9 Chapter 9- Budgets

Budgeting is a process that depends on goals, specific benchmarks, expectations, and realities. The more accurately those realities reflect the nature of the cost itself (fixed, variable, semi-variable), the more realistic the budget may be.

A budget is a financial roadmap, typically created for a specific period, like a month or a year. It acts as a spending plan that tracks your expected income (money coming in) and expenses (money going out).

Budgets are crucial for financial planning and success in the food & beverage industry. They help business owners and managers.

• Forecast revenue and expenses: By predicting income and costs, budgets allow for informed decisions about staffing, inventory, marketing, and pricing.

• Control costs: Budgets help identify areas where spending can be optimized. This is especially important for food & beverage businesses, where costs like food, labor, and rent can be significant.

• Set financial goals: Budgets establish targets for profitability and growth, keeping the business focused on achieving its objectives.

• Track performance: Comparing actual results to budgeted figures helps measure progress and identify improvement areas.

Common types of budgets used in the food & beverage industry:

• Operating Budget: This is the leading financial roadmap, outlining all expected income and expenses related to daily operations. It includes categories like food costs, labor costs, rent, utilities, marketing, and supplies.

• Cash Flow Budget: This budget focuses on the cash movement in and out of the business. It helps ensure sufficient cash flow to cover ongoing expenses and avoid financial shortfalls.

• Food Cost Budget: This budget details the projected cost of food inventory, including purchases, waste, and recipe costing. It is crucial for maintaining healthy profit margins.

• Labor Budget: This budget estimates payroll expenses, including wages, benefits, and overtime. It helps with staffing decisions and scheduling.

• Capital Expenditure Budget: This budget outlines planned spending on equipment, renovations, or other long-term investments.

Using different budget types and other financial documents, food and beverage businesses can gain a comprehensive financial picture and make informed decisions that drive profitability and success. Food and beverage budgets give financial institutions and investors a window into a business’s economic health. They offer insights into profitability, risk management, and plans, all crucial factors in making informed investment decisions.

A pro forma budget is a financial forecast, or what if” scenario. It is different from a regular budget in a few ways. First, it focuses on the future. Whereas regular budgets are typically for upcoming periods like a year, pro forma budgets can cover various future scenarios or events. Pro forma budgets are created to estimate the financial effects of something happening. This could be a new product launch, a business expansion, an economic downturn, or anything that might impact the business financially.

Pro forma budgets incorporate past performance (like historical budgets) and factor in assumptions and projections about future events or changes. Pro forma budgets incorporate past performance (like historical budgets) and factor in assumptions and projections about future events or changes. Food & beverage operations may use pro forma budgets in scenarios such as planning for an expansion so they can estimate the fiscal impact of opening a new location or adding a catering, online ordering, or expanding service, applying for a loan as their pro forma budget can demonstrate the business’s projected financial health to secure a loan. Overall, pro forma budgets are a way for food & beverage businesses to assess the financial implications of future decisions or situations proactively.

Pro forma budgets can also assess financial health and risks because they reveal a business’s projected income and expenses, clearly showing its profitability and ability to generate a return on investment. Investors and banks want to see if the company can control its expenses effectively. Food & beverage businesses have high variable costs like food and labor, so budgeting efficiency in these areas is crucial. A well-constructed budget, especially a cash flow budget, demonstrates the business’s ability to manage cash flow effectively. This is important to ensure the business can meet its ongoing financial obligations.

Fixed Cost: If you are planning a budget and you decide a specific cost will be treated as a fixed cost:

• The dollar amount will stay the same regardless of how you adjust sales.
  • The $ amount will stay the same, but the % will change as sales increase or decrease.
• It will carry over from period to period and in projections.
• When you budget, you can make any cost fixed or variable, regardless of whether it is fixed in the traditional sense. However, to get a more accurate budget, it is best to treat all noncontrollable costs as fixed.

Variable Cost: If you are planning a budget and you decide a specific cost will be treated as a variable cost:

• The percentage will stay the same regardless of how you adjust sales.
  • The % will stay the same, but the $ amount will change as sales increase or decrease.
• It will carry over from period to period and in projections.
• When you budget, you can make any cost fixed or variable, regardless of whether it is fixed in the traditional sense. However, to get a more accurate budget, it is best to treat all noncontrollable costs as fixed.

The following is a simplistic example of determining designated fixed and variable costs.

Fixed Costs

• The dollar amount stays the same if a line item is designated as a fixed cost.
• You divide the dollar amount by total sales to determine the percentage.

Variable Costs

• The percentage stays the same if the line item is designated as a variable cost.
• You multiply total sales by the percentage to determine the new dollar amount.

In the example below,

• The red numbers are fixed costs,
• The blue percentages are variable costs.
• To determine the Employee Benefits, take the salaries and wages dollar amount and multiply it by the 25%
• All other calculations are calculated as described for the common-size income statement. 

• To determine the Salaries and Wages dollar amount
  • Take total sales and multiply it by the percentage
  • $500,000 X 27% = $135,000

• To determine the Employee Benefit Expense dollar amount
  • Take the dollar amount of salaries and wages and multiply it by 25%
  • $135,000 X 25% = $33,750

• To determine the Direct Operating Expense dollar amount
  • Take total sales and multiply it by the percentage given
  • $500,000 X 6.2% = $31,000

• To determine the Music and Entertainment percentage
  • Take the dollar amount and divide it by total sales
  • $1,500 / $500,000 = 0.3%

• To determine the Marketing percentage
  • Take the dollar amount and dive it by total sales
  • $8,500 / $500,000 =1.7%

• To determine Utility Services, Repairs and Maintenance, and General and Admin dollar amounts
  • Take total sales and multiply by the percentages given.

• To determine Occupancy Costs, Depreciation, and Interest percentages
  • Take the dollar amount given and divide it by the total sales.

• All other calculations are completed the same way as the common-size income statement.

The income statement is a snapshot of the financial past and shows a net profit or loss. However, a budget is a forecast (road map to the future) that can be changed. Food and beverage businesses adjust their operating budgets for many reasons, both to react to changes and to proactively manage their finances. Here are some common reasons for adjustments:

• Fluctuations in Revenue or Costs: Sales might be lower than expected due to a slow season or increased competition. On the other hand, food or labor costs could be higher due to supply chain issues or rising minimum wage. The budget needs to reflect the reality of the business’s income and expenses.

• Unexpected Events: Sometimes, events take place that cannot be predicted. A burst pipe might require repairs, or a new health regulation might necessitate equipment upgrades. These unexpected events can throw off the original budget.

• Seasonal Needs: Many food and beverage businesses experience busier and slower periods throughout the year, causing adjustments in staffing levels or marketing efforts leading to changes in labor or advertising costs.

• Profitability Goals: Budgets are created to forecast revenue, expenses, and profits, but if the food and beverage operations are not achieving their profit targets, they will need to consider where they can cut costs or increase sales. This might involve menu pricing adjustments, reducing waste, or offering promotions.

By regularly reviewing and adjusting their operating budget, food and beverage businesses can stay on track financially and make informed decisions about their operations.

If food sales are forecasted to be $32,000 in one month, but you are anticipating a busier than average month of food sales, and you want to increase the food sales forecast by 10%, there are two methods we can use to determine the new food sales dollar amount.

To determine the increase of 10%.

• $32,000 x 1.10 (10% is the same as .10) (100 + 10 =110)  (110 as a decimal is 1.10)
  • $32,000 x 1.10 = $35,200
• A 10 % increase in sales for the operating budget would increase the expected sales revenue to $35,200 instead of the initially forecasted $32,000.

If food sales are forecasted to be $32,000 in one month, but you are anticipating a slower-than-average month of food sales, and you want to decrease the food sales forecast by 10%, there are two methods we can use to determine the new food sales dollar amount.

To determine the decrease of 10%.

• 100% – 10% = 90% (100 – .10 = .90)
  • $32,000 x .90 = $28,800
• A 10 % decrease in sales for the operating budget would change the expected sales revenue to $28,800 instead of the forecasted initially $32,000.