodology and demonstrates their success. Key words:
Food and beverage
profit
improvement
Food and beverage operations: the control legacy
operations - - are part and parcel of the system of budgetary control, where any set of planned results is substantially and typically based on actual results achieved during previous trading periods. An unfortunate effect of this approach to the control of profitability is, quite frequently, to perpetuate operational mediocrity and profit under-achievement f r o m one trading period to another. Where, therefore, a food and beverage operation requires a substantial improvement in profitability, it is obvious that neither the conventional controls nor the system of budgetary control are the sole instruments to employ.
The traditional - - and now generally accepted - approach to food and beverage control is based on the five-stage control sequence which reflects what is sometimes described (Kotas and Davis, 1981) as the 'catering cycle'. Each of the five stages of the catering cycle - - buying, receiving, storing and issuing, preparing and selling - - influences the level of gross profit currently achieved. Hence, in order to secure a fully comprehensive control system, it is essential to ensure that the repertoire of control techniques in operation covers all the five stages of the catering cycle.
Food and beverage operators who have run profit improvement programmes now recognise that, in addition to the conventional controls, this second, non-routine line of attack is required in order to secure an adequate improvement in profit levels. What, therefore, has emerged is a twopronged exercise in profit management consisting of:
The advantages of this traditional approach to the control of food and beverage operations are quite clear: it is logical in that it follows the natural sequence of events (buying, receiving, etc.); it is comprehensive - - if only with regard to the control of foods and beverages; finally, it is capable of producing all the essential data required within the context of a food and beverage management information system.
(a) the traditional food and beverage controls; (b) periodic PIPs - - ad hoc measures designed to secure additional permanent improvement in the profits of the business.
However, food and beverage control systems were originally developed several decades ago when labour was considerably cheaper. And it is not surprising, therefore, that many control systems in operation tend to concentrate almost exclusively on foods and beverages and pay inadequate attention to the control of payroll and other costs. The second and more important criticism that may be levelled against the traditional approach is this: food and beverage control systems - - particularly in the case of larger Int. J, Hospitality Management Vol. 2 No. 1 pp. 37-42 1983 Printed in Great Britain
control
PIPs: specific objectives The principal objectives of profit improvement programmes may be summarized as follows: To offer senior executives formal training in the latest control techniques and methods of profit improvement. • To give such executives an opportunity to •
37
0278-4319/83/010037-06503.00/0 (~)1983 Pergamon Press Lid
38
Richard Kotas
apply in food and beverage operations under their control some of the knowledge so gained. • To provide a suitable forum for the discussion of topics relevant to profitability. • To give such executives more insight into how their operations make a profit - - here the identification of the actual business orientation (Kotas, 1981) is essential, as the most effective m e t h o d of raising profits in marketoriented operations will differ considerably from the methods that should be employed in cost-oriented operations. • Finally, and most importantly, the major objective is to secure a higher level of profitability.
the PIP as an important contribution to the financial well-being of the company. In the majority of food and beverage operations there is a distinct annual trend in the volume of sales; and it is of great importance that the PIP is introduced at the right time of the year. In the case of seasonal food and beverage operations it is best to introduce the PIP well before the comm e n c e m e n t of the high season - - when business is relatively slack and when, therefore, senior executives are able to devote sufficient time to this kind of training. Typically, a PIP consists of three separate parts, as illustrated in Fig. 1.
Some organizational aspects One of the first major decisions that must be made relates to the choice of the PIP tutor. There are two possibilities here: a p r o g r a m m e tutor may be chosen from amongst the senior personnel of the c o m p a n y or, alternatively, an outside consultant of the right calibre may be employed. It is frequently found that it is difficult to select an appropriate executive from the company for at least two reasons. First, senior executives tend to be specialists: those responsible for operations may feel that they do not quite have sufficient knowledge of financial techniques to mount a satisfactory PIP. Conversely, those who have responsibility for finance and control often feel that their knowledge of food and beverage operations is similarly inadequate. Second, even the most c o m p e t e n t business executives are not necessarily effective teachers; and good teaching is particularly important during the first part of the PIP. A successful PIP must be related to the profit objectives of the c o m p a n y and, therefore, tailormade. The choice of the teaching material must, therefore, be established on the basis of extensive consultations between the p r o g r a m m e tutor and the directors of the company. Quite clearly, the right balance has to be struck between the teaching of new techniques and the appraisal of the specific techniques and control procedures used by the company. The p r o g r a m m e tutor - - w h e t h e r he is a member of the c o m p a n y or an outside consultant - must be given the right support. It is very desirable, therefore, that at least one or two directors as well as the financial controller/chief accountant should take a close personal interest in the PIP. More specifically, such individuals should attend all the training sessions, take part in the discussions and make it quite apparent that they regard
ir,tens;~,e ,b,or! c o u r s e ~ Oq pro~ltdbl;.ity
~ or 2 d@ys
PElf \ rn~rovement project I C: ~eek;
L ProJects
I or 2 d@ys
Fig. 1. Constituent parts of the PIP.
Short courses The first part of the PIP, the intensive short course, should normally last one full day - - most certainly not longer than two days. The principal objective of this first part of the PIP is to ensure that all participants are au Jait with the latest developments in relevant techniques of control and financial m a n a g e m e n t . Also it is important to ensure that all participants not only understand but also are able to apply such techniques to the specific nature of the food and beverage operation for which they are responsible. In order to secure the requisite degree of relevance, the p r o g r a m m e tutor should base most of his teaching on information received from the company. He will, therefore, have to have at his disposal typical profit statements for the various food and beverage units operated by the company. Finally, before a PIP is actually comm e n c e d the p r o g r a m m e tutor will have to be quite clear what business orientation should be given to the short course: should it be training relevant to a market- or cost-oriented operation? Once this aspect of business orientation has been decided upon, the appropriate t h e m e will have to manifest itself in all aspects of the short course as well as in the choice of profit i m p r o v e m e n t projects. Table 1
PIPs in food and beverage operations
39
shows an example of a recent short course for three separate groups of executives.
consultation with senior members of the company concerned.
It will be observed that, as the course shown in Table 1 is intended for senior managers, no provision is made for the treatment of routine control procedures, as it may be assumed that techniques such as methods of buying, standard recipes, volume forecasts and sales histories are not only known but are actually employed by the course participants. Also, it should be noted that the course has been designed for a revenue-oriented sector of the industry. It is for this reason that a high proportion of the time available has been devoted to aspects of revenue accounting.
In addition to the unit control profile it is worthwhile to prepare a company control profile, which summarizes all the individual profiles. The company control profile is a good indicator of the overall control strengths and weaknesses (Sizer, 1979); and points to the type of profit improvement project that should be chosen by the majority of course participants. An example of a simple company control profile is given in Table 3, and this shows the overall revenue control strengths and weaknesses with striking clarity. The control of gross profit margins is the strongest control feature. Both average spending powers and number of covers should be strengthened; and 'other procedures' - - which includes the monitoring of waiters' sales, sales histories, volume forecasts, etc. - - is an area which is badly neglected.
Each short course should end with the choice by each participant of a profit improvement project. This is a matter where, normally, discretion should be exercised by each participant concerned. However, some guidance should be given by the programme tutor on the most desirable type of project. It is for this reason that it is useful - - at some stage during the short course - - to ask each participant to prepare a unit control profile - - an example from a recent PIP is shown in Table 2. It will be observed that the main purpose of this particular control profile is to establish what specific revenue-oriented techniques are currently being employed. The example in Table 2 is, clearly, intended for a revenue-oriented operation; and was designed after adequate
Implementation of project As already suggested the individual profit improvement projects should reflect the current control needs of the company. There is, however, within this important constraint a great deal of scope for the imagination and ingenuity of each participant concerned. Participants should, however, be warned not to undertake projects which are unduly ambitious: a limited, fully c o r n -
Table 1. Example o f an intensive short course
Dates: Thursday-- 15, 22 and 29 January 1981 Time 9.15-10,30
Course content Cost behaviour. Break-even analysis. Introduction to revenue accounting. Profit sensitivity analysis
10.45-12.00
Techniques of revenue accounting. Monitoring sales volume. Sales mix management. Use of statistics and visual aids.
12.00-12.30
Unit control profile: revenue control,
12.30-14.00
Lunch
14.00-15.15
Control of labour costs: aspects of seasonality.
15.30-16.45
Syndicate w o r k - - practical applications of revenue accounting techniques.
16.45-17.30
Review of unit control profiles. Selection of profit improvement projects.
40
Richard Kotas
Table 2. Unit control profile
Revenue control
Control procedure Average sp ending p o wer (ASP) Are ASP figures recorded daily? Are ASP figures produced separately for food, beverages, etc? Are ASP figures produced for each selling unit? Are ASP figures charted to show trends?
Number of covers (NOC) Are NOC figures recorded daily? Are NOC figures produced daily for each selling outlet? Are NOC figures used for planning staff rosters? Are NOC figures charted to show trends?
Possible mark
Actual mark
1
1
2
2
1
1
1
0
5
4
2
2
1
1
1
0
1
0
3 Sales mix (SM) Are SM figures recorded daily? Are SM figures produced for food sales daily? Are SM figures produced for beverage sales weekly? Are overall SM figures produced for each selling outlet Are SM figures charted to show trends?
1 1 1 0 0
5
3
5
4
5
1
Gross profit (GP) Is actual food GP% calculated at least weekly? Is actual beverage GP% calculated at least weekly? Is GP% calculated in respect of each element of beverage sales at least weekly? Are GP margins charted to show trends?
Other procedures Is a weekly check kept on individual waiters' sales? Are formal sales histories maintained? Are waiting staff instructed (at least one hour per month) how to increase sales volume? Is a formal system of volume forecasting used?
PIPs in food and beverage operations
41
Table 3. Company control profile
quent weekly trading results of the two bars were as follows:
Control 3rocedure
OveraLl. company score I
2
/
Number of covers
/~
SaLes mix
o,~
Gross :)rofit Other )rocedures
4
3
Averoge spending )ower
•
/ e~
~ / -
pleted project is worth much more (both in terms of additional profit and the participant's sense of achievement) than one which looks grandiose and impressive but, somehow, never reaches completion within the time allowed. The time allowed for the completion of the projects needs careful consideration. Experience available so far indicates that three weeks is inadequate. Also the consensus of opinion is that three months would be too long a time - - as most participants would, in such circumstances, tend to do little during the first few weeks available. Six weeks, then, is the period of time that has emerged as the most appropriate; and most of the profit improvement projects tackled so far (the overwhelming majority of them were far from being trivial) have been such as to lend themselves to full completion during the six-week period.
Some recent projects
Net sales % Gross profit Cash gross profit Net profit Food merchandising
increase 12.5% decrease 0.8% increase 23.0% increase 36.7%
Participant CD was operating a busy popular selfservice buffet. It was clear from both observation and experience that the positioning of a particular food item had some effect on its sale; in other words, some parts of the total display area, the 'merchandising hot spots' promote sales more than other areas. He selected six popular, high gross-profit items, and their positioning on the display area was then changed over a period of time. The number of portions sold was monitored hourly. By the end of this experiment CD had a huge volume of data from which it was possible to decide on the most advantageous positioning of the six items concerned. The effect of this exercise may be summarized as follows: Sale of 6 experimental food items Food sales - - total Number of transactions Average spending power
increase increase increase increase
162.0% 15.2% 6.5% 8.2%
Basic control procedures Participant EF was managing a small, costoriented unit. His profit improvement project was 'to improve all basic control procedures'. He managed to achieve the following: (a) more frequent stock-taking; (b) more spot checks on food usage; (c) a complete re-appraisal of cooking methods; (d) he introduced visual aids to food control.
During the last few years a large number of profit improvement projects have been completed: some in small units employing fewer than 25 employees - - others in large units employing over 400 employees. In terms of sales volume, the smallest units had a turnover of about £400,000 p.a. whilst the largest ones were multi-million pound operations. Given below is an outline only of some of the projects completed.
During the six months following the intensive short course his gross profit percentage improved substantially and his net profit was doubled? (In this particular case profit under-achievement was due to a lack of basic controls; and a few relatively simple improvements were bound to produce truly impressive results.)
Price and net profit
Adjusting labour costs to sales volume
Participant AB was, amongst others, responsible for the operation of two public bars. He had a 'hunch' that if he reduced the price of spirits (doubles only) from £1.00 to £0.85, the increase in the sales volume would more than compensate the loss resulting from the lower price level. Halfway through the six-week period he introduced the new prices, having previously given this new arrangement sufficient publicity. In relation to the average figures for the first three weeks the subse-
Participant GH was responsible for a catering operation which included a restaurant, several bars and a self-service buffet. The latter was, over a long period, losing money at the rate of over £3000 per month. GH's profit improvement project was: 'to reduce the operating loss by the end of Month 4 and to operate profitably from Month 5.' In order to map out the strategy of profit improvement, he calculated the profit multipliers for his operation. From these it appeared that the
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Richard Kotas
most fruitful approach was to replan the direct labour rosters and, in this way, secure a more sensible adjustment of labour costs to the daily pattern of business. By the end of Month 5 he had not quite reached his objective - - his loss was, however, only £200. Over the subsequent 6 months of trading his net profit averaged over £500. The conversion of a substantial monthly loss into a reasonable profit on this buffet made a considerable difference to the overall profitability of his total operation.
Presentation of projects Six weeks after the short course all participants return to report on the progress they have made. As already mentioned elsewhere it is in this paper, it is imperative that at least one or two directors and the financial controller attend this session - not only to be informed, but to demonstrate their support for the company profit improvement programme. Quite naturally, as projects vary considerably in nature and scope, it is difficult to decide how much time should be allotted to any one individual presentation. Experience tends to indicate, however, that, on average, one should allow at least half an hour per project; and this means that one can accommodate not more than eight projects a day. Such presentations are not, however, the sole purpose of the reporting-back session. As the conception, development and implementation of a project are being explained, it is u s u a l - and indeed desirable - - for participants to pose questions, ask for supplementary explanations and offer comments. It is for this reason that it is of the utmost importance to make provision for sufficient time to be available for general discussions, as these are at least as important as the presentations themselves. Thus, the learning process which commenced during the short course, and was then put to a practical test during the six-week period, continues throughout the day - - through question and answer, exchange of views and experience, etc. Inevitably, by the end of the day all those present (including the Programme Tutor!) felt that they had learnt more - - some considerably more - gained more insight into the determinants of profitability and, importantly, picked up more practical ideas on profit improvement methods.
PIPs: some principal advantages It seems appropriate to conclude this paper by listing some of the main advantages of this recently developed technique. These are as follows: • Profit improvement programmes are superior to conventional courses in that they provide an important link with practical profit performance. • The assessment of the benefits of training is always difficult; indeed a lot of training is an 'act of faith'. Profit improvement programmes result in benefits most of which may easily be quantified in terms of their impact on profitability. • The conventional type of course does not offer any guarantee of substantial, permanent benefits. A successful profit improvement programme constitutes a clear proof that the participant has both understood the theory and is capable of putting it into practice. Perhaps the greatest benefit of profit improvement programmes lies in their impact on executive attitudes (de Bono, 1978). After tackling one or two projects, a manager accepts that this kind of innovative action not only constitutes a profitable adjunct to conventional food and beverage controls, but is an integral part of his executive responsibility. A good project is the product not only of hard work: at the conceptual stage the most important ingredients are imagination and the will to innovate. No senior manager will normally complete a project on his own, and the involvement of less senior managers and, often, supervisors has further positive effects not only in terms of particular skills and techniques but, equally, innovative attitudes.
References Bono, E. de (1978) Opportunities. a handbook ~,~/ business opportunity search. Penguin, London. Fuller, J. (1975) Market Orientation in the Hotel and Catering Industry. In Kotas, R. (ed.) chapter 9. Surrey University Press, Guildford. Kotas, R. and Davis, B. (1981) [~od and Beverage Control, pp. 4-12. International Textbook Co, Glasgow. Kotas, R. (1981) PSA: use of profit multipliers in pricing decisions. Hospitality, June, pp. 27-35. Kotas, R. and Wanhill, S. (1981) PSA: its nature, significance and applications. International Journal of Tourism Management, September, pp. 176-188. Sizer, J. (1979) An Insight into Management Accounting, pp. 237-247. Pelican Library of Business and Management.
About the Author Richard Kotas is Senior Lecturer in Accounting at the Department of Hotel Catering and Tourism Management at the
University of Surrey, U.K. He is the author of numerous books and articles on aspects of accounting in the hotel and catering industry, and a consultant to the industry.