Chapter 13 Management of Financial Resources. Foodservice Organizations, 5th edition Spears &...

Chapter 13

Management of Financial Resources

©2004 Pearson Education, Inc. Upper Saddle River, New Jersey 07458

Foodservice Organizations, 5th editionSpears & Gregoire

Users of Financial Statements

Groups who need financial data:Owners – keep track of their investmentBoards of directors – determine the

effectiveness of managers supervising the daily operation

Managers – assess the daily and long-term success of their decisions

Creditors – lend money or goods on credit to the operation



Users of Financial Statements

Groups who need financial data:Employees – assess the company’s ability

to meet wage and benefit demands.Governmental agencies – taxation and

regulationFinancial analysts- desire information about

a firm for their own or a client’s purpose



Key Aspects of Accounting

Auditing – an independent review of accounting records.

Cost accounting – determination and control of cost.

Financial accounting – report of transactions for an organization and the periodic preparation of various reports from these records.

Managerial accounting – uses historical and estimated financial data to assist in daily operations and in planning future operations.



Accounting Principles

Generally Accepted Accounting Principles (GAAP) Principles underlying preparation of financial

statementsProvide consistency to the preparation of

financial statements.




Business Entity Concept Business enterprise is separate from the

person or persons who supply its assets, and the financial records of each are distinct

Fundamental Accounting Equation Assets = Liabilities + Owner’s Equity.




Going-Concern Concept Assumption that a business will continue to

operate for an indefinite period of timeMoney as a Unit of Measure

Business transactions are recorded as dollar amounts

Cost Principle Transactions are recorded in dollars at the

time of the transaction




Cash Basis of Accounting Transaction recognized at time of cash

inflow or outflowAccrual Basis of Accounting

Transaction recognized when revenues earned and expenses incurred

Matching Revenues and Expenses matching revenues with all applicable

expenses during the accounting period in which they occur




Depreciation Allocation of costs of a fixed asset over the

estimated useful life of the asset.

Adequate Disclosure Disclosure of data believed essential to

reader’s understanding of financial statement.

( ) life useful of years valuesalvage-asset theofcost




Consistency Principle Use of same accounting method from one

period to anotherMateriality Principle

events or information accounted for if they “make a difference” to the users of financial statements

Conservatism moderation in recording transactions and

assigning values



Basic Financial Statements

Balance sheet – statement of assets, liabilities or debts, and capital or owner’s equity at a given time or at the end of the accounting period.

Income statement – financial report that presents the net income or profit of an organization for the accounting period.



Assets

Resources of a company.Current assets – cash and all assets that

will be converted into cash in a short period of time, generally 1 year.

Fixed, or long-term, assets – permanent assets acquired to generate revenues for the business.

Accumulated depreciation – loss of value over the expected life of a fixed asset.



Liabilities

Debts of a company.Current liabilities – items that must be

paid within a period of 1 year, including accounts payable for merchandise, accrued expenses, and annual mortgage payment.

Fixed, or long-term, liabilities – obligations that will not be paid within the current year.



Owner’s Equity

Money value of a company in excess of its debts that is held by the owners.

Profit-oriented ownership types: Proprietorship – business owned by a single

individual. Partnership – business owned by two or more

people. Corporation – business incorporated under the laws

of the state with ownership held by stockholders.



Income Statement

Gross profit – determined by subtracting cost of goods sold from sales or revenue.

Net profit or loss – determined by subtracting expenses from gross profit.



Cost of Sales

Inventory at beginning of period $ XXX

+ Purchases during the period +XXX

Total value of available food $ XXX

– Inventory at end of period –XXX

Cost of goods sold during period $ XXX



Tools for Comparison and Analysis

Use a variety of tools to analyze financial dataRatio analysisTrend analysisCommon-size statementsBreak-even analysis

Operational indicators help managers understand financial information and compare performance to earlier periods



Standards of Comparison

Internal standards of comparisons – review of current performance in relation to: Budgeted performance Past performance Preestablished department standards

External standards of comparison – review of performance in relation to similar operations or comparisons with industry performance.



Ratio Analysis

Analysis of financial data in terms of relationships.

Ratio – a mathematical expression of the relationship between two items.Common ratio – x to y (x:y)Percentage Turnover – number of time x must be

“turned over” to yield the value of y (y/x).Per unit basis – dollars per unit



Ratio Analysis



Liquidity Ratios

Indicate the organization’s ability to meet current obligations (ability to pay bills when due).

Current ratio – relationship between current assets to current liabilities.

Acid-test ratio – (quick ratio) current liabilities are measured against cash and other assets readily convertible to cash.

sliabilitieCurrent

securities Marketablereceivable AccountsCashratiotest -Acid

++=



Solvency Ratios

Used to examine an establishment’s ability to meet long-term financial obligations and its financial leverage.

Relationship between:Total assets and total liabilitiesLiabilities and equity (debt to equity ratio)Liabilities and assets (debt to asset ratio)



Activity Ratios

Examines how effectively an organization is using its assets.

Inventory turnover ratio – the number of times the inventory is used up and replenished during a period.

valueinventory Average

sold goods ofCost turnoverInventory =



Profitability Ratios

Measures an organization’s ability to generate profit in relation to sales or the investment in assets.

Profit – (net income) a monetary amount of income remaining after all expenses have been deducted from income or revenue.

Profitability – relative measure of the profit-making ability of an organization.




Profit margin – assesses overall financial efficiency.

Return on equity – measures adequacy of profits in providing a return on owners’ investments.

Sales

profitNet marginProfit =

Equity

profitNet equityon Return =




Return on assets - measures management’s ability to generate a return on the assets employed in generating revenue.

assets Total

profitNet assetson Return =



Operating Ratios

Success of the operation in generating revenues and in controlling expenses.

Performance indicators: Analysis of revenue mix Average customer check Food cost percentage Labor cost percentage Food cost per customer Meals per labor hour Meals per full-time equivalents Labor minutes per meal



Trend Analysis

A comparison of results over several periods of time.



Common-Sized Statements

Financial statements where data is expressed as percentages for comparing results from one accounting period to another.

Comparisons with industry performance are facilitated by expressing the financial statements in percentages.



Break-Even Analysis

Break-even point - point at which total revenue equals total cost

No profit, no loss

Salescosts Variable

-1

costs Fixedpointeven -Break =



Break-Even Analysis

Fixed costs (FC) – costs required for an operation to exist, even if it produces nothing.

Variable costs (VC) – costs that change in direct proportion to the volume of sales.

Semivariable – costs that cannot be clearly classified as either entirely fixed or entirely variable (labor, maintenance, and utilities).

Contribution margin – ratio of variable cost to sales subtracted from 1.



Break-Even Analysis



Cost-Volume-Profit (CVP) Analysis

Used to determine the volume required for a given level of profit.

Salescosts Variable

-1

desiredProfit costs Fixedlevel revenueor Sales

+=



Budget

A plan for operating a business expressed in

financial termsTo control expenses and profit in relation to

sales



Types of Budgets

Operating budget – Includes sales or revenue, changes in pricing, profit objectives, expenditures, and labor.

Capital budget – includes improvements, expansions, and replacements in building, equipment, and land.

Cash budget – detailed estimate of anticipated cash receipts and disbursements during the budget period.



Budgeting Concepts

Fixed budget – prepared at one level of sales or revenues.

Incremental budget – projecting changes for the ensuing year in relation to the current budget.

Flexible budget – adjustments are made to various levels of operation or sales; useful in operations with varying sales or revenues throughout the year.



Investment Decisions

Capital expenditure – requests for renovation of space or the purchase of supplies/equipment valued at more than $5,000.

Payback period – indicator of time it will take to recover the money invested in a particular project or piece of equipment.

Time value of money – concept that money has a differing value over time.

incomeyearly Expected

investment InitialperiodPayback =



Net Present Value (NPV)

Present value of expected future cash inflows and outflows related to a capital expenditure.

Requires: Initial investment –amount the organization will

need to spend to renovate a space and/or purchase a piece of equipment.

Expected income – (cost savings) amount a foodservice director expects to have earned or saved each year as a result of this capital investment.



Net Present Value (NPV)

Requires:Cost of capital – the minimum return a

company expects on an investment.Discounted cash flows – factors used to

discount a future cash flow to a current value based on cost of capital percentage figures.

Chapter 13 Management of Financial Resources. Foodservice Organizations, 5th edition Spears &...

Documents

Transcript of Chapter 13 Management of Financial Resources. Foodservice Organizations, 5th edition Spears &...