Accounting Analaysis: Comprehensive Catering Budget

Budgeting Essentials In this chapter, we will be referring to a hypothetical off-premise caterer who is starting a small catering business from a small kitchen equipped with basic equipment and utensils. This caterer pays annual rent of $5,000, is financing the business from personal savings and plans to rent the necessary front-of-the-house equipment from a local rental company. All examples and exhibits in this chapter will refer to this hypothetical caterer. Readers are cautioned at this point to not use the exhibits and figures in this chapter as "gospel." They are not. They are simply guidelines. Every offpremise caterer operates differently. The purpose of utilizing a hypothetical situation is simply to relate financial theory to reality. Readers are not to assume that the various revenues, expenses, and profit are absolute numbers which all off-premise caterers must emulate. They are not. They are used only for demonstration purposes. The first step in developing a budget is to project sales based on past and projected future performances. Obviously, startup caterers will have no past performances to evaluate, so they must make educated "guesstimates" as to their projected sales. When estimating sales, it is better to err on the underside, being conservative. Projected sales estimates should be based on the following input: • Number of projected catered events • Average selling price of each event • Seasonal variations • National and local economic indicators • Competitive factors • Industry trends Once sales are projected on an annual basis, they can then be broken down by month. For example, a startup off-premise caterer who generally caters outside events in the South would generate more sales in the cooler months and fewer sales in the warmer months. This caterer, who projects $100,000 in first-year sales, could prepare monthly sales projections as follows: January $2,000 February 3,000 March 8,000 April 6,000 May 9,000 June 5,000 July 2,000 August 4,000 September 3,000 October 10,000 November 15,000 December 33,000 Why is it necessary to project sales on a monthly basis? Isn't it adequate to simply project them for the year? The answer is No! The reason is that it is imperative to determine profit and cash flow at least on a monthly basis in order to determine the amount of funding necessary to startup the business, and continue to fund it, until it becomes self funding. In the above example, it is more than likely that this theoretical off-premise caterer will lose money at least in the months of January, February, July, August, and September and hopefully generate a profit in the other months. In those months where there are losses, the business will be unable to pay its expenses from revenues; therefore, operating capital (cash) from the owner will be needed, to keep the business operating. A detailed discussion of this will follow later in this chapter. expense categories are: The next step in preparing a budget is to estimate expenses. The four main • Cost of sales (food cost) • Payroll and related costs • Direct operating expenses • Administrative and general expenses (A detailed discussion of the component expense categories for each of these expenses will follow in the accounting section of this chapter.)