CHAPTER FIVE: Competencies• Forecasting Sales• Financial Budgets• Requirements for Obtaining a Loan• Various types of Loans• What it Takes to Acquire a Loan• Nuances of Leases

2

SUFFICIENT CAPITAL• Lack of finance and

working capital is a close second to lack of management when it comes to reasons for restaurant failure

3

TYPES OF LOANS• TERM LOAN

– repaid in installments, usually over a period longer than a year

• INTERMEDIATE LOANS– are made for up to five years

• SINGLE USE REAL ESTATE – typically run less than 20

years

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3 IMPORTANT FINANCIAL QUESTIONS TO ASK

YOURSELF1. How much money do

you have?2. How much money will

you need to get the restaurant up and running?

3. How much money will it take to stay in business?

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PROJECTING SALES AND OPERATIONAL

COSTS• 7 basic categories are used – Sales– Cost of sales– Gross profit– Budgeted costs– Labor costs– Operating costs– Fixed costs

6

INCOME STATEMENT• Provides information to management and

ownership about the financial performance of the restaurant over a given period of time

• Allows for analysis and comparison of sales and costs

• Shows income after expenses have been deducted (net income or loss)

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SAMPLE INCOME

STATEMENT

SalesFoodBeverageOther

Total SalesCost of Sales

FoodBeverageOthers

Total Cost of SalesGross Profit

Other IncomeTotal IncomeControllable Expenses

Salaries and WagesOperating Expenses, etc

Total Controllable ExpensesRent, interest, depreciation, etc

Net Income Before TaxesIncome Taxes

Net Income

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BUDGETING COSTS

• Two main cost categories– Variable

• Change proportionately according to sales– Food and beverage costs

– Fixed• Unaffected by changes in sales volume

– Real estate taxes, depreciation, insurance premiums

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GROSS PROFIT• Money left from sales after

subtracting the cost of sales• Must provide for all other

operating costs and still leave enough dollars for a satisfactory profit

• If insufficient enough to cover costs, sales and cost mix must be replanned

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UNIFORM SYSTEM OF ACCOUNTS FOR RESTAURANTS

(USAR)• Outlines a uniform classifications and

presentation of operating results• Allows for easier comparisons to

foodservice industry statistics• Provides a turnkey accounting

system• Is a time-tested system

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BALANCE SHEET• Used to determine a sole proprietor’s or

company’s worth• Lists all assets and liabilities• Must always balance

– Assets= liabilities + net worth• Photo of the restaurant financial standing at a

given moment in time– Usually at the end of a financial period or fiscal year

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SAMPLE BALANCE SHEETCurrent Assets

Cash, Accounts Receivable, Allowances, Inventories, etcPrepaid ExpensesTotal Current AssetsFixed Assets

Land, Buildings, Furniture, etc.Deferred ExpensesOther AssetsTOTAL ASSETSLiabilities and Net WorthCurrent Liabilities

Accounts Payable, Accrued Expenses, Deposits, Income Taxes, etc.Current Portion of Long-Term Debt

Total Current LiabilitiesLong-term debt, deferred taxes, etc

TOTAL LIABILITIESNet Worth (for individual proprietor)TOTAL LIABILITIES AND CAPITAL

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SEAT TURNOVER• Number of times a seat turns

over in an hour• Some consider to be most

critical number in operation• Goal rates vary from as high

as seven an hour to less than one an hour, depending on type of establishment– High turnover equals low-check

average and high sales volume

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LOAN SOURCES• The local bank• The local savings and loan association• Friends, relatives, silent partners,

syndicates• Landlords• Small Business Administrations (SBA)• SBICs• Economic Development Administration

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SMALL BUSINESS ADMINISTRATION

(SBA)• User-friendly• Excellent record of success in lending

money to restaurants• 3 principal parties:

– SBA– the small business borrower– the private lender

• Government cosigns loan• Purpose is getting small business going• SCORE (experts in the field who help in

specific problems)

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STOCKPILING CREDIT1.A personal and financial statement

a. Educational and work historyb. Credit referencesc. Copies of federal income tax statements for previous three

yearsd. Financial statements listing assets and liabilities and life

insurance.2. If in business:

a. Business historyb. Current balance sheetc. Current profit and loss statementd. Copies statement for last yeare. Copies of federal income tax returns for past three yearsf. Life and casualty insurance in forceg. Leaseh. Liquor licensei. Health department permit

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COLLATERAL• Security for the lender• Personal property or

other possessions the borrower assigns to the lender as a pledge of debt repayment

• If debt id not repaid, lender becomes owner of collateral

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FORMS OF COLLATERAL• Character (most important)

• Real estate• Stocks and bonds• Chattel mortgages• Life insurance• Assignment of lease• Savings account• Endorsers/Co-makers/Guarantors

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LEASING• Obligated to pay for entire

lease period• Beginners should go for a

five-year lease • Lease building• Lease equipment• Cost (determine if lease cost

is fair)• Terminology (avoid

misunderstanding)• Rent calculated per square

foot per month of space

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RESTAURANT WORTH

• 2 Potential Values–Real estate value–Value as a profit generator

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The End