Creating a proforma, budget and a period profit & loss statement has gotten a bit more complicated as sales for off premises channels have grown significantly in the past few years.
When working with brands on their off premises programs we consistently find that companies are still behind in how they put together their budgeting as well as financial reporting for off premises revenue and expenses.
The process of budgeting vs. financial reporting has different goals and of course some different parameters. What is in common with both is sales.
Our experience has shown that the two areas where most revisions and additions to the financial model are needed fall into three categories.
- Differentiation by sales channel within budgets and financial reporting to ensure accurate KPI’s.
- Allotment of investment for growth within the budgeting process
- Knowledge and allocation of costs specifically associated with the off premises sales channels, both prime costs as well as other expenses.
Each is an important component to better understand your off premises sales channels and their expected and actual contribution to revenue.
The problem is essentially trying to fit 10lbs of flour into a 5lb bag, as you can guess it doesn’t fit. Neither does trying to fit off premises sales channels into our regular budgeting and reporting process.
When off premises sales channels are added to your standard budgets and financial reporting without proper delineation a few things generally happen.
- Poor transparency of where sales are coming from along with how each channel is performing. In other words, there is not enough breakdown in each individual channel.
- Cost structures are blended and with different food, paper, labor and supporting costs it becomes harder to understand what is profitable and what is not.
- Inability to understand your ROI for off premises investments.
So what is the answer?
What we are now recommending is establishing separate budget and financial reporting exclusively for off premises sales channels. This can then be linked and rolled up into your larger financial model.
Today, most brands now have a VP or DIrector of Off premises and it only makes sense to provide that key role with their own budget and P&L. Off premises sales continue to grow as a share of total sales, with many brands already hitting the 40% target and some even higher.
The Goals of an Off premises financial model.
- Differentiate each sales channel to establish forecasts & growth KPI’s for each channel.
- 1st party catering
- 3rd party catering
- 1st party take out & delivery
- 3rd party take out & delivery
- Establish KPI’s for each sales channel to understand performance.
- Same store sales growth
- Same store traffic growth
- Same store ticket growth
- Off premises gross profit, operating profit, net profit, and profit margins
- Accurate food and paper cost that represent the off premises cost structure differences
- Labor costs (although most likely estimated and/or allocated to the off premises sales channels
- Strong understanding and accounting of other costs related to off premises specifically
- Allocation of fixed costs representative of its use within your brick and mortar location.
Although not a perfect solution in every way this model offers up some significant opportunities to better understand how your off premises business is impacting the overall performance of your restaurants and company.
When building a catering program for Roti Mediterranean, we separated our sales and cost structure to help us better understand not only how well it was growing but also assigning the “right” costs and investments to the business.
If we looked at it in year one and even year two, our investments ate up a lot of the profits but by year three and four we realized we were contributing more total profit margin than the dine-in sales for the company at 25% of total sales.
Over 10 years ago, off premises sales channels were somewhat limited to catering, maybe a bit of online ordering, and certainly no 3rd party platforms, so overall a much simpler model. Nevertheless, our understanding of what and how to budget, along with an understanding of the key expenses, gave us the ability to manage catering as a business within a business.
I often thank my leadership team not only for the confidence to make the investments but also for providing our team with the fortitude and tools to measure our success. That in itself provided everything needed to ask for more investment.
My favorite example was justifying our sales team, especially when their commission structure created six figure incomes. We had the data and the proof that the ROI was a clear winner.
How to Create a Off Premises Financial Model
1. Gather Data:
- Historical Data: Collect data on past off-premises sales, costs, and investments.
2. Define Assumptions:
- Sales Assumptions: Estimate the growth rate in off-premises sales channels based on historical data and market research.
- Customer Behavior: Estimate the number of orders & average order value.
- What Costs to Include:
- COGS – Ensure each channel has each menu item costed out for food and paper.
- Operating expenses.
3. Revenue Projections:
- Number of Orders: Estimate the monthly number of takeout, delivery, and catering orders.
- Average Order Value: Calculate the average revenue per order for each off-premises channel.
- Seasonal Variations: Account for any seasonal fluctuations in demand.
- Discounts and Promotions: Consider the impact of discounts and promotions on revenue.
4. Cost Projections:
- Cost of Goods Sold (COGS): Calculate the cost of ingredients, packaging, and labor for each off-premises sales channel.
- Operating Expenses: Include costs related to technology, marketing, delivery services, and staff.
- What percentage of crew & management labor is attributable to off premises sales channels. Sometimes this must be estimated and allocated.
- Overhead Costs: Account for utilities, rent, insurance, and other fixed expenses. (usually a percent of sales)
- Variable Costs: Consider variable expenses like credit card processing fees.
- What investments need to be made – Growth, especially in catering comes with investment, make sure you accurately provide the needed resources that support your projections.
5. Profitability Analysis:
- Gross Profit: Calculate gross profit by subtracting COGS from revenue.
- Operating Profit: Deduct operating expenses from gross profit.
- Net Profit: Consider all costs including overheads to calculate net profit.
- Profit Margins: Analyze profit margins for each off-premises channel and the overall program.
6. Sensitivity Analysis:
- Scenario Planning: Run scenarios for best-case, worst-case, and expected outcomes based on changing variables.
- Break-even Analysis: Determine the point at which off-premises sales cover all costs.
8. Monitoring and Adjustment:
- Key Performance Indicators (KPIs): Establish KPIs such as customer satisfaction, order accuracy, and delivery time to monitor the program’s success.
- Regular Review: Periodically review the actual performance against projections and adjust the model as needed.
- Feedback Loops: Incorporate customer feedback and market trends into your model for continuous improvement.
- Be Realistic: Base your assumptions on thorough research and real data whenever possible.
- Iterate: Financial modeling is an iterative process. Refine your model as you gather more data and insights.
- Consult Experts: If you’re unsure about certain financial aspects, consider consulting with financial experts or accountants.
Remember, the accuracy of your financial model greatly influences your decision-making process, so invest time and effort into creating a robust and realistic model.
Advisory Success Programs
The Off Premises Growth Academy is an advisory, education and certification firm with a focus on helping restaurant brands evaluate, build and implement direct to consumer off-premises programs.
We specialize in:
- Advisory Support
- Education & Certification for Operators & Suppliers
- Program Evaluation
- Strategy, Leadership, Operations, Experience, & Promotion Guidance and Support
Use coupon “BLASTOFF23” for your free consult*
*100% off of the regular priced consult of $249USD. Enter coupon at checkout