Finance

1. Introduction To Finance

This chapter, to a certain extent, covers basic principles of finance for nonfinancial managers. It introduces basic financial tools and principles of financial and statistical analysis as it relates to a foodservice operation. It highlights the importance of financial management and the need to understand how businesses can be affected by dreadful financial decisions. Just as in every other business, the management of a food service company is compelled to either employ an executive with sound financial knowledge or to have a finance expert on the middle management team.

The chapter discusses in detail the meaning of financial and statistical analysis, which is an integral part of a company’s success, and how to apply financial and statistical analysis to their department or operation to avoid financial pitfalls, which can lead to severe negative consequences, more than often, irreversible. The chapter further provides useful information and references about income statements, financial and statistical analysis techniques, how to apply them, what the results mean, and to a certain extent, how to take preventive or corrective actions.

Foodservice managers need to allocate ample time to analyze the daily, weekly, monthly, and yearly results and compare them to other departments where applicable to other properties in case of a multiunit operation and industry-related data to determine the results organization is obtaining. This should be done regularly and “as needed,” meaning as a preventive measure to future financial shortfalls and as corrective measures to shortfalls already occurred.

The evaluation should determine how well the foodservice operation is performing and where improvements should be made. Consequently, priorities, objectives, methods, and deadlines for corrective and further preventive actions can be made (Engwall, 1988; Abrams, 2000). Key indicators, in other industries, also called Key Performance Indicators (KPI, also called “flags” red for negative, green for positive. These KPIs show the degrees of efficiency and effectiveness in cost minimization, revenue optimization, and profit maximization.

“Red Flags” indicators must be investigated immediately and in great depth, and corrective adjustment must be considered. One must ask the question: what and when do we need to do it? What if we do it, and what if we do not act? Like many other important decisions, these are decisions that managers, together with financial analysts, must take regularly. For example, the need to drop a price, to substitute an expensive functional product with a less expensive to remain profitable, and the list could go on.

A thorough discussion of top management, finance department, middle management, and line operating personnel is conceivably most needed to develop mutual understanding and suggest solutions to the problems. In cases where all key indicators are satisfactory, such as revenue optimization and cost minimization, but the profit is not maximized adequately, then it may be necessary to examine the operation for possible inefficient purchasing and/or receiving practices, wrong menu pricing, incorrect records or financial statements, incorrect inventory method and computation of inventory value, production waste, on use of by-products, too big plated portions, pilferage, embezzlement etc.

These financial and statistical-operational analysis guidelines can be applied in a single food service establishment for self-analysis, by the unit manager of a multi-unit operation or by the foodservice/director of food and beverage in a hotel operation.