Budget analysis and performance review for Pappadeaux San Diego's fiscal year 2000

Pappadeaux Restaurants - San Diego No.

Budget Analysis

For the year ending April 30, 2000

The fiscal year ending April 30, 2000, marks the first of many years to come for the San Diego Pappadeaux Restaurant. Although this year was not quite as profitable as budgeted, Pappadeaux Restaurant has a promising future in its new location.

In order to ensure the success of the future, it is essential to reduce expenses while concentrating on increasing sales. An analysis of the budget for the fiscal year ending April 30, 2000, follows in this report. In addition, recommendations for improvement are also included. Please refer to Exhibit 1 for the Income Statement for the fiscal year.

With dedication and concentration, the Pappadeaux Restaurant - San Diego will explode in sales and success!

Exhibit

Budget Actual Variance

Revenues

Sales $900,000 $800,000 ($100,000)

Expenses

Food $300,000 $250,000 $50,000

Supervisory Labor $90,000 $95,000 ($5,000)

Hourly Labor $180,000 $150,000-30,000

Utilities $40,000 $47,000 ($7,000)

Insurance and Taxes $30,000 $32,000 ($2,000)

Rent $50,000 $60,000 ($10,000)

Supplies $18,000 $14,000 $4,000

Corporate Overhead $90,000 $120,000 ($30,000)

Total Expenses $798,000 $768,000 $30,000

Net Income $102,000 $32,000 ($70,000)

Sales

Analysis

Sales this year at Pappadeaux San Diego No. 1 did not live up to the budgeted expectations of $900,000 for the location. Actual sales totaled $800,000, which were $100,000 less than budgeted for the fiscal year. There are several reasons for this discrepancy.

First, since the Pappadeaux San Diego No. 1 location just celebrated its grand opening in the last fiscal year, one of the first requirements for success in this industry is to attract customers. The first year in business is rarely a financial success, and although a huge amount under budgeted sales, as the first year, this is a bright signal. With concentration on customer satisfaction to encourage recurring visitors, we should experience a boost in sales.

Second, corporate advertising expenses have been drastically cut on the national level, and twice as much on the local level. This last year, corporate headquarters reduced its national budget by 20% and an immense 40% on the local level. Pappadeaux Restaurants success is largely dependent upon the impact of its advertising, especially with the already established competition in the seafood restaurant business in the area. This would be a large contributing factor to the $100,000 negative variance in sales for the fiscal year.

Analysis

Food is one of few variable expenses which are controllable by local management at Pappadeaux Restaurant San Diego No. 1. The cost of food is directly related to the amount of sales at the restaurant. $300,000 was budgeted for food expenses; however, only $250,000 was used. Pappadeaux Restaurants corporate pays for the food and then bills the expense to the location.

The food expense came drastically under budget because there was a lack of sales. In order to increase sales, food that is ordered must be the top quality for the best price. Customers are more likely to be return customers when the food on their plates is top quality and well prepared.

Recommendations

Ensure quality control of the merchandise from order to delivery to location storage to preparation. Ensure employee knowledge of food handling and preparation by properly posting and labeling guidelines and OSHA standards. Conduct mandatory food standards meetings with entire staff to further ensure proper knowledge.

Food expenses for the next year should remain the same, 33.3% of budgeted sales. ($900,000 X.333), which amounts to $300,000.

Proper inventory and ordering must also be enforced during the next fiscal year to keep costs down.

Supervisory Labor

Analysis

The budgeted amount for the first year of business of Pappadeaux Restaurant - San Diego No. 1 for supervisory labor was calculated as 10% of projected sales ($900,000 X.1) for an amount of $90,000. Due to an unforeseen rate increase in supervisor wages, actual supervisory labor expenses came over budget by $5,000 for a total of $95,000.

Recommendations

Supervisory labor expenses should remain at $95,000 for the year. There should not be any rate increases this year until the actual amount of sales is sufficient to justify such a raise.

Hourly Labor

Analysis

In the previous year, the mistake of drastically reducing the number of employees had a direct impact on the San Diego No. 1 Pappadeaux Restaurant. While the budgeted amount of hourly labor was $180,000, only $150,000 of that expense was spent. The $30,000 budget surplus is a direct result of a drastic employee layoff that was geared toward increasing current employees wages and therefore performance. However, the hourly wage rate hike was insufficient to be meaningful to the employees. Rather, the team of employees is necessary to successfully run the kitchen, dining room, and waiting room.

Recommendations

In order to increase sales, hourly labor needs to increase. Hourly labor should be budgeted at $200,000 (original employee number budget of $180,000 + $20,000 - additional labor costs) to include a rehire campaign for both hosts and servers. Hosts are needed to ensure proper greeting and seating. In addition, hosts can be in charge of collecting names for the customer mailing list database, putting address labels and stamps on envelopes and stuffing them with mailings. Additional servers are needed to be on each shift in order to ensure quality customer service. Servers should be highly encouraged and recognized for helping others and ensuring top service.

Utilities

Analysis

Expenses for various utilities at the San Diego Pappadeaux Restaurant are contracted with the Public Utility Commission. This last year, expenses were increased by the company, which cost $7,000 over the original budgeted amount of $40,000. Although the actual utility costs were $7,000 over budget, total actual consumption was on target.

Recommendations

Since this is a mandatory increase by the Public Utility Commission, this is an expense that must be adjusted. Next year's budget should be $47,000.

Consumption needs to be kept at budget or go under budget. Ensure employee diligence with shutting off lights in break rooms and bathrooms and keep all unused equipment.

Insurance and Taxes

Analysis

Insurance costs for the fiscal year ending April 30, 2000, came just about on budget. The projected amount for insurance and taxes for was 3.33% of total sales (projected at $900,000). Actual insurance and taxes came to 4% for the year. This is mostly due to a local business tax increase.

Recommendations

Insurance and taxes expense should be calculated at 4% of total budgeted sales.

With a recommended sales budget of $900,000, this expense should be $32,000 ($900,000 X.04).

Rent

Analysis

Rent is established by corporate headquarters, and it is a fixed expense. An unexpected $10,000 increase in rent resulted in rent coming over budget by $10,000.

Rent was expected to amount to $50,000; however, actual costs amounted to $60,000, as directly imposed by corporate headquarters.

Recommendations

The budgeted amount for the next fiscal year's rent expense should be $60,000, which includes the current rent increase without any envisioning of another.

Supplies

Analysis

Budgeted expenses for supplies amounted to $18,000, 2% of total sales ($900,000 X.02). Actual expenses came to $14,000, $4,000 under budget (1.75% of sales). Supplies are purchased locally. This is a variable expense dependent upon sales.

Recommendations

The supply budget should still be 2% of total budgeted sales in order to compensate for cost increases in supplies.

In addition to the 2% of total sales, an additional $5,000 should be budgeted to fund the customer mailing list campaign to purchase envelopes, labels, and postage, and to pay for printing of coupons for direct and indirect mailing. More return customers mean more sales! The total supplies budget for next year should be $23,000 ($900,000 X.02 + $5,000).

Corporate Overhead

Analysis

Corporate overhead is not controllable by the San Diego No. 1 location. This is a fixed expense imposed on the location by the corporate Pappadeax office. Expenses this year were largely over the projected budget of $90,000. Actual corporate overhead costs amounted to $120,000 - over budget by $30,000. Increased expenses are due to a new computer system installed at corporate headquarters.

Recommendations

In order to account for this year's unknown overhead hike, the next year's budget should include the normal 10% rate ($900,000/90,000) + another $10,000. Since the next fiscal year's sales budget is $900,000 once again, the budgeted amount for corporate overhead should be $100,000 (10% of $900,000 + $10,000).

Recommendations for Pappadeaux Restuarants' system of accounting

In order to concentrate on long-term customer satisfaction, efforts need to be focused on quality in every aspect of the business. The following recommended annual budget presents a larger actual net income than this year's $32,000; however, it is more realistic than $102,000 for the location as it begins its second year of business in the San Diego area.

Recommended sales for the year ending April 30, 2002, should be targeted a $1,000,000.

Recommended Annual Budget

Pappadeaux Restaurant - San Deigo No. 1

For the Year Ending April 30, 2001

Exhibit 2

Budget

Revenues

Sales $900,000

Expenses

Food $300,000

Supervisory Labor $95,000

Hourly Labor $200,000

Utilities $47,000

Insurance and Taxes $32,000

Rent $60,000

Supplies $23,000

Corporate Overhead $100,000

Total Expenses

Net Income