The Declining Balance Budget
As an operator solving cost of goods challenges can be challenging but the positive news is that 90% cost of goods problems come from 1 of 3 areas:
Pricing Problems: Dishes/Drinks aren’t priced correctly to yield the proper gross margin.
Waste: Food is a perishable commodity so if a restaurant brings in too much food using lax kitchen practices it can spoil and need to be thrown away.
Shrink: This covers items that are given away to guests and not discounted or goods consumed by staff. This is also where you would categorize theft.
As your finance team, these are problems that we help many operators solve. We will attack the three underlying causes in a separate article but this article is focused on a tool that we often recommend – the Declining Balance Budget. Simply creating a mechanism to evaluate and manage food cost spend can often solve the problem and is necessary to highlight the problem and is helpful in creating a culture of financial care that we find exists at our most successful clients.
We recommend a declining balance budget to highlight food cost problems and help management create positive structures. A declining balance budget involves initially estimating sales for a given period, such as a week, and then applying the targeted cost percentages for food to determine a budget for food expenses.
Here's a step-by-step explanation of how a declining balance budget works and its benefits:
Estimate Weekly Sales: Begin by estimating the total sales expected for the week. This estimate is based on historical sales data, seasonal trends, or any forthcoming events that might impact sales volumes.
Calculate Targeted Food Budget: Apply the targeted food cost percentage to the estimated sales. This percentage reflects the desired cost of food as a proportion of sales, based on industry standards or your specific operational goals. For example, if your target food cost percentage is 30% and your estimated sales are $10,000, your food budget for the week would be $3,000.
Track Food Expenses: Throughout the week, deduct all expenses related to food purchases from the initial budget. This includes all ingredients and food items bought for the restaurant's operations.
Monitor Budget Balance: As expenses are deducted, the budget balance declines. Monitoring this balance helps in understanding how food costs are tracking against sales in real-time.
Identify Problems Quickly: If the budget reaches zero before the end of the week, it indicates that food costs are exceeding the targeted percentage of sales. A negative balance highlights an immediate need for management to investigate and address the overspending. This could involve reviewing supplier costs, portion control, waste management, or menu costing and pricing.
The advantages of using a declining balance budget include:
Real-Time Monitoring: It allows for real-time monitoring of food costs in relation to sales, offering an ongoing view of financial health.
Proactive Management: It helps in identifying cost overruns early, allowing for timely adjustments before they escalate into larger financial issues.
Focused Control: By concentrating on the specific area of food costs, it helps managers to focus their attention and resources on one of the most significant variable costs in the restaurant business.
Financial Discipline: Encourages discipline in purchasing and inventory management, as every expense directly impacts the budget balance.
Below is an example of the Declining Balance Budget. If you’re interested in implementing one just reach out to your Harmony Team.
