Financial Analysis of a Restaurant: Income, Costs, and Control

This report analyzes the financial aspects of a restaurant, focusing on funding, income generation, and cost control. It begins by identifying various sources of funds available to a restaurant owner, including share issues, debentures, term loans, and asset sales. The report then explores methods for generating income, such as influencer marketing, coupon drops, social media strategies, and sub-letting unused space. Furthermore, it delves into the elements of cost, gross profit percentages, and selling prices for restaurant services and products, covering production, administrative, selling, distribution, and research overheads. The report also highlights the importance of direct and indirect costs, as well as the calculation of gross margin percentages. Finally, it examines methods for controlling cash and stock, including inventory tracking, credit purchases, labor cost control, and waste management, emphasizing the use of JIT and EOQ methods and bank reconciliation statements. The report concludes by emphasizing the significance of these financial strategies for the success of a restaurant.

Finance in Hospitality
industry

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Sources of funds which are available for Paul......................................................................1
1.2 Methods of generating income..............................................................................................2
2.1 Elements of cost, gross profit percentages and selling price for services and products
offered by restaurant...................................................................................................................3
2.2 Methods for controlling cash and stock in restaurants..........................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
The present report is giving brief understanding about sources of funds which are
available for restaurant and how it can generate profit with understanding concept of selling
price, cost elements and gross margin percent. This report is purely based on task. Task 1 is
giving information about sources of funds, task 2 is giving its contribution that sale of old even
or sub letting of unused space, task 3 is giving understanding about elements and last but not
least about controlling cash and stock.
TASK 1
1.1 Sources of funds which are available for Paul
On the basis of cited case situation, Paul a restaurant owner wants to purchase new oven
which in turn helps in reducing energy consumption and helps in saving cost. In this regard, there
are several internal and external sources are available which Paul can use for meeting monetary
requirements.
 Issue of shares
 Issue of debentures
 Term loans
 Fund from operations
 Sale of fixed assets
 Sale of current assets
 Working capital decrement
 Receipt of dividend, interest and refund of tax
Issue of shares: It is the most common method for raising long term capital because of
popularity of capital market for investors and even shares are used for financing projects along
with long gestation period (Irwin, D. and Scott, J. M., 2011).
Debenture issue: It is another kind of resource that can be used by Paul runs in order to
fulfil its objective. While issuing debentures in the stock exchange, there is need of payment of
fixed rate of interest to all debenture holders.
Term loans: For financing long term projects, term loans are used because of high rate of
interest as compared to rate of interest on debentures. Paul runs can take loan from bank and can
repay it in easy instalment. It will help the company in gaining money for expansion of buisness
unit.
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Sales of assets fixed assets: This is most common method for generating fund, in this all
fixed assets such as land, plant, building and machineries can be sold off for financing long term
and short term. This will improve the creditworthiness and goodwill of the organization. Hence,
by selling old oven with the scarp value of £3000 Paul can generate funds and would become
able to invest money in new oven.
Factoring: Paul can meet financial requirements by discounting bills, received
fromdebtors, through financial institution Paul can enhance funds.
Working capital: It should be reduced by either decreasing current liabilities or by
increasing current assets. These both activities provides fund for short term perspective. Paul
runs can utilize its working capital for the expansion of business so that it can generate revenues
in the firm.
Hire purchase: By purchasing oven on the basis of hire purchase system business entity
of restaurant would become able to meet monetary requirements to the significant level.
1.2 Methods of generating income
 Influencer marketing: The most common method which is used by every business, and
in the Paul runs restaurant, it is most popular method by tapping local celebrities with
social media or large blogs. Modern word of mouth marketing works very well for the
promotion of restaurants.
 Apartment coupon drops: Every apartments wants to offer good value to their tenants,
so coupon should be dropped and responses should be tracked (Brotherton, B., 2012).
 Social Media strategy: It can be used as sophisticated marketing medium, contests
should be created which gives encouragement to sharing and helps in recognizing the
guests. Example develops a Facebook strategy. By this way Paul runs will be able to
interact well with consumers that will support in attracting them towards the brand.
 On the basis of given case situation, by giving spare space on ground floor to Costa
coffee Paul would become able to generate more income.
 Further, by publishing recipe book firm include innovative dishes Paul can get more
income.
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2.1 Elements of cost, gross profit percentages and selling price for services and products offered
by restaurant
Usually there are 5 types of overheads:
 Production overhead : Example, restaurants rent, rates, lighting, heating, expenses related
to employees canteen.
 Administrative overhead: Example, printing and stationery, bank charges, telephone,
postage and insurance.
 Selling overhead: Example, expenses of sales representatives and executives, advertising
and publicity expenses.
 Distribution overhead: Example, delivery van, carriage and freight outwards, wages of
packers.
 Research and development overhead: Example, Subscription of books and journals,
research association, patent feeds
In business organization, for taking suitable decision based on pricing should have proper
information about cost. The major cost elements are :
 Direct cost
 Indirect cost
Direct cost: It is just similar like its name which usually consists of payment which can be
easily traced to any one item like expenditures related to manufacturing. But in the present
scenario of Paul's restaurant major expense can be labour cost which consists of wages, salaries,
benefits, service commissions, food and beverages and unemployment taxes and one can also
include cost of giving uniform to employees (Blocher, Chen and Lin, 2008). As he relies on shift
employees or part-time employee so it varies according to volume of business.
 The cost in expenses consists of fixed and variable costs, so on the perspective of fixed
cost where actual checks for each and every month or might be on regular basis such as
occupancy, communication like phone systems, internet, marketing and insurance and
licenses.
 Cost of meal can be easily known as variable in nature, even supplies like napkins, table
clothes, maintenance cost, discounts and taxes are referred as variable expenses.
Gross margin percent: It can be also identified as percentage of sales. As it has been
calculated by dividing gross margin from revenue and then its product from 100.
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Hypothetical example:
Gross margin 4000
sales 6500
Divide 0.6153846154
*100 61.54%
The final answer has been expressed as 61.54%, as greater gross margin percent is always more
recommendable because it signifies smaller portion of revenues and variable expenses has been
paid.
Selling price: It signifies the suitable price of restaurant must be able to cover cost and must
attain profit margin which has been identified earlier.
2.2 Methods for controlling cash and stock in restaurants
Inventory definition: Inventory can be defined as property, goods in stocks or the content of
buildings.
Paul can control cash and stock in his restaurant by :
 Keep proper tracking and managing inventory to control the cost of food.
 Raw material should be purchased on credit for reducing costs.
 Labour cost should controlled for reducing employee turnover.
 Yield management should be properly applied.
 Wastage should be controlled via portion controlled.
 Internal thefts and larceny should be under controlled.
 Proper track of costs on daily and weekly perspective.
In addition to this, by using JIT & EOQ method firm can ensure smooth functioning of
operations and become able to control on holding as well as ordering cost.
By preparing bank reconciliation statement restaurant owner can check balance and thereby
would become able to manage resources more effectually.
Further, it has assessed that restaurant owner can exert control on stock and thereby cost level
by taking into account inventory management tools such as economic order quantity, just in time
etc. Moreover, economic order quantity presents units which restaurant should unit should
maintain for ensuring smooth functioning of operations (DRURY, 2013). However, on the
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critical note, it can be presented that assessment pertaining to economic order quantity is time
intensive exercise.
Purchasing: to have the appropriate costs control in the organisation there \need to have
control over purchasing of organisation.
Cash: The managerial professionals need to manage the inflows and outflows of the cash
which in turn will be effective and helpful to meet the cash requirement in the entity.
Security: To trade the marketable securities in the external market which will bring the
effective revenue gains to the business.
Reconciliation: There is needed to manage a bank reconciliation statement which will be
fruitful for analysing the financial transaction of the business.
Storage: There must be management of inventory in the organisation. It comprises with
managing the operations of entity as to have effective control over the cash requirements in
business.
CONCLUSION
From the above report it has been concluded that sources of funds are very important for
any business especially restaurants. Paul should adopt many techniques for controlling cash and
stock for reducing its cost.
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REFERENCES
Books and Journals
Blocher, E., Chen, K. H. and Lin, T. W., 2008. Cost management: A strategic emphasis.
McGraw-Hill/Irwin.
Brotherton, B., 2012. International Hospitality Industry. Routledge.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Irwin, D. and Scott, J. M., 2011. Barriers faced by SMEs in raising bank finance. International
Journal of Entrepreneurial Behavior & Research. 16(3). pp. 245-259.
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