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Three financial statements analysis
horizontal (trend), vertical (aka common size), ratio
horizontal analysis
looks at the percentage change in a line item from one year to the next
issues with horizontal analysis
small percentage changes can hide major dollar effects, large percentage changes from year to year may be relatively inconsequential in terms of dollar amounts
how to calculate horizontal analysis
subsequent year = previous year/ previous year
horizontal analysis things to consider
beware of looking only at the percent changes, can be used to look at multiple years of data, calculate the percentage change from the previous year over a 5 year period
trend analysis
another method of horizontal analysis, compares changes over a longer period of time
compares each year with a base year
any subsequent year - base year / base year
vertical analysis answers what question
what percentage of one line item is another line item?
vertical analysis is useful for analyzing the balance sheet
what's called common size
vertical analysis, converts every line item to a percentage, allows comparisons between the financial accounts of the organizations of different sizes
vertical analysis equation
line item of interest / base line item
preferred approach for gaining an in depth understanding of financial statements
ratio analysis
ratio analysis is an expression
of the relationship between two numbers as a single number
ratio analysis provides an indication of the organization's
ability to cover current obligations with current assets (ability to pay short term debt)
is one raito better than another
no
a ratio can be interpreteed relative to
a benchmark
ratio's should not be
too high or too low
you should also consider what with the ratio
the trend
small differences in a ratio may indicate
large percentage deviations from benchmark
liquidity
how well is the organization positioned to meet its short term obligations?
profitability
how profitable is the organization ?
activity
how efficiently is the organization using its assets to produce reveues?
capital structure
how are the organization's assets financed and ability to take on new debt ?
6 liquidity ratios
current ratio, quick ration, acid test ration, days in accounts receivable, days cash on hand, average payment period
current ratio
proportion of all current assets to all current liabilities
quick ratito
used in industries in whiich net accounts receivable is relativley liquid
acid test ratio
most stringest test of liqudiity
how much cash is avaiable to pay off all current liabilities
days in accounts receivable
how quickly a hospital is converting its receivables into cash
days cash on hand
number of days worth of expenses an organization can cover with its most liquid assets
average payment period
how long on average it takes an organization to pay its bills
operating margin ratio
measures profits earned from the organizations main line of business,
operating income/total operating revenues
longterm debt to net assets
measures the proportion of debt to net assets
long term debt/ net assets
age of plant ratio
accumulated depreciation / depreciation expense
what does age of plant ration tell us
average age of a hospiital's plant and equpment
capital structure ratios answer what questions
how are an organinzations assets financed? how able is this organization to take on new debt?
why take money today
certainty, inflation, opportunity cost
future value
present value grows to its future value
present value
an amount to be received in the future is discounted to present value
what future value depends on
length of the investment period, method to calcuate intresst, interest rate
two ways to calculate interest (2 ways)
simple vs compound
simple interest
interest paid on the principal alone
compound interest
interest earned on both the principal amount and any interest already earned
future value equation
FV=PV(1+r)^n
present value
the value today of a payment to be recieved in the future
preset value takes into account
the cost of capital or discount rate, taking future values back to the present is called discounint
present value =
FV x1/(1+i)^n
annuity
a series of equal payments made or received at regular time intervals
3 types of capital investments
strategic decisions (design to increase long term position)
expansion decisions (increase operational capability)
replacement decisions - designed to replace older assets with newer, cost - saving assets
each decision has 2 components
if its wothwhile and how to finance it
3 ways to analyze capital investments
looking at just cash flow
payback method
net present value method
internal rate of return
payback method is
calculate the time needed to recoup each investment
net pressent value method
difference between the initial amount paid for an investment and future cash flows while adjusting for the cost of capital
how to calculate NPV
takes into account time value of money and cost of capital, looking at money
Formulas for and how to calculate fixed labor cost
FC (fixed cost) all operating expenses = rent&lease + supplies&materials + equipment maintenance + utilities + depreciation + other operating expenses
Finding semi variable amount for fixed labor cost= (salaries&wages + employee benefits) x .6
Formulas for and how to calculate variable labor cost
Variable cost are food, beverages and a portion of labor so everything else is fixed
Finding semi variable amount for variable labor cost = (salaries&wages + employee benefits) x .4
Formulas for and how to calculate variable rate
VR= variable cost (food cost+ beverage cost + variable labor cost)/sales (also called total revenue)
Formulas for and how to calculate contribution rate
CR = 1-VR
VR (varible rate) = Variable Cost (food cost + beverage cost + variable labor cost)/sales (also called total revenue)
Know the break even formula and how to use it to calculate break even as well as desired level of profit.
Sales = (fixed cost + profit) / contribution rate
S=(FC + P) / CR
You need to put the profit at 0 to find the break even point. After you find the break even point put in the profit to the desired amount
Differences between an income statement and a balance sheet
An income statement shows a company's financial performance over a specific period, detailing revenues, expenses, and profits or losses.
A balance sheet provides a snapshot of a company’s financial position at a given moment, listing assets, liabilities, and equity.
Differences between assets and liabilities. How are they categorized on financial statements, and examples of each
An asset is a resource that the company owns.
(cash, inventory)
A liability can be understood as a debt or obligation of the company.
(debt)
Different methods of accounting (accrual vs. cash etc...)
Cash Basis Accounting:
- Revenue and expenses are recorded only when cash is received or paid out.
- Simpler method, often used by small businesses.
Accrual Accounting:
- Revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.
- Provides a more accurate picture of financial performance over time.
Cost Principle
Recording transactions and valuing assets in terms of dollars at time of transaction
Amount of dollars expended for goods
Cash vs. Accural
Cash: recognize a transaction time of cash flow
Accrual: recognize when earned
Matching revenues and expenses
Match revenues and expenses in the accounting period in which they occur
Depreciation
Costs allocated over the useful life of an asset
How to use the S=VC+CM formula to solve for variable cost per visit
How to solve for variable cost per visit
Total sales = price per visit x number of visits (this gives us our sales)
Sales - CM = variable cost
Variable cost/visit = VC/visit
How to use the S=VC+CM formula to solve for contribution margin
How to get contribution margin:
FC + net income = CM
(Price per visit - variable cost per visit) x number of visits
How to use the S=VC+CM formula to solve for price per visit
How to calculate the price per visit:
(variable cost x numbers of visits) + CM = number of visits
How to use the S=VC+CM formula to solve for number of visits
How to solve for number of visits:
price per visit/profit
How to solve for number of visits:
CM = price per visit - variable cost per visit
How to use the S=VC+CM formula to solve for fixed costs
How to solve for fixed cost
FC= CM -net income (also known as profit)
How to use the S=VC+CM formula to solve for net income.
How to solve for net income:
CM - FC = net income
What should you base your decisions on when it comes to changes in cost
You should choose the option with a higher contribution margin. As this will mean you are making more money
break even formula
the break-even formula is S= (FC + P) / CR
Semi variable fixed labor cost
Finding semi variable amount for fixed labor cost= (salaries&wages + employee benefits) x .6
semi variable for variable labor cost
Finding semi variable amount for variable labor cost = (salaries&wages + employee benefits) x .4
variable rate
VR (varible rate) = Variable Cost (food cost + beverage cost + variable labor cost)/sales (also called total revenue)
how to get contribution margin for an item
CM= selling price - variable cost of that item
Standardized recipies
a recipe producing a known quality and quantity of food for a specific operation
It specifies (1) the type and amount of each ingredient, (2) the preparation + cooking procedures and (3) the yield + portion size
Have specific operation attached: cooking time, temperatures and utensils
Recipie costing basics
Cost per unit equation = A.P. cost/number of units = cost per unit
Unit cost: the price paid to acquire one of the specific units
Cost per portion
total recipe cost/number of portions = cost per portion
Total recipe cost
The total cost of ingredients for a particular recipe; it does not reflect overhead, labor, fixed expenses or profit
Overhead costs
expenses related to operating a business, including but not limited to costs for advertising, equipment, leasing, insurance, property rent, supplies and utilities
Food cost percentage
The ratio of the cost of foods used to the total food sales during a set period, calculated by dividing the cost of food used by the total sales in a restaurant
Selling price
Plate cost/desired cost % = selling price
A.P. cost
the condition or cost of an item as it is purchased or received from the supplier
E.P. cost
The amount of a food item available for consumption or use after trimming or fabrication; a smaller, more convenient portion of a larger or bulk unit
Yield percentage
Formula: E.P. weight/A.P. weight = yield percentage
Definition: the ratio of the unusable weight of an ingredient after cleaning and trimming for the quantity purchased, calculated by dividing the trimmed weight by the as-purchased weight of an ingredient
How to factor a recipe and cost individual ingredients (including the use of yield % and weights and equivalent measures)
How to calculate and interpret cost percentages (Cost/sales=cost%)
Take the overall total sales if specific sales are not available
You can find really every kind of percentage you need by taking the cost you are looking at dividing it by total sales and multiplying it by 100
Covers
One diner (person) = a cover
Seat turnover
Seat turnover = number of customers served/number of seats
Calculated sales per server
average sale for server = total sales for server/number of customers for server
Variable costs vs. fixed costs and their differences and characteristics
Fixed costs:
normally unaffected by changes in sales volume. little direct relationship to the business volume
examples: insurance premiums, real estate taxes, depreciation on equipment
these should never be taken to mean static or unchanging but merely to indicate that any changes that may occur in such costs are related only indirectly or distinctly to changes in volume
Variable costs:
clearly related to business volume
As business volume increases, variable costs will increase, as volume decreases, variable costs should decrease as well
Directly variable costs: directly linked to vomule of business, so that every increase and decrease in volume brings a corresponding increase or decrease in cost
Examples: payroll costs, food, beverages
Semivariable cost:
A portion of it should change with short-term changes in business volume and another portion should not
salaries + wages
Controllable costs
can be changed in the short term
food + beverages (controlled through changing portion sizes)
Variable costs
Normally controllable
Uncontrollable costs
cannot normally be changed in the short term
rent, interest on mortgage, real estate taxes, license fees + depreciation
Average check
average check = total dollar sales/total number of covers
Prime cost
refers to the costs of materials + labor: food, beverages and payroll
Sales mix
the relative quantity sold of any menu item as compared with other items in the same category
Formula: take the number sold of that item and divide it by the total amount sold of all the items. Then multiply that answer by 100
Menu pricing factors and concepts. How to calculate menu sales price (prime cost method)
Raw food cost (also labeled as entree cost or food cost)
Direct labor cost (labor all together)
Prime factor (also called prime-cost factor)
Prime cost: the cost of food, beverages, and direct labor (all labor together) added together
Basic terminology and definitions from each chapter and lecture
Menu engineering- the difference between star, plowhorse, puzzle, and dog; be able to conduct menu engineering analysis including menu mix %, CM, categorization, and classification.
Menu engineering takes a look at every item and sees if it is profitable
