Business
Introduction
The current business plan has been prepared for the Barley Vine Rail Co. (BVR) based in Orangeville. The business plan shall analyze the financial statements of the company for the first year and also recommend changes for cost reduction in the second year of its operations.
Background Research
The Barley Vine Rail Co. (BVR) is a casual, Canadian Bistro located in the heart of downtown Orangeville. The seating capacity of the restauarant is 80 for dining room, 30 for bar and 100 for private dining space in the basement of the restaurant. The restaurant has a strategic location on the Broadway street that has a high level of connectivity and a large number of commuters for various locations such as theater and farmers market. The company maintains a staff that consists of 6 FOH employees and 8 BOH employees in addition to 1 FOH Manager (also the owner/operator), 1 Chef and 2 Sous Chefs. The menu of the restaurant offers limited and seasonal items and is rotated in each season. The organization was set up in October 2013 and has been a successful venture in the first year of its operation. The restaurant has been featured in many newspapers such as Globe and Mail and has been recently featured on Food Network's, 'You Gotta Eat Here.' The restaurant is heavily engaged on social media websites and also offers local entertainment through cultural artists.
Income Statement Analysis
The main aim of income statement analysis is to examine the profitability of the organization and its risks . The profitability analysis helps in deteming the effectiveness of execution of the firm’s strategies and objectives. The net income of the firms are an indicator of the profitability of the company. The firm has a gross profit of 25 percent which is sufficient to cover the various expenses of the firm. The food costs are higher that constitute 82 percent of the sales costs. The beverages costs are much lower and therefore beverages are the most profitable menu item for restaurant businesses. The sales of beverages in the restaurant increase the profit margins of the restaurant . The beverages sales of the restaurant Barley Vine Rail Co. (BVR) are just 15 percent of the sales revenues in comparision to the food sales of 60 percent of the sales. The firm has a higher value of variable costs in comparison to the fixed costs. Firms in retail business usually have higher value of variable costs over the fixed costs. Usually the organiztaions that have a higher value of fixed costs over the variable costs experience a higher increase in the operating income with the increase in sales figures through economies of scale . Similarly the operating income of such organizations falls with the decrease in the sales of goods leading to the diseconomies of scale . The firms that have higher fixed costs in comparison to the variable costs have a higher operating leverage.
Indentification of Costs to be Controlled
The profit margin of the restaurant may reduce in the second year of operations in the following cases:
- An increase in the cost of sales as a percentage of sales
- An increase in the selling, general and administrative expenses in relation to sales.
- Decrease in equity income relative to sales
- Decrease in the interest income relative to the sales
- Decrease in provision of income taxes relative to sales
The costs of sales for the restaurant are expected to rise in the second year of operations as the cost of food ingredients used in menu preparation is expected to be higher in the next year due to inflation. The labor costs may also vary with the economic situation and the factors of demand and supply. The restaurant may have to pay bonus to existing employees to retain experienced and professional employees.
An increase in the demand for restaurant menu items in excess of available capacity may lead to an increase in the selling prices of the products.
The costs that can be effectively controlled in the restaurant set up include the following expenses:
Complementaries: The current cost of complementary in the restaurant is 0.6 percent, which should be reduced to increase the profitability.
Laundry Expense: The laundry uniform expenses can be reduced by allowing employees to wash and arrange for cleaning of the uniforms on their own.
Small ware Expenses: The expenses on serve ware can be reduced by buying non-breakable high quality plastic server ware that is less subjected to damage due to breakage and has a longer life.
Food Costs: If a restaurant uses higher end ingredients with minimal processing, the cost tends to be higher and the selling price is higher . The average cost of food menu items are usually between 38-42 percent of the menu prices . The food costs can be controlled by modifying the ingredients of the dishes.
Recommendations
On the basis of the income statement and cost analysis, the following are recommended for the restaurant in the long run:
- Menu Standardization: The restaurant can opt for menu standardization to offer certain fixed items which will help the restaurant in controlling menu costs in the long run. The standard measures and recipes should be followed in order to ensure that the ingredient costs can be controlled .
- Melamine Small ware: The restaurant can buy melamine Serve ware that has a longer life and therefore reduces costs in the long run.
The sales and profitability is also affected by the changes in the external environment of the restaurant that may lead to cost fluctuations in the long run.
Works Cited
Lister, Jonathan. What Are the Successful Profit Margins for a Restaurant Business? n.d. http://smallbusiness.chron.com/successful-profit-margins-restaurant-business-23578.html. 2 December 2014.
Sullivan, Jim. 12 Smart Ways to Save More Money in Your Restaurant Today. n.d. http://sullivision.com/node/101. 2 December 2014.
Wahlen, James M., Stephen P. Baginski and Mark Bradshaw. Financial Reporting, Financial Statement Analysis and Valuation. Mason: Cengage Learning, 2010. Print.
