Term Paper on "Hotel Food and Beverage Cost Control"

Term Paper 10 pages (3327 words) Sources: 1+

[EXCERPT] . . . .

Hotel Food and Beverage Cost Control

An Examination of Effective Hotel Food and Beverage Cost Control Methods Today

Effective cost control techniques are absolutely essential in today's hotel industry. It is also critical to use the best tools that are available to help hotel managers implement these techniques; however, because every hotel setting is unique, it is vital to understand what approach is best suited to which situation. To this end, this paper provides an examination of basic hotel management food and beverage cost control techniques, including organization, profit planning, sales and break even analysis, menu pricing, food purchasing, storeroom control, food production, beverage and bar control laws and food service. A summary of the research will be provided in the conclusion.

Review and Discussion

Overview of Basic Hotel Management Food and Beverage Cost Control Techniques. In coming years, hotel managers will be in great demand for two fundamental reasons: 1) more large hotels and motels are being constructed today; and 2) business travel continues to increase along with rising domestic and foreign tourism. In this environment, "The hotel manager with an eye for the bottom line -- one who knows accounting and understands cash management -- and an eye for the amenities that give the hotel's customers the best value for their money will be much sought-after in this decade" ("Boom careers for the coming years" 79). In his essay, "Turn a Bankrupt Hotel into a Successful One," Jerry Morrison (1991) suggests that hotels may be losing money because their expenses exceed their revenues. According to Hayes and Miller (1995), in order to control costs more effectively, food service managers must have a confident command of accounting, marketing, and legal issues, as well as food and beverage sanitation, production, and service methods.

Organization. In virtually every type of organization, responsibility and accountability are inextricably related. According to Loren E. Newland (1997), "This concept is no less true in the lodging industry. For example, the food and beverage manager is responsible for ensuring that quality meals are served to guests. If guests are satisfied, the food and beverage manager receives the credit. If the guests express dissatisfaction with their dining experience, the same manager is subject to criticism" (45). For any hotel manager today, then, an essential part of the strategic approach to identifying more effective food and beverage cost control techniques is to refine existing approaches as well as determine superior techniques when possible to better address shifts in the needs of customers. In fact, customer satisfaction is the ultimate goal of total quality management efforts of all service industries (Randall & Senior 74). Generally, these techniques either increase a hotel's penetration of its current market base or extend it into related segments. "By introducing playgrounds, for example," Calkins and his colleagues report, "McDonald's encouraged families to come more often and to stay longer and purchase additional beverages and desserts" (Calkins, Eagle, Farello, Horn & Loch 134).

Profit Planning. Effective profit-planning techniques allow restaurant managers to understand the effects of planning decisions on the organization's financial returns and profitability; the process includes the preparation of planned (budget) profit and loss statements and balance sheets (Mcmenamin 524). According to this author, "The objective of profit planning is to show the effects of planning decisions on the firm's expected level of financial returns and profitability over the planning period" (Mcmenamin 559). The primary difference between profit planning and cash planning is that profit plans must taken into account all revenues and expenses that are related to the planning period, regardless of whether they are to be paid during the period or not; therefore, profit and loss statements will include non-cash items such as depreciation (Mcmenamin 559).

Such profit and loss statements are prepared on an accruals/matching basis, a process that requires the matching of all revenues earned, or expected to be earned, during a defined accounting period, with all the expenses incurred, or expected to be incurred, in generating those revenues during the identical period (Mcmenamin 559). Consequently, managers will have to ensure that profit and loss statements are adjusted to account for accruals and prepayments; in this regard, accruals can be viewed as those amounts that are owing at the end of an accounting period as to the goods or services that were actually consumed during the period (such as food, beverages, heat and light). According to Mcmenamin, "Prepayments are amounts paid in advance during one accounting period which relate to the next accounting period, e.g. insurance premiums" (559). In addition, and perhaps most importantly, keeping food costs down and waste to a minimum is essential to this profit planning and making process (Baird & Rasmussen 673).

Sales and Break-Even Analyses. In their book, Capital Budgeting: Financial Appraisal of Investment Projects, Dayananda, Harrison, Herbohn, Irons, and Rowla (2002) note that measuring the opportunities and risks that are associated with the expected cash flows of any endeavor and incorporating these factors into the determination of the net present value (NPV) is essential for any real-world project evaluation. "There are various ways in which risk can be incorporated into the NPV computation and capital budgeting decision support," they advise. "These include the risk-adjusted discount rate, the certainty equivalent, sensitivity and break-even analysis and simulation" (114). The process involved in break-even analyses serves to provide hospital managers with a determination of how low an income variable can fall, as well as how high a cost variable can rise, before the project breaks even at a net present value of zero. "For example," Dayananda and his colleagues say, "management may wish to know how low a product's price could go in a price war before the project becomes uneconomic. Information about the critical variables allows management to make decisions at two points in time in the investment analysis" (133). During the planning phase of the break-even analysis, hotel managers can allocate additional resources to develop more reliable forecasts for variables which will be critical to a given project's success. The decisions made by the hotel manager or others involved in the decision-making process during this stage are known as ex-ante (before the event) decisions (Dayananda et al. 133).

During the operational phase of the break-even analysis, managers can focus on the specific aspects of the identified critical variables so that the project continues to achieve the hotel's goals; the decisions made during this phase are called ex-post (after the event) decisions (Dayananda et al. 133). These break-even analyses can then be applied to a wide range of economic and human resource variables to help identify optimum pricing and staffing levels; certainly, though, one of the most important of these variables will always be at what level to set menu prices based on these constantly changing variables, but there are other factors that should be taken into consideration in this analysis that transcend a simple break-even analysis and these are discussed further below.

Menu Pricing. According to Kreul (1982), a growing body of research suggests that menu prices that that fall just below a round number result in more sales. As a result, many menus will feature prices that use the digit 9 among the rightmost (or ending) digits of a price, as in 99-ending prices such as $17.99. This author notes that while these studies have clearly demonstrated that the use of the 99 price ending (as opposed to the 00 ending) can significantly increase sales, it remains unclear how such an effect occurs. "One possible source of a sales effect is the image, or impression, that the 99 price ending may communicate to consumers. If the 99 ending communicates a favorable price image that is not counteracted by also communicating an unfavorable quality image, then an enhancement of sales might result" (Kibarian & Schindler 95). Menu pricing decisions can be seasonally influenced, and just as the break-even analysis must taken into consideration a wide range of variables in determining a final answer, food purchase decisions for any given menu item must be based on a range of factors, not the least of which are quality and price; these considerations are discussed further below.

Food Purchasing. According to Neely (2002), the food margin of any given menu item represents the difference between its sales price and the cost of its component raw materials. This author reports that, "Individual restaurant budgets were built up from assumptions about targets for covers, sales, and food margin. Margin is calculated by dividing food purchases (adjusted for changes in inventory) by actual sales" (252). Unlike many industries in which break-even analyses and other management tools are commonly used, though, restaurants are faced with a highly complex situation characterized by razor-thin profit margins and demanding clientele.

In this dynamic environment, planning for the food purchases to achieve optimum food margin targets must start over with the introduction of a new menu item. The final decision to include or exclude a menu item will largely depended on its ability to be satisfactorily integrated into the menu as a whole based on… READ MORE

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