Chapter 40 — Exercises

Items marked † have worked solutions in the answers appendix. Show your arithmetic on every computation; a capstone is exactly the wrong place to round in your head.

Recall

  1. Name the rungs of the back-of-house ladder in order, from dish to executive chef, and the front-of-house ladder from busser to general manager.

  2. Name the four crossings between the two ladders described in §40.1, and say which one is available to a cook who does not want to leave the kitchen.

  3. † Define time in grade and explain how it differs from the minimum time before someone will hand you the title. Why does that gap widen in a labor-short industry?

  4. §40.3 sorts certification into three lists: legally required, expected by employers, and optional but career-moving. Give two examples from each list, and state the caveat that attaches to every item on the first list.

  5. Define debt service coverage ratio and state exactly what a 1.25× covenant requires of a business with \$69,500 of annual debt service. Then state the five conditions the lender attached to Bellwether's approval, and identify which one exists because of Finding 2.

  6. Distinguish phantom equity from sweat equity in one sentence each, in terms of what the recipient actually owns and what has to happen for either to pay.

Applied reasoning

  1. † Why is the promotion to sous chef described as the hardest on either ladder? Name the four structural supports §40.1 says a new sous needs, and say who is responsible for providing them.

  2. A server earning roughly \$58,000 a year in a strong room is offered an assistant general manager position at \$48,000 salary. Lay out the case for and against taking it, and name the single piece of information that should decide it.

  3. † The chapter says a prime-cost bonus needs three gates. Name them, and for each one name the specific bad behavior it prevents. Then explain why a bonus without gates is described as "a bet that your manager's judgment will outperform your incentive design."

  4. Why does a sales-only bonus usually produce worse outcomes than a prime-cost bonus? Give three distinct mechanisms by which a manager could increase such a bonus while making the restaurant worse.

  5. Explain why the host stand is described as a revenue position rather than a greeting position, referencing what Chapters 22 and 24 established about pacing, table mix, and RevPASH.

  6. The chapter claims that "above a certain altitude there is no back of house and no front of house — there is only a P&L." What does that imply about how a line cook aiming at executive chef and a server aiming at general manager should each spend the next three years?

  7. † Give three reasons people leave the operations ladder that are not failures of ability, and explain why the industry's habit of treating those departures as washing out is both inaccurate and expensive.

Cost this, compute this

  1. † Using the illustrative figures in §40.3, compute the two-year net position of the culinary-school path and the working path. State the gap, and split it into cash spent and earnings forgone.

  2. A general manager has a base salary of \$58,000 and a prime-cost bonus of 12% of the dollars saved against a 61.0% target, capped at 15% of salary, on \$1,400,000 of sales. Compute the bonus at actual prime costs of 61.0%, 59.5%, and 57.0%. Is the cap binding at any of them? At what prime cost would it become binding?

  3. † A chef works four years at \$21,000 below market in exchange for a promised 6% stake. Compute the foregone compensation, and compute what the business must be worth for that trade to break even.

  4. Bellwether's annual debt service is \$69,500. Compute the operating profit at which a 1.35× covenant would trip, and express that as a percentage decline from the plan's \$261,020.

  5. † Using the plan's Year-1 statement (revenue \$1,550,000, COGS \$430,280, occupancy \$95,200, other operating \$217,000, G&A \$46,500), recompute prime cost, operating profit, operating margin, and DSCR if labor lands at 37.0% instead of 32.3%.

  6. Compute the margin of safety in covers for the plan's 95 covers a night against each of the three break-evens from Chapter 32 — 66 accrual, 77 cash, 81 at lawfully classified labor — expressed as a percentage of the plan.

  7. † A restaurant's monthly fixed obligations are \$52,400 and it opens with \$11,600 of working-capital reserve. How many days of cover is that? How much additional reserve would three full months of cover require?

Read this and find the problem

  1. † Read Figure 40.4 carefully. Separate the analyst's findings from the analyst's recommendation, and explain why only one of the two findings became a condition of approval.

  2. Read Figure 40.5. Explain why "not one scenario touches the line" is the chapter's most alarming sentence rather than its most reassuring one.

  3. Read the 13-week forecast in §40.9 and identify every week in which the net change is positive. What do those weeks have in common? What does that tell you about how granular a cash forecast has to be before it is useful?

  4. In the same forecast, week 7 ends at \$13,608 and week 8 ends at −\$2,924. Explain the mechanism by which a good week increases the danger of the week after it, and name the two structural features of restaurant payroll that produce the effect. Then compute labor as a percentage of sales for the full quarter (\$121,926 accrued on \$292,300 of sales) and explain why it and the 35.3% annual figure are both true.

  5. † The plan's Year-1 operating margin is 16.8%, and Chapter 1 put the full-service norm at 3–10% of sales. Diagnose the discrepancy without concluding that the plan is dishonest. Name at least three contributing factors and say which single correction brings it inside the normal band.

  6. Chapter 1's checkpoint asked five open questions. Take question 5 — "can a chef with no ownership experience and a manager who has never read a P&L run a 60% prime cost?" — and write the two- or three-sentence answer the completed plan supports, citing the chapters that produced the evidence.

Build this

  1. † Build a four-quarter labor ramp for a restaurant forecasting \$1,200,000 in Year 1 that blends to 34.0% for the year. State quarterly sales, quarterly labor percentages, quarterly labor dollars, and one specific operational lever per quarter. Prove the blend.

  2. Write the trigger clause for the ramp you built in exercise 27: the metric, the threshold, the duration before it fires, the action, who owns the decision, and what has to happen before the cut is restored.

  3. Design a variable-pay structure for a beverage director built on pour cost rather than prime cost, including the target, the share, the cap, and three gates appropriate to a bar.

  4. Build a personal-exposure table (in the format of Figure 40.6) for a 40-seat restaurant with a \$300,000 project, a \$180,000 SBA 7(a) loan, a seven-year lease at \$52,000 a year, and \$25,000 of equipment financing. Then compute what a good-guy clause capped at nine months of rent would change.

  5. Draw the career ladder for the specific restaurant you work in now — actual positions, actual head count per rung. Mark the rungs that have no path upward inside the building, and name what you would change first.

Write the memo

  1. † Write the one-page response to Finding 1 of the credit memorandum. It must contain the quarter-by-quarter ramp, the revised annual figure, the effect on prime cost and coverage, and the trigger. One page. No more.

  2. Write the paragraph you would add to a two-partner operating agreement covering what happens if one partner becomes unable to work for six months. Address compensation, decision rights, and what happens if the period extends.

  3. Write a 200-word memo to a newly promoted sous chef explaining what the rung is actually for, what they should stop doing, and what you will provide.

  4. A candidate you want to hire as chef de cuisine asks for "a piece of the business." Write the email that responds honestly: what you can offer, what you cannot, what has to be written down, and what you are asking them to go find out before the next conversation.

Judgment and ethics

  1. † A chef has worked three years at \$19,000 a year below market on a handshake. The owner now offers 3% of a business valued at \$800,000. Compute both sides of the trade and the break-even valuation. Then write two separate pieces of advice: one to the chef, one to the owner.

  2. † Your best server asks to be promoted to assistant general manager. Your honest estimate is that it is a \$9,000 pay cut in year one and a \$15,000 raise by year four. Do you tell them the year-one number? What exactly do you say, and what do you offer to make the transition survivable?

  3. The credit analyst wrote, in the bank's own permanent file, that the covenant protecting the loan measures the wrong interval — and recommended approval anyway. Argue both sides: that this was responsible professional practice, and that it was not.

Business Plan extensions

  1. † Open your Business Plan Workbook (Appendix C) and assemble the section list from §40.7. Mark every section as complete, partial, or not started, and rank the incomplete ones by how much revenue or risk rides on them. Then identify the single assumption in your plan carrying the most revenue, and write the one-page defense of it — number, mechanism, trigger.

  2. Build the 13-week cash forecast for your own concept, starting from your planned opening month rather than January. Name the week it runs short and state what specifically you would change to move that week. Then itemize the personal exposure your plan would require, in the format of Figure 40.6, and name the single line you would negotiate first.