Hospitality Financial Leadership: Credits to Cost of Sales in Food & Beverage

Monday, July 16 2018

Hospitality Financial Leadership: Credits to Cost of Sales in Food & Beverage

Hospitality Financial Leadership: Credits to Cost of Sales in Food & Beverage
July 16, 2018 11:23am prev next
By David Lund
Giving the proper credits to your food and beverage operation is an important task. You want to ensure it is done consistently and fairly. This article examines all the usual credits, different types, the proper way to take them and why we need to take them.
The first question to answer is why we need to credit the F&B operation for its goods used in other parts of our business. Someone once asked me why we don’t credit maintenance for their costs when used in other departments. Or better still, why don’t we credit rooms when staff members stay over because of bad weather or business volumes? Why is F&B so special? I have heard this one a hundred times.
The reason F&B is special is because it has cost of goods sold accounts. Cost of food and cost of beverage. The rooms department has no such cost of goods account because they are not producing anything they do like F&B. In F&B we buy products—food and beverage—and we manufacture goods and sell them for a higher price. In rooms we don’t do anything like this (sorry, rooms folks). In the case of maintenance, that is a non-operating department (no revenues) so it gets no such credit. We do appreciate all their hard work, but we do not give them any credit on our books. Sorry.
We want to give F&B credits for their goods used in other departments, so we can keep a close eye on the cost of goods sold percentage—food cost percentage and beverage cost percentage. Credits come in two forms: credits for goods at cost and credit for goods at retail. These transactions are handled separately but their values effect the same accounts on the statements.
Let’s do credits for goods at cost first. As a young lad one of my first jobs in hospitality was a food and beverage storeman. My job was to fill all the requisitions for the kitchens and the bars. Many carts full of food from the freezer, fridge and dry goods room every day were delivered to the kitchen. Boxes and boxes of wine, beer and spirits for the bars to pick-up. But then, every once in a while, I would get requisitions from other places: general manager’s house, executive offices, staff cafeteria, and the chef also would order booze for the kitchen and the bars ordered food like limes, lemons and juices. I thought at the time this was interesting, but I had no idea that it all meant something. Every one of these “other orders” caught the attention of the cost controller each month as he requested I keep a separate and complete copy of each “other” requisition.
Odd, I thought, as the main requisitions piled high in the corner of the office, never to see the light of day again. Each one of the other items was costed and recorded as a credit to either the food or the beverage cost depending on what family the products requested belonged to. The cost controller totaled these requisitions each month and sent the summary up to accounting.
Food to the GM’s house was a credit to food cost and a debit to GM’s expense. Same for the booze and oddly enough it was a big number, then a credit to the beverage cost. Same with the cafeteria food as it became a debit to employee benefits.
The booze to the kitchen, which I am pretty sure didn’t all make it to the soup (Cheffie), was a credit to the beverage cost and a debit to the food cost. Lemons and limes to the bars were a reverse to the booze for the kitchen. Finally, I was able to see the work I was doing was not going unnoticed. These items were closely watched, and I even had a visit one day from the Director of Finance and some strange people from the corporate office. They were interested in looking at all the requisitions for the GM’s house. I still wonder why.
Credits for goods produced were not handled by me in the store room. They were done by the number crunchers in the accounting office. When a hotel uses food or beverage to entertain or promote the hotel, the cost of sales is credited to the food and beverage departments' accounts and a corresponding debit is charged to the department that benefits from all this entertaining—usually the sales department. What happens each day in a hotel when there is an event which is a “hotel event” the banquet event order states which “house account” to charge the function to. That night the auditors reverse the revenues, credit food cost, credit beverage, reverse the sales tax (depends on your local rules) and debit the sales entertainment account at cost. The same thing happens when one of the managers uses a restaurant or bar for entertaining. Reverse the sales, taxes, covers, reduce the value of the sale to cost, credit F&B costs and debit the department that consumed it.
At this first job I was often asked to consider giving credits for things other than the cost of sales. I would hear: Why we don’t credit the labor the same way, especially for big events? Why don’t I get a credit for all those 50 percent off accounts? Why don’t I get a credit for all those package discounts? Why don’t I get a credit for the “poor service” write-off account?
I could fill this article with the requests I have heard, some of them seemingly legitimate and others not so much. All I can say to that one is “Read the book, The Uniformed System of Accounts for Hotels. It tells what to do and not do when it comes to all things financial.
For consistency, your hotel must establish the rules for their credit to the cost of sales. Some things to consider: What percentage to use as a credit to the cost of sales? Last year’s cost percentages, budgeted costs, year to date cost, last month’s cost. All of these are good selections, just make sure once you choose your method, you stick with it (consistency principle). Do you take the credits each day with your income audit or do you do it monthly with the closing of the house accounts? Who can authorize the use of the promotion and entertainment accounts? I have seen some questionable events, outings and requisitions in my day. You want to make sure the proper approvals are in place for both types of credits.
Tags: david lund , hospitality financial leadership , food & beverage , credits About David Lund
David Lund is The Hotel Financial Coach, an international hospitality financial leadership pioneer. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years.
He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. David coach’s hospitality executives and delivers his Financial Leadership Workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams.
David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines and he is the author of two books on Hospitality Financial Leadership. David is a Certified Hotel Accounting Executive through HFTP and a Certified Professional Coach with CTI.
For a complimentary copy of my guidebook on creating a finically engaged team in your hotel head over to my website, www.hotelfinancialcoach.com and don’t forget to email me for any of my free hospitality financial spreadsheets.
Contact: David