What are Other Expenses?
Fixed versus Variable Expenses
Managing and Controlling Other Expenses
Occupancy Costs and Interest Expense
Define “other expenses” or expense items that are not directly related to Food & Beverage or Labor
Categorize “other expenses” in a typical foodservice operation profit and loss statement
Explain the sources of “other expenses” and the variations that may result from the ownership structure of a restaurant
Distinguish between variable, fixed, mixed, controllable and non-controllable expenses
Describe strategies to control “other expenses”
- Other Expenses
- Uniform System of Accounts for Restaurants
- Statement of Profit and Loss or “Income Statement”
- Controllable versus Non-Controllable Expenses
- Controllable Profit
- Fixed versus Variable expenses
Which line items are considered “Other Expenses”?
The Uniform System of Accounts for Restaurants published by the National Restaurant Association provides a standardized account classification system that is used by most restaurant operators. Other Expenses are categorized as controllable or non-controllable. The Uniform System advocates the following presentation for the Statement of Profit and Loss or “Income Statement” (Other Expenses are highlighted):
- subtract Cost of Sales
- subtract Payroll & Employee Benefits
- subtract Controllable Expenses
- equals Controllable Profit
- subtract Occupancy & Depreciation Expenses
- add Other non-operating Income
- subtract Interest Expenses
- equals Net Income Before Taxes
The Other Expenses category regroups all expenses that do not directly relate to Cost of Goods Sold and Employee Payroll & Benefits. A detailed list of Other Expenses line items is presented in the list below. However, restaurants have customized lists that suit the nature of their operations.
On-site foodservice operations, such as those in education, healthcare, etc. may not follow the Uniform System of Accounts for Restaurants, but all segments in the industry have some accounting system that separates food & beverage, labor and “other” expenses. Those foodservice operations in non-profit settings may not pay occupancy expenses and taxes, but they may have expenses considered “indirect” costs or other similar categories. No matter what the category of operation, other expenses are part of the picture and must be controlled to manage the “bottom line.”
Controllable expenses adjust as a result of managerial decisions. These costs can be increased or decreased within a reasonably short period and include such categories as:
- Direct Operating Expenses (uniforms, laundry, tableware, paper supplies, cleaning supplies, contract cleaning, etc.)
- Music & Entertainment
- Sales & Marketing
- General & Administrative
- Repairs & Maintenance
As an example “Flowers and Decorations”, which is a line item under Direct Operating Expenses, is a controllable expense insofar as the related cost is directly under the control of a manager who can modify the amount at will.
Non-controllable expenses tend to be fixed in nature and cannot usually be changed within the normal rhythm of business (or fiscal year) and include costs under the following categories:
- Occupancy Costs (Rent, building insurance, real estate and property taxes, equipment leases, etc.)
- Depreciation & Amortization
- Corporate Overhead
- Interest Expense
- Taxes (local, state and federal)
Rent comes under “Occupancy Cost” and is an example of a non-controllable cost. While it is possible to renegotiate more favorable conditions, the outcome would take a long time and involve decisions of multiple stakeholders.
Other Expenses: Controllable:
- Direct Operating Expenses:
- Auto or Truck Expenses
- Banquet and Catering
- Bar Supplies
- Cleaning Supplies
- Contract Cleaning
- Equipment/Other Rentals
- Flowers and Decorations
- Guest Supplies
- Kitchen Utensils and Supplies
- Laundry and Dry Cleaning
- Linen and Linen Rental
- Menus and Drink Lists
- Paper and Packaging
- Tableware /Smallwares
- General & Administrative:
- Accounting and Payroll
- Bad Debts
- Bank Charges
- Cash (Over) / Short
- Claims and Damages Paid
- Collection Fees
- Consulting and Coaching Services
- Credit Card Charges
- Directors’ or Officers’ Fees
- Dues and Subscriptions
- Franchise Fees
- Insurance – Liability and General
- Licenses and Permits
- Office Printing and Supplies
- Professional Services
- Security and Deposit Services
- Telephone and Communications
- Repairs & Maintenance:
- Building and Structure
- Equipment and Furniture
- Grounds and Parking Lot
- Total Repairs & Maintenance
- Music & Entertainment:
- Audio Broadcast Service
- Bands and Musicians
- Comedians and Entertainers
- Meals Served to Musicians and Entertainers
- Music Licensing Fees
- Television Broadcast Service
- Direct Response Marketing
- Public Relations and Publicity
- Heating Oil and Other Fuel
- Recycling Credits
- Trash Removal
- Water and Sewage
Other Expenses: Non Controllable
- Occupancy Costs :
- Rent (facility, parking…)
- Common Area Maintenance
- Insurance of Building and Contents
- Other Municipal Taxes
- Personal Property Taxes
- Real Estate Taxes
- Equipment lease, Depreciation & Amortization, Interest Expense
- Long-term Debt
List provided as an example, restaurants have their customized list that reflects their operation.
Fixed versus Variable Expenses
For management and control purposes, expenses are further categorized as fixed, variable or semi-variable depending on how they vary as the activity level of an operation fluctuates:
- Food cost is an example of variable expense as it fluctuates in direct proportion to increases and decreases in sales (volume of business or number of customers)
- Rent is a fixed cost that stays the same irrespective of changes in revenues or volume of business
- Energy is a semi-variable expense. Security lights, refrigeration and air-conditioning or heat stay on when the restaurant is closed. Energy costs increase when the restaurant resumes operation and things like ovens, grills, and lighting are operating at peak levels.
Managing and Controlling Other Expenses
Other Expenses are expressed in either Percentage of Total Sales:
Other Expenses ($) divided by Total Sales ($) equals Other Expenses %
and/or Dollar Cost per Guest:
Other Expenses ($) divided by Number of Guests equals $ Cost per Guest
Individually, the “other expenses” line items represent a small percentage of total revenues and are often overlooked. According to a study by the National Restaurant Association, Direct Operating Expenses (c.f. previous definition) account for 3% to 5% of revenues. However, restaurant operations are low margin businesses and 3% to 5% of revenues could also represent the net income (or profit). Therefore, restaurant managers need to pay attention to each line of expense.
According to the formula stated above, in order to reduce the other expenses percentage, either sales have to go up or expenses have to decrease. Controlling other expenses requires managers to monitor and reduce the variable portion of these other costs where appropriate. However, controllable expense items are mostly semi-variable. In an on-going operation, some costs will decrease but a fixed portion will continue to occur when the activity slows down or even closes. Maintenance and reduced cleaning schedules will still be enforced, advertising will be reduced but not eliminated, guest supplies will be stocked for re-opening, a person will need to keep on taking reservations, security lights and refrigeration will still be switched on.
As previously mentioned, variable costs are influenced by managerial decisions and policy. Therefore, establishing and enforcing operating procedures is an essential part of controlling other expenses.
Example: Utility Policies and Expenses
Energy Consumption - Food Service
Utilities in restaurants represent 3.5% to 5.5% of revenues. Cooking-related activities (water heating, cooking, and refrigeration) account for approximately 70% of total energy expenses.
Restaurants manage energy costs by combining proper management and maintenance policies with technology. Check lists are provided to employees responsible for turning off cooking equipment, exhaust fans, lights, computers, and office equipment. The following checklist is an example of an energy-saving program.
Equipment and Energy Saving Program
- Switch off the door heater on your reach-in refrigerator or freezer
- Check the temperature setting in refrigerators and freezers
- Temperatures that drift below recommended levels waste energy
- Clean refrigerator coils regularly
- Reduce defrost cycles in refrigerators
- Inspect refrigerator and freezer doors to prevent leakage of cool air
- Upgrade your walk-in refrigerator and freezer
- Adding strip curtains cut air infiltration by 75 percent, automatic door closers are inexpensive
- Shift ice production time in ice machines
- Timers shift ice production to nighttime off-peak hours
- Replace incandescent light fixtures with LEDs
- Install occupancy sensors
- Replace air filters in air-conditioning (AC) systems
- Check AC temperatures
- Maintain panels on rooftop AC units
- Maximize location of kitchen appliances
- Group heavy-duty appliances, such as charbroilers under the center of the hood, and place ovens at the ends
- Install a low-flow pre-rinse sprayer valve
- Set your hot water temperature at around 130 ̊F
- Fix leaks
- Maximize efficiency of dishwashers
- Invest in connectionless steamers for cooking
- Install a variable-speed (exhaust) hood controller
- Install fan controllers for walk-in coolers and freezers
- Retrofit the defrost controller
- Invest in remote air-cooled ice machines
- Invest in a high-efficiency, condensing water heater
- Consider low-flow toilet fixtures
- Install energy-efficient windows
- Paint the exterior in a light color
The above energy-saving program is an example of the type of program and decisions that foodservice managers need to consider in controlling costs. Procurement and buying decisions for direct operating expenses (see Table 14.1) need to be carefully researched and considered to be sure that other expenses that are controllable are being managed as carefully as possible.
Food service operations farm out numerous services to suppliers. These may include maintenance (kitchen equipment, building mechanical, etc.), pest control, grounds services (landscaping, snow removal), uniform rental and cleaning, insurance, communication, printed material, and various guest supplies. To ensure that the operation benefits from the most competitive rates, contracts should be awarded through a request for proposal (RFP) or bid process and re-examined periodically.
Restaurant operations are increasingly reliant on technology for front of the house operations with the use of such systems as reservation management, kiosks and tabletop tablets, digital point of sales, and loyalty programs, or back of the house with inventory and ordering systems, energy management, maintenance records, and scheduling.
While technology assists management decision processes optimizing revenues and expenses, it also generates significant costs (investment, equipment and software maintenance and upgrade, obsolescence, etc.) and a related investment should be the subject of a detailed cost/benefit analysis.
Occupancy Costs & Interest Expense
Occupancy and Interest expenses include such items as rent (ground, facility, parking), common area maintenance, insurance of building and contents, taxes (municipal, personal property, real-estate) and interest expenses on long-term debt (generally mortgages.) Occupancy and interest expense therefore depend on the ownership structure of the operation. Does the operator own or lease the facility? If owned, is the mortgage paid-off?
This expense category is fixed and non-controllable. It can only be changed in the long run through lease renegotiations, loan refinancing or repayment, or an appeal for real estate taxes revision.
If the foodservice operation is part of a non-profit business or institution, indirect costs and budget categories that cover overhead costs may be beyond the control of the foodservice director, but they are still costs that need to be covered by revenue generated by the operation.
A note of caution:
- While a manager has little power of decision over non-controllable expenses, he/she is still accountable for producing enough revenues to cover them.
- Controlling expenses is not synonymous with cost cutting. Indiscriminately cutting cost can result in using inferior products, constant breaking down of equipment, run down facilities, outdated décor, etc. which can also lead to low employee morale, being understaffed or left with unskilled workers, all of which could damage guest experience and ultimately ruin a business.
It’s a Constant Balancing Act
Controlling expenses consists of aligning an operation’s expense level with the service standard and price point that is advertised (and hopefully delivered) to the guests. Therefore, proper control requires a manager to forecast the desirable expense level and benchmark the actual costs against forecasts that are materialized in a budget (c.f. Budgeting chapter). It’s a managerial skill that takes experience and practice to develop.