Michigan State University Extension
Tourism Educational Materials - 33300009
06/06/02
Statistical and Ratio Analysis
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Evaluating Food Service Establishments...Key Check Points
Purdue University
by Robert D. Buchanan, Restaurant, Hotel and Institutional
Management Specialist
HE-210
The manager of a food service establishment and/or the
manager and his superior need to take the time to make an
overall analysis to determine the results that the
organization is actually obtaining. This should be done
several times a year. The evaluation should determine how
well the food service operation is doing and where
improvements should be made. Then some priorities,
objectives, methods, and deadlines for improvements can be
established.
This is one of a series of pamphlets describing how a
person can fairly comprehensively, yet in less than a day,
provide an overall evaluation of a food service operation.
The key items, or food service conditions, to evaluate
under each major category are described. Taken together,
the key indicators of general conditions measure the
degrees of efficiency (minimal costs) and effectiveness
(optimal organizational satisfaction). A major category
that has a deficient key indicator should be investigated
further, and corrective adjustment should be considered
and/or made where appropriate. A discussion of facts by
management with the operating personnel is perhaps most
needed to develop mutual understanding of the problems.
Attainable performance objectives should be jointly
established and reviewed at a later date.
If all key indicators are satisfactory in a major
category, other aspects of that category are probably
being handled with similar care. If all of the key
indicators are high, but the profit is not adequate, then
it will be necessary to examine the operation for
inefficient purchasing and receiving practices, improper
menu pricing, inaccurate records or financial statements,
inventory method and method of computing the value,
production waste, plate waste, security and pilferage, and
so forth.
These operational analysis guidelines may be used by the
manager of a single food service establishment for self-
analysis, or by the unit manager's supervisor.
1. Management Planning, Organizing, and Controlling
(HE-202)
2. Personnel (HE-203)
3. Purchasing (HE-204)
4. Receiving, Storage, Issuing, Inventory (HE-205)
5. Food Preparation (HE-206)
6. Food Presentation and Service (HE-207)
7. Maintenance of Building and Equipment (HE-208)
8. Sanitation and Housekeeping (HE-209)
9. Statistical and Ratio Analysis (this publication)
10. Consumer Satisfaction (HE-211)
9. Statistical and Ratio Analysis
Successful food service management requires a number of
technical skills. Purchasing food and supplies demands
technical skill. Preparing and merchandising food demands
another technical skill. There is another technical skill
that plays a big part in how well the business does - and
sometimes, whether one even stays in business - and that
is financial skill. It is a "think skill" - one that helps
management understand the financial apparatus of the
business; and on the practical side, one that helps
management interpret what Balance Sheets and Income
Statements say about the business.
Dun and Bradstreet studies show that incompetence,
mismanagement, and lopsided business experience are the
underlying causes for most food service failures. It is
safe to assume, in these failure cases, that the side most
often lopped off is financial control. Without control, a
business will "run away" from management. Eventually it
will crash or simply fizzle out of existence. These are
the most common on-the-surface causes of failures in the
food service industry:
* Not enough sales.
* High operating costs.
* Poor credit and collection policy.
* Too many fixed assets.
* Too much wrong inventory.
Yet the buildup of pressure that these "failure points"
exert on the food service operation is recorded
faithfully, month after month and year in and year out, on
the Income Statements and Balance Sheets. Being "recorded"
is one thing. Being understood, analyzed, and acted on by
management is another! The purpose of financial analysis
is to give management effective control of the business.
Management needs to analyze, interpret, and evaluate
proper data to (1) establish trends and operating
standards, (2) provide a guide to measure achievement, and
(3) make optimal decisions in regard to food, labor,
inventory and overhead. Some sort of budget or forecast of
estimated gross volume and net profit is necessary for
financial planning. Expected future cash flow should be
related to future contract payment commitments.
Some basic questions management should be able to answer
immediately regarding financial management are:
- How much does it cost to open the food service
establishment each day?
- How much gross sales must be made each day just to meet
opening costs?
- How much is being spent on food, labor, fixed and
variable overhead items?
- How much profit is earned?
- What does this profit represent in terms of return on
investment to the owners?
- What is the business worth?
It is suggested that an accountant's advice be sought to
set up the business books and for a continuing review.
We will look at statistical analysis and ratio analysis.
Statistical Analysis
The major indicators that may be analyzed statistically
include: the break-even point, analysis of the profit and
loss statement, analysis of key factors, food cost per
meal served, percent of customers served, average check,
labor productivity index, and staffing related to the
number of customers.
The purpose of statistical analysis of operating
statements and budgets is to compare actual costs with
budgeted costs, or a current period with a past period to
measure performance, and to highlight deviations so that
corrective action can be pinpointed. Immediate and
vigorous corrective action needs to be taken to correct
problems. There are many possibilities for waste and
inefficiency, most of them the result of inadequate
employee training. These are the most common:
- Overportioning.
- Overproduction.
- Overstaffing-employees waiting, watching, and coasting.
- Not buying to specification.
- Paying for items not received.
- Improper preparation and cooking procedures.
- Theft.
- Spoilage.
It is important that "historical" comparisons be made in
the same operational unit, using the same operational
procedures and accounting system. It is, of course,
misleading and can be dangerously disruptive to make
comparisons of financial statements that do not have the
same accounting method and/or operational conditions.
The Break-Even Point--The point at which total sales are
sufficient to cover all fixed expenses (rent, property
taxes and insurance, interest and depreciation, and the
fixed portion of operating expenses such as payroll, music
and entertainment, advertising and utilities) and the
variable expenses (cost of sales and the variable portion
of operating expenses) needs to be determined by each food
service operation. In a study of restaurants operated by
professionals with many years of experience reported in
Tableservice Restaurant Operations Report 1977 (National
Restaurant Association), the break-even point was
$2,785.00 per seat for table service restaurants. The
volume of sales in this sample could have been achieved by
a daily seat turnover of 1.24 and an average check (food
only) of $4.69. The computation is illustrated in
Analysis of Profit and Loss Statement--The analysis of the
Profit and Loss Statement can be divided into three parts:
(1) Sales, (2) Expenses, and (3) Profit. In analyzing
sales, are sales increasing or decreasing, and if so, why?
Profit can be improved in only two ways: (1) by raising
sales more than operating expenses; or (2) by cutting
operating expenses more than sales. Some food service
operators may want to divide sales by: food, beverage, or
other income (rental and commissions, gift shop/cigar
stand sales, grease and waste sales) and/or by breakfast,
lunch, dinner, and in-between meal sales (coffee-break
type of sales). Expenses may be calculated as a ratio
of sales and the percentages compared to this year,
(Vis. 1) last year, and the percentage of this years
budget (this years goal) spent to date. It is much easier
to analyze amounts of various expense items as a
percentage of sales. Food cost may be divided into several
categories so that raw food cost can be more easily
investigated and so that the menu or menu cycle can be
analyzed relative to costs.
An example is shown in Table 1 (Vis. 2)of a profit and
loss breakdown of an institutional type food service,
where an amount of about 18 percent of total sales is
taken to pay back the bond holders. The example in Table 2
(Vis. 3) is typical of a service restaurant. These two
statements are shown to illustrate how sales, food costs,
and operating expenses may be categorized to aid in the
analysis of a particular operation. The expense categories
and percentages may vary considerably for each segment of
the food service industry.
A word of caution is appropriate here. The operator needs
to determine if this type of data collection is practical-
--if the time and cost of accumulating this information is
worthwhile and will be of continuing benefits. Too often,
this type of complex report is never analyzed and becomes
a record for record's sake alone. It is included as an
example of data that can be examined, interpreted, and can
create a standard for comparison which is necessary for
control. It presents a means whereby control can be
accomplished. It allows management to anticipate and
prepare for future conditions. It provides a check on
projections. Analysis of this type of data can be the
major source of improvement where management has the
interest and capability to use this technique of
self-evaluation.
(Vis. 2)
(Vis. 3)
Analysis of Key Factors - The number of meals served,
sales, rates, food cost, labor cost, expenses and profit
this year to date may be compared to: (1) each of the last
three years' totals for the same period, (2) the dollar
difference to date this year compared to previous years,
(3) the percent plus or minus difference this year
compared to last year, and (4) the percent spent of the
budget to date compared to the budget. Also, the current
month may be compared to the same month last year. To be
more accurate in evaluation, an inflationary factor needs
to be taken into consideration. This factor will vary each
year. Table 3 (Vis. 4)is an example.
Food Cost Per Meal Served
Is food cost per meal served increasing or decreasing and,
if so, why? The food cost per meal served is quite
variable because of rapidly changing food costs, theft,
different menu items, lack of controls, and poor
purchasing methods. Analysis may pinpoint where corrective
action is needed.
Food cost per meal = Total food cost divided by Total
number of meals or meal equivalent. Example: $16,842
divided by $20,523 = .812 food cost per meal served.
This figure can be compared this month to the same month
last year and year to date this year compared to last year
as follows:
FOOD COST PER MEAL
Last year this month .78; year to date .81
This year this month .84; year to date .82
Per Cent of Customers Served
For schools, colleges, and hospitals, a record of meals
served compared to the maximum possible, or the per cent
of customers served, should be compared to the school
attendance record, or college and residence hall
occupancy. This is found by the following:
Total possible no. of customers divided by No. of
customers actually served = % of customers served Example:
632,128 divided by 387,764 = 59%
Average Restaurant Check
The ability to generate sales is the most important aspect
of the commercial food service establishment. The average
check is the ratio between the average sales value of food
and beverage per customer. It is calculated as follows:
Average check = Total food & beverage sales divided by No.
of customers. Example: $1,400 divided by 560 = $2.50
Trends can be found by comparing the ratio over time. The
average check can be compared to similar types of
operations. The effect of menu changes, price changes,
promotions, and personal selling can be identified.
Labor Productivity Index (Vis. 5)
Productivity measurements tend to stimulate a climate of
"innovative-mindedness" and stimulate competition.
Productivity measurements tend to create the desire to be
productive. Productivity increases are usually brought
about by management's innovations---in improving the
organization structure, modifying the menu, utilizing a
different combination of market forms of food and food
preparation methods, increasing the impact of personal
selling, fully realizing the impact on volume,
streamlining work flows, introducing better equipment and
facilities, developing an enlightened program for
selecting and training, stimulating better individual and
group effort, researching labor requirements and refining
manning schedules, implementing a timely feedback system
for labor utilization and cost by labor categories, etc.
The Labor Productivity Index showing how to determine the
number of meals served per labor hour can easily be
figured for the number of meals served per hour of
supervision, food production, service, sanitation, and
clerical and maintenance for control.
Staffing Relative to Number of Customers Food service
establishments should relate hourly sales figures to the
number of hours of labor in supervision, food preparation,
service, sanitation, and clerical and maintenance (Chart
2)(Vis. 6). Further analysis into hourly sales
per-man-hour can be useful in planning to staff for peak
loads and in staggering hours of work. The daily report
should be evaluated for staffing refinement and can be
compared to previous operating days.
(Vis. 5)
(Vis. 6)
Ratio Analysis
Financial analysis may be approached from the external or
the internal viewpoint. External analysis is based upon
existing or historical statements. Outside creditors and
owners are motivated by considerations of risk versus
return. Some of the questions outsiders are concerned with
are:
- Do the food service organization's financial statements
present the sort of picture that encourages continued
support of the business?
- Is it a good enough picture to attract new funds?
- Given the financial position of the business, what sort
of funds can be attracted?
- With the risks indicated by analysis of the financial
statements, what sort of returns must be offered to
attract more funds to the business, or even to retain
existing commitments?
Owners prefer more cash to less cash; cash sooner rather
than later; and cash inflows that have small, rather than
wide, variance.
Management, in developing internal financial analysis,
details internal planning statements that look to the
future, usually in the form of budgets for a year to as
long as five years, revised and updated yearly.
Analyzing financial statement ratio trends help management
know: (1) financial resources of the organization,
(2)ability to meet future obligations, and (3)how
profitable the business is. Basically, what ratios tell
management is the pulling power, pressures, stresses and
strains that work in the business. The credit analyst uses
this information to help decide whether or not the food
service establishment is a good credit risk. Management
can use the same information to help decide the course of
the business. Weakening trends of financial ratios should
set in motion corrective actions that enable the business
to avoid failure. Management gains a better idea of the
financial health of the business by taking the various
ratios together, rather than by examining each ratio
independently. Ratios alone never explain or evaluate
anything by themselves. The reasons for the trends over
time are the important thing: ratios only indicate the
trouble spots that need improvement.
We will briefly discuss: (1) the current ratio to measure
the restaurant's ability to meet its current debt, (2)
the debt to equity ratio to indicate the total debt as a
percentage that the owners have put in the business and
which indicates the strength of capitalization, (3) the
return on owner's equity ratio to measure the
profitability of the owners' investment in the business,
and (4) the profitability of assets ratio to measure the
earning capability of assets to the interest rate for debt
capital used in financing the assets. These ratios are
calculated from the Balance Sheet and Income Statement.
The figures shown here are fairly typical and are intended
as guideline examples only. Each food service business
must be examined in context with its own set of
circumstances.
The Current Ratio
Liquidity ratios are used in the analysis of a business's
ability to meet short-term obligations as they become due.
The current ratio is probably the most commonly used
liquidity ratio. This ratio expresses the relationship
between the total current assets and the total current
liabilities of the food service establishment. The current
ratio is calculated for the restaurant as follows:
Current ratio = current assets divided by current
liabilities. Example: $43,530 divided by $32,740 = 1.3:1
This means there is $1.32 of current assets for every
$1.00 of current liabilities. It is a rough measure of
capability to pay bills. A current ratio of about 1:1 is
generally considered to be reasonable. The food service
industry typically has a low current ratio because of (1)
minimum credit extended to customers, (2) low inventories
on hand, and (3) quick cash turnover because of rapid
inventory turnover. Popular thought is that the higher the
ratio, the better shape the business is in. Table Service
Restaurant Operation Report '77 (National Restaurant
Association) shows a current ratio of $1.89 of current
assets for every $1.00 of current liabilities for a group
of well-established restaurants, operated by
professionals with many years of experience. However, a
high ratio, by itself, does not tell: (1) whether cash is
being used to best advantage, and (2) the distribution of
current assets---whether receivables and/or inventory may
be too high.
Debt-Equity Ratio
Solvency is the ability of a business to meet its
obligations. There are two basic ways to finance: (1) the
owners may supply the money or (2) a combination of
owner's money and debt financing (borrowing may be used).
Leverage refers to the amount of long-term debt used to
finance the asset of the restaurant as compared to the
amount of the owner's investment. Leverage ratios are used
to show the relationship between the amount of debt and
owner's monies used to finance the assets of the
restaurant. The percentage of total debt (liabilities) to
the total owner's equity (net worth) ratio shows the
percentage of the owner's equity in the business:
Debt-equity ratio = Total liabilities divided by Total
equity. Example: $141,730 divided by $161,100 = 86.4%
This shows that creditors have invested 86 cents in loans
for every $1.00 of the owner's investment. It is
advantageous to employ leverage if the cost of borrowed
funds is less than the earnings which can be generated
from their use. It is important to equate trends, over
time. The debt to equity ratio is typically low in the
food service industry because of the: (1) heavy investment
in fixed assets offset by heavy liabilities with a
long-term repayment program, and (2) low working capital
requirements. The higher the percentage, the more money
the owner has in the business and the safer his creditors.
They are safer because more owner's equity is there to
cushion creditors against a loss. However, it may also
show that the owner is: (1) too conservative, unwilling to
take any risks; (2) not using his funds to the best
advantage; and (3) not realizing the maximum potential of
his business. A small amount invested in the business by
the owner might encourage the owner to speculate with
outsider's money.
Return on Owners' Equity Ratio
This measures rate of return or yield on the owner's
investment in the restaurant. A restaurant has a major
investment in assets. It is essential that there be
sufficient earnings to cover the cost of financing and to
provide a satisfactory return to the investors. This ratio
expresses the percentage relationships between the net
profit after all expenses including income taxes are
deducted and the average stockholders' equity in the
business.
Return on owners' equity = Net profit after taxes divided
by Average stockholder's equity. Example: $27,120 divided
by $302,600 = 8.96%
The owners earned a return of 8.96 percent on the total
cumulative equity investment in the business. This should
be compared with other investment opportunities which are
available.
Profitability of Assets
Assets represent total capital provided by owners,
creditors, and investors. The rate of return-on-assets
ratio expresses the relationship between profits and the
book values of the total assets of the restaurant. This
ratio is calculated as follows:
Return on assets = Profit before interest on Income taxes
divided by Total average assets. Example: $32,450 divided
by $302,900 = 10.7%
This ratio provides a measure comparing the earning
capability of assets with the interest rate for debt
capital used in financing the assets. It aids in the
analysis of whether to purchase assets and of the use of
debt financing. It is important to follow trends over a
period of time.
Summary and Conclusion
Good records provide the business with a valuable
management tool. The purpose of statistical and ratio
analysis is to compare current with past records and/or
the budget, develop some operating standards, and to
highlight deviations so that corrective action can be
pinpointed. By watching the gauges---the Income
Statements; Balance Sheets, and the Ratios-comparing their
readings from year to year, management is able to control-
--and to step in with the right action at the right time--
-to keep a downtrend from becoming a catastrophe; to keep
an uptrend up.
Comparisons to previous periods and budgets may cause
management to ask some questions about the business. For
example: if the business had been making more profit on
sales than it is now, which expenses are whittling down
the profit? If the cost of food is increasing faster than
the inflation rate, management might want to review all
potential suppliers, discounts, receiving, security and
preparation procedures. If labor cost is increasing at a
greater rate than wage increases, management might want to
review productivity, staffing related to volume, overtime,
etc. Significant changes in revenue per man hour overall
or for particular activities can be a signal to increase
or decrease staff, investigate why a particular employee's
productivity has fallen, reward an employee whose
productivity has increased notably, or other suitable
managerial responses.
Following this line of questioning with other ratios,
management can eventually touch upon every aspect of the
business-receiving, food preparation, service, sanitation,
short-term and long-term debt, return on investment, etc.
Management will then have performed a complete physical
examination of the food service organization.
References
Bolhuis, John L., Wolff, Rodger R., and the Editors of
NIFI. The Financial Ingredient in Foodservice Management.
Chicago: D.C. Health Company, 1976.
Brodner, Joseph, Carlson, Howard M., and Maschal, Henry T.
Profitable Food and Beverage Operation. New York: Ahrens
Publishing Company, 1962.
Fay, Clifford T., Jr., Rhoads, Richard C., and Rosenblatt,
Robert L. Managerial Accounting for the Hospitality
Service Industries. Dubuque, Iowa: William C. Brown
Company, 1971.
Keiser, James, and Kallio, Elmer. Controlling and
Analyzing Costs in Food Service Operations. New York: John
Wiley and Sons, 1974.
Kruel, Lee, and Kotas, Richard. Management Accounting for
Hotels and Restaurants. Rochelle Park, N. J.: Hayden Book
Company, 1978.
Laventhol, Krekstein, Horwath and Horwath. Uniform Systems
of Accounts for Restaurants. Chicago: National Restaurant
Association, 1968.
Solomon, Kenneth I., and Katz, Norman. Profitable
Restaurant Management. Englewood Cliffs, N. J.:
Prentice-Hall, 1974.
Other publications, catalogs, correspondence courses
National Restaurant Association
One IBM Plaza, Suite 2600
Chicago, Illinois 60611
Educational Institute of the American Hotel and
Motel Association
Stephen S. Nisbet Building
1407 South Harrison Road
East Lansing, Michigan 48823
National Institute for the Food Service Industry
120 South Riverside Plaza
Chicago, Illinois 60606
Cahners Books International, Inc
221 Columbus Avenue
Boston, Massachusetts 02116
Small Business Administration, 575 N. Pennsylvania St.
Indianapolis, Indiana 46204, has the following management
assistance series covering a wide variety of topics:
Management Aids (Free)
Small Marketers Aids (Free)
Small Business Bibliographies (Free)
Small Business Management Series Booklets
Starting and Managing Series
Small Business Research Series
Cooperative Extension Work in Agriculture and Home
Economics, State of Indiana, Purdue University and U.S.
Department of Agriculture Cooperating. H.G. Diesslin,
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