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When the Cat’s Away… Will Management Play?

In our industry, theft is common place. Owners cheat the government by not reporting all of their restaurant’s sales in order to reduce tax obligations and to keep GST and PST paid to them. Bartenders are able to have a free-for-all as most owners do not understand the dynamics of what happens behind the scenes and servers are running guest checks together in order to cheat both customers and the restaurant. Collusion is commonplace and the dynamics of how the game is played change every time a new control is put in place. Unfortunately, the ultimate implementers of those controls is usually playing as well.

Everyone steals ….. and for a business which wants to have ‘industry’ status, it is still run in a very ‘ma and pa’ manner. But some are trying to change this approach to operations. Now approximately 50% of restaurant sales in Canada are operated by multi-unit owners, who can obviously only be in one place at one time. As a result they have come to rely on ‘hired’ non-equity management to enforce operating regulations made at the corporate level and to provide a level of service which will build traffic counts and customer loyalty.

These managers represent corporate …… there actions are supposed to be above reproach, their skill levels are supposed to be high and their integrity unquestionable. Many are given a free rein with limited review or reporting other than monthly financial goals and objectives. The average Canadian restaurant achieves sales of approximately $450,000 per year and major chains range from $1.5 million to $3.5 million. With minor exceptions the salary range for bar and assistant managers of these chains is $25,000 to $40,000 and for most managers is $40,000 to $60,000. Given the salary levels and the understanding that the restaurant owner is making an industry average 10% operating profit (defined as profit before interest, depreciation and income tax) equating to $150,000 to $350,000 per year, it is easy to see why many of these managers may want to arrange for their own ‘perks’ throughout the year.

In this article, we are going to explore some of those perks or …. what management is really doing while Cat’s Away.

Grocery shopping

It is often the case that staff do some minimal grocery shopping in a restaurant’s walk-in and dry storage taking small items like ketchup, spices and dishes. However, management has much greater access as there really is no one able or being made responsible to ‘catch’ them. As such the walk-in can easily become a grocery store for a busy manager. Boxes of food can be prepared by the kitchen staff including salads, sauces, steaks, fish and other items— ideal for parties and the cottage. While all managers will tell the staff (should any have the nerve to ask) that they have written a cheque to the restaurant, very few if any really do.

The walk-in or better yet the prepped food — organized by the kitchen manager — is really an ideal way to shop. It’s quick, the quality is good, the prep is done and its very inexpensive.

Depending on the excessiveness of the shopping extravaganza and its frequency, walk-in shopping will be very difficult for corporate to detect as its impact on food cost will be negligible for a restaurant in the $3 million range.

Missing product can be written off as waste or ‘stale’ product without ever being detected.

Registers off-line

More commonly an owner trick, an industrious manager of a large volume restaurant can take a register or point-of-sales machine off-line and assign only one or two servers to it. As such, the server’s sales are tracked off-line although the machine is still tied into the remote kitchen printers. Sales are recorded separately and the proceeds kept by the manager who can make the adjustments after the shift or the next day. While high volume credit card sales may off-set some of the opportunity, those sales will be accredited to other servers and all the cash sales will be allocated to the off-line staff.

Unless owners are willing to come to the restaurant and conduct periodic checks, it is unlikely that these off-line sales will ever be detected.

Another methodology of theft, which has recently been uncovered in Quebec, is the development of special software which can be ‘overlaid’ on many of the current POS systems. This special software, arbitrarily backs-out sales representing anywhere from 12% to 25% of sales on a daily basis without any track what-so-ever. While this is again a more common owner methodology of shorting the till, recouping cash and tax and reducing the profit level of the restaurant, a manager can also implement the system quite effectively and an owner would likely not be able to find the overlay until it was far too late.

Kickbacks

The best and most undetectable of all management theft is that related to kickbacks made by suppliers directly to management to ensure that their product is chosen over others, even if there is a price difference. For example, while major suppliers have developed marketing dollar incentives for their corporate customers, many corporate operations must use local suppliers for certain items such as wine, cigars and other products. In many cases the supplier may increase the cost of, for example, cigars but give the purchaser of those cigars a few free samples with every purchase. Therefore if a manager knows that they will get free product for use at home, which will never be detected, they will likely buy and continue to buy from that supplier, no matter the price to the restaurant. The same applies to beer, wine, and meat suppliers among others. Free product which would go a long way in reducing restaurant costs are being kept by management as an incentive for buying product from one supplier over the other rather than making those decision based on price, quality and service.

Complimentary meals

Management and management keys (control over the POS) allows management to void bills and ‘comp’ meals. Many corporate restaurants or those run at a distance allow management to have discretion as to providing complimentary meals and managing operation voids. Therefore management can set up a series of complimentary meals and voids on a weekly basis which are not real, and back out the actual sale and keep the revenues for themselves. While this sounds like a lot of work for a manager of a smaller restaurant, it could add up to over a thousand dollars a month in a larger operation with little effect on the business while making a wonderful bonus add-on.
Should management decide to back out one or two sales per day through server voids, the effect could be in the neighbourhood of over a thousand dollars per week without raising the ire of anyone within the organization.

Skimming

We are all aware that suppliers provide a series of perks to management in order to ensure that they stay at the top of mind, however, given the fact that management has full control over the purchasing, stocking and selling of all products, it is easy for them to set up a skimming operation within the restaurant. In one restaurant we found that the assistant manager (earning about $25,000 per year) had a superior personal liquor and wine collection amounting to approximately 1,000 bottles. We found out that much of that liquor and wine was purchased by the restaurant and inventoried although it never arrived at the location. Basically, due to the special nature of the items being purchased, many had to be hand selected at the LCBO or through agents. The wine was purchased by the manager and taken into inventory. They also had the right to ‘comp’ the wine or void the bottle … and their personal inventory grew at a fantastic rate.

Much of the same holds true for cigar and speciality liquor purchases as many of these are controlled by just one manager and should they have the slightest interest in gaining a personal benefit, it is quite easy for them to help themselves.

Keeping door covers or entertainment charges

In another restaurant operation in Toronto, the club manager has been known to take the cover charge in cash and not place it on the customer bill as it is supposed to be done, thus, obtaining a huge cash bonus at the expense of the operation which has made the investment in bringing in the entertainment in the first place. Entertainment overhead charges are very difficult to monitor, especially given the frequency of complimentary passes within these types of organizations.

Trading product for personal benefits

Another common scam which managers can getaway with without much difficulty is to trade product for personal benefits. For example, a manager could trade complimentary meals for services rendered to them at home on a personal basis. A new fridge, grill, bar-b-que or even a home renovation could be traded for a year end company party provided on a gratuitous basis. The party, charged off to marketing or promotion, can be easily explained away to owners, while the benefits to management are never tracked.

In another case, I have seen restaurant designers provide free home interior design assistance for a chance to bid on new restaurant work. Obviously they will make up that free work in over billing the restaurant owner later — while the perk is well worthwhile when one is trying to stay in the bidding process.

So what is an owner to do?

In very much the same manner owners and managers have set up a series of controls to ensure that employee theft is kept to a minimum, owners must set up a series of systems which control management theft.

Partners and participation

One way to do this is to make the manager a partner in the business where they receive a ‘more than reasonable’ compensation package along with a very healthy bonus package. The company which has most successfully executed this approach is Outback Steak House in the US where managers are partners (they actually have to buy in to the business) and receive a bonus package which can earn them up to US$150,000. The average US Outback manager earns approximately US$122,000. This is a good incentive.

This system is predicated not so much on the manager earning a percentage of their salary as a maximum cap but rather that the manager earn a healthy percentage of the operating profit of the business (operating profit being defined as profit before interest, depreciation and income tax). This, in fact, provides the incentive for a $50,000 a year manager to earn a bonus based on sales increases and profit achieved. In Canada, we mostly base our incentives on high goals, in many cases unattainable goals, and cap the bonus at 10% to 15% of salary. This latter approach provides an incentive to steal.

Set up a system to check the system

Hands-off owners can not be totally hands-off. You are responsible for your bottom line and your return on investment. Most restaurant managers have come up through the ranks and understand if management, and now that they are management, if owners are overseeing the business carefully. Not only are you responsible to inspect the operation every once-in-awhile to ensure that the operation is clean and still providing good quality service and product, but you must also develop a series of checks-and-balances in order to ensure that your management team is working for you — not against you.

You need to get timely financial information (within three or five days of month end) along with sales and variance reports. These reports will show losses and should be accompanied with an explanation of why they occurred. Complimentary and promotion meals should not be provided for on an allowance basis but should be offered at management discretion but each must be detailed in writing as to who received the complimentary meal or promotion and why along with a contact name and number for the owner to follow-up. The follow-up allows you to have contact with your customers and also allows you to check on the validity of the promotional meal. Finally, the extra paperwork will make management think twice about simply giving away your product.

Spot check operations

While many owners spot check operations by attending at the restaurant once-in-awhile (likely during operating hours), a periodic weekly or monthly spot check (lets say four or six times per year) will provide you with great insight as to what your management is doing. First and foremost, review the internal control systems developed for watching over staff. Ensure that they are in place and are being followed. If not, you know that you have a management problem at the on-set. If they are being followed then you are off to a good start.

The next step will be to conduct an inventory analysis of your more expensive and easy to count products like beer, wine, steaks (if purchased pre-cut) etc. Through a careful analysis of your sales (tracked on your POS) and your inventory, you should be able to determine variances. If variances do exist and are not accompanied by a written explanation — you have a problem.

You should also make sure that your management have developed and maintain a monthly theoretical vs. actual food and beverage cost analysis which is updated along with the monthly financial statements. This analysis will allow you an opportunity to ensure that your costs are constantly in-line and serves as a failsafe against other internal management controls.

Divide functions

An elementary rule to control purchases and kickbacks to management is to divide the various aspects of the inventory, purchasing and receiving functions. While many smaller restaurant companies insist that they can not afford to divide these functions among three staff or management members, I believe that you can not afford to have only one member control all three of these functions. If the purchaser receives the goods, the system of checks and balances will not work.

Communicate with suppliers

Talk to your suppliers and let them know that while management may be managing, you are still controlling the action. If there are favours to be given out, then you are the one. If marketing dollars are available, they should be provided to you and not to management. Let the wine suppliers know that you want to know when they are dropping off samples so that you can try and go to the restaurant to try the wine as well. By doing this neither the supplier nor manager will know what you know. It will increase the likelihood that discounts and free supplies stay at the restaurant rather than go home with management, ultimately reducing your costs of operation and increasing your profit.

Check with alarm company

And if you ever wanted to know how often and how long the after hours parties which management and staff have at the restaurant and at your expense, just call your alarm company and have them report to you on a weekly basis the time the alarm is set. Most restaurants can shut down within an hour of closing and any time beyond that will need an explanation (or better yet, you could just drop in once in a while for a drink with your staff).

Conclusion

Your management are in place to oversee that service staff treat your customers fairly and provide the best service available. They are also there to ensure that your management systems and controls are in place and working, ensuring staff theft is kept to a minimum. However, you also need to develop corporate systems and controls which enable you to oversee your management teams, ensuring that …they are not playing while you are away.

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