Question

Rhy’s Fries – Part 6 September 30, 20X1 It’s been a crazy ride for Ronald and Rhy’s Fries. He and Peter travelled around the carnival circuit all summer and into early fall stopping at every fair, exhibition, convention, carnival and rodeo they could make it to. Some locations were better than others, and there were some minor issues including a few truck breakdowns, inventory spoilage and some wrong turns that they had to contend with, but overall it was a successful season. Ronald was also surprised to discover how popular his new product was; poutine. It was so popular that Ronald has decided to pursue this as the next avenue in this business; a fry and poutine restaurant. There is a perfect, high traffic location that is available to buy but a restaurant is completely different than a food truck and he’s a little unsure about what it’s going to take to make it work. The location was previously a clothing retail store, and as such it’s going to require some extensive renovations to turn it into a functioning restaurant. On top of that, it will need kitchen equipment (deep fryers, stoves, cooking utensils, etc.) as well as tables, chairs and other restaurant amenities before it would be able to open. Alternatively there is a less desirable location that is available to lease. The location is in an older area of the city and was previously a restaurant. It has old, but still functioning equipment (deep fryer, stove, cooler, ovens etc.) though it’s unclear how long the equipment will last. The lessor has also indicated that any of the restaurant amenities (tables, chairs, utensils, etc.) that are on the property can be purchased at a deeply discounted rate. The restaurant itself is in good shape and aside from a thorough cleaning won’t require a lot of work to get it open. Ronald once again seeks out the advice of Uncle Bob to get some clarity on the risks and advantages of each option (Lease vs Buy). He also wants to get some more information about something he recalls Bob talking about at a previous meeting; Internal Controls. 6a.) As Bob, what would you tell Ronald regarding the two options (Lease or Buy)? 6b.) What are some of the important internal controls that Ronald will have to consider and implement in this situation regardless of which option is chosen?

Answer 1

Buy option-There is a perfect, high traffic location that is available to buy but a restaurant is completely different than a food truck and he’s a little unsure about what it’s going to take to make it work. The location was previously a clothing retail store, and as such it’s going to require some extensive renovations to turn it into a functioning restaurant. On top of that, it will need kitchen equipment (deep fryers, stoves, cooking utensils, etc.) as well as tables, chairs and other restaurant amenities before it would be able to open.

For this alternative a lot of capital expenditure is required to be incurred at the initial stage itself as a restaurant is required to be purchased, further expenditure has to be incurred on some extensive renovations to turn it into a functioning restaurant as well as on other restaurant amenities.However as this is a high traffic location there is chances of high revenue Generation .

Lease option. The location is in an older area of the city and was previously a restaurant. It has old, but still functioning equipment (deep fryer, stove, cooler, ovens etc.) though it’s unclear how long the equipment will last. The lessor has also indicated that any of the restaurant amenities (tables, chairs, utensils, etc.) that are on the property can be purchased at a deeply discounted rate. The restaurant itself is in good shape and aside from a thorough cleaning won’t require a lot of work to get it open.

For this alternative a less amount capital expenditure is required to be incurred as The restaurant itself is in good shape and aside from a thorough cleaning won’t require a lot of work to get it open.However there is burden of periodical lease payments

Internal Controls.

1. Vet Employees and Contractors

According to 2017 estimates from the National Restaurant Association, employee theft accounts for 75 percent of inventory shortages and about 4 percent of sales.

Thoroughly vet candidates and contractors. Schedule time immediately after interviews to verify work history and speak with references. If everything checks out, run a pre-employment background check. And if they will handle money, add a credit check.

2. Reconcile Payroll and Staff Records

Have specific management procedures that dictate who can hire, who has scheduling responsibilities, and who can change pay rates.

A second manager should review payroll data before processing. This means double-checking timesheets for hourly employees, overtime and salary wages, as well as reconciling them against the budget. It’s wise to wise to outsource payroll to avoid tax penalties and interest.

3. Maintain Consistent Cash Management

Managing cash in restaurants will never be perfect, and it often differs from one place to the next. Some options for handling this among restaurant internal controls? Give individual employees ownership of their register drawer for their shift, or use tamper-proof deposit bags for daily cash deposits.

Place security cameras over the point-of-sale (POS) stations, at the bar and in the dining room. It will discourage theft and provide a reference if someone comes up short.

4. Spread Financial Responsibility

Set a system of checks and balances that requires two or more people to count money or sign off on registers after a shift. This prevents theft and mistakes.

A manager can supervise if a senior crewmember is not available. Pairs of managers can alternate making deposits and reconciling bank statements.

The person signing checks should not be the same one inputting accounts payable data.

5. Reconcile Bank Statements Immediately

Here’s an easy restaurant internal control: Monitor bank accounts with monthly statements. Immediately compare the previous month’s deposits, disbursements and miscellaneous items to your monthly profit and loss (P&L) statement.

The longer it takes to discover theft or an oversight, the more difficult and costly it’ll be to address.

The most significant exposure tends to be credit cards. Reconcile credit card receipts, payments and deposits at the same time as your bank accounts.

6. Systemize Accounts Payable and Inventory

Nothing brings a restaurant to a screeching halt faster than inventory issues. Allow managers, chefs and cooks to place regular orders from vetted vendors within specific dollar amounts. This power allows them to keep the kitchen operating with minimal hassle.

Summary: Restaurant Internal Controls

The restaurant internal controls outlined here are primarily manual, and they constitute the first line of defense. Technology plays a critical role in automating and reporting data on everything from inventory to cook-station efficiency.

Staying on top of technology is key to remaining competitive. But staying on top of internal controls is even more critical when it comes to maintaining a healthy business — and seeking an outside buyer or investor if the time comes.