When reviewing your profit performance what do you look at?
Thursday 25 October 2018
RE-POSTED BLOG FROM MAY 2017
Many businesses today are choosing to compare their actual gross profit against the expected, forecast or budgeted gross profit; only taking action to investigate variances when the percentage falls below by more than a predetermined amount, usually 2% - 3%, or the £’s contribution falls below an expected or budgeted amount.
Though providing a good benchmark this method lacks sophistication and can open the business up to many types of fraud. Fraudsters, working in the business can manipulate the figures to produce the desired result, masking their activities and enabling them to continue unchallenged/checked. This can result in the business losing thousands before the fraudulent activity is discovered. In 2016, we were asked to investigate suspicious activity by a restaurant owner who had lost, by the time we were called in, £8.5k. This loss happened over a 3-month period!
A further problem with GP% comparison comes if the breakeven of the business is unknown. Simply by focusing on the GP% you may miss that the sales are insufficient to generate enough profit to cover all operating costs. This is the single biggest factor leading to business failures in the hospitality sector.
As professional auditors, we always advocate the use of external stocktakes and cash checks. It’s not to boost our business, more to protect the profits of our client’s businesses.
Generally, an external stocktake will provide much more detailed analysis of the businesses profit performance. As a minimum, you should receive a surplus/deficit against expected income for your bars and a trading account showing the gross profit for your food business. Your stocktaker should be able to identify factors that have impacted your food gross profit performance so you are able to take corrective action.
The most detailed information is obtained from the detailed sales report (PLU sales report) for the period. This not only provides the income by product but also includes the volumes sold. Using this the stocktaker will prepare a detailed till variance report.
The till variance report shows the stock consumed in the stock period alongside the till sales for that item. Any variance is shown as a negative (loss) or positive (gain) against each stock item. The till reconciliation report enables you to spot any potential theft/fraud and identify training needs.
The provision of recipe costings for your food menu along with the PLU sales for the period will help your stocktaker to provide a till variance report for your food business. With this information, they will be able to calculate your expected gross profit and with more sophisticated analysis analyse what products brought about the variance – just as with your bar stocktake.
Actual gross profit performance against expected gross profit. This is the quickest and simplest way of monitoring performance.
Surplus or deficit against expected income. A little more complex than a simple gross profit comparison. This analysis lets you know the profit shortfall against the expected based on your sales mix. This method uses the actual number of each item sold and the gross profit generated from those sales.
Till variance. This method looks at the stock consumption and compares it to till sales. It is the most detailed analysis and provides you with a product by product stock +/- variance.