Financial Statement Gymnastics - Part II

John Cornyn

Financial Statement Gymnastics

When it comes to comparing food cost, what appears obvious at first is often less so.

As we noted in the first column of this series, the business of comparing data and results among different foodservice operations has long been problematic for foodservice directors.

For example, "Food Cost" would seem to be one of the most basic operational variables and one that should be easy to define. Yet what appears obvious at first is often less so. This column looks at some of the reasons the calculated food cost percentage or total of one operation may not be comparable to that of another, even similar, operation.

Percentages can be deceiving. Food cost is often expressed as a percentage of total sales, because it usually has a direct correlation to those revenues. Yet many foodservice programs are allocated only a portion of the money received by their organization for them. For example, a higher education institution may retain from five to fifty percent of board plan revenue received from students. Because internal overhead charges are rarely publicly documented, food cost percentages in such situations are often not comparable.

When a food cost is not a food cost. Another common cause of variance occurs when the food cost category is used to account for other kinds of expenses.

For example, some organizations which use significant amounts of disposable service ware include these expenses in the food cost category, a practice that is common in the quickservice restaurant segment. But for many operations, it makes more sense to show disposable service ware costs as a separate category. Administrators should know whether such components are part of an operation’s food cost, or accounted for elsewhere.

Accounting for employee meal benefits. In a variety of situations, ranging from institutions that offer employee meal discounts to high end executive dining rooms, meals can be treated as a partial or full employee benefit. Whenever meals bring in variable revenues or are accounted for with "imputed" values, the relationship between food cost and foodservice revenue is affected. Again, it can make direct comparisons difficult.

The cost of credit is sometimes included in invoice costs. An often overlooked issue is the relationship between accounts-payable policies and food cost. It is no secret that suppliers who extend credit to an organization consider payment terms when establishing pricing levels. Extended terms have a cost, and suppliers recognize this with prompt payment discounts. If applied against food costs, these discounts can significantly lower them.

The corollary is also true: if your organization is one that regularly delays payment 60-120 days after delivery, it almost certainly is paying for that privilege, even if the credit cost is "invisible" because it is rolled into a distributor’s pricing.

Changing food costs into labor costs. Some organizations "self distribute" by maintaining their own warehouse facilities. This essentially reduces food cost by replacing them with warehouse and labor costs. A similar effect occurs in operations with large commissaries, central production operations. Raw materials used in those operations are clearly shown as food costs. But in what category is the cost of warehouse space, labor and delivery vehicles shown? Should these be included as part of food cost, or as a separate line item under "other controllable expenses?"

A related issue arises with convenience foods. How many of an operation’s food choices are prepared on-site versus purchased in a ready-to-serve state? Has an operation lowered its food cost at the expense of a higher labor cost, or a higher combined food and labor cost?

Accounting for rebate revenues. If vendor and/or manufacturer rebates are received, should they be credited against food cost or treated as "other income?" Depending on the size of an operation, this revenue (or lack thereof) can be one of the more significant accounting differences when it comes to self- versus contractor-operated comparisons.

Factors such as these make food cost benchmarking frustrating enough. But they are even further complicated by general issues. Consider the following questions, and how the answers to them would affect benchmarking comparisons:

-Is your program truly large enough to demand volume discounts?

- In a small operation, purchasing is just one of several hats a manager or chef must wear. Is such multi-tasking cost-effective, and does a manager in this situation have the time to research and/or negotiate for the lowest cost options?

-Consider the number and diversity of customers served daily when comparing two operations. How does one program compare to the other relative to service levels and the number of choices offered?

-Are both operations required to keep all food choices available right up to the end of a service period, or are some choice "outs" tolerated in order to reduce food waste?

-How are leftovers handled, and if significant amounts of leftover food are donated to a food bank or other charity, how is that donation valued and accounted for?

John Cornyn FCSI is a principal with the Cornyn Fasano Group, a foodservice management consulting firm located in Portland, Oregon. He and his partner, Joyce Fasano, coauthored the book Noncommercial Foodservice: An Administrator’s Handbook.