Costing in F&B Functions: Best practices for Accurate Accounting

What is F&B?

Food and beverage (F&B) businesses are the subset of the hospitality industry which deals with the production, processing, distribution and sale of food and beverages. The food and beverage industry includes restaurants, cafeterias, fast-food joints, pubs, food manufacturing, catering, food transportation and more.

F&B in KSA

The Food and Beverage (F&B) industry in Saudi Arabia is said to be the largest in the Middle East accounting for 51% of total food retail sales in the GCC region. It is approximately valued at over USD 45 billion. The KSA’s vision 2030 aims to attract nearly 100 million visitors annually that is likely to contribute directly to the food and beverage industry in the KSA. The surge in the Dubai & Riyadh dining is driven by diversity in dining preferences, from luxury to fast-casual options. The recent thrust in tourism activities in Saudi Arabia has upheaved the culture of eating at restaurants due to limited entertainment options available hence increasing the demand of global cuisines and contributing to the expansion of food and beverage industry in KSA.

About the Blog

As the food and beverage industry sustains the potential to grow in KSA, it becomes crucial for food and beverage businesses to streamline their operations such as to maximize profit, to thrive in competitive business market, and to navigate the unique challenges this industry has to offer. In this blog, we’ll explore the intricacies of costing in the food and beverage industry and how the accounting companies in Saudi Arabia can contribute to enhance profitability and efficiency of such businesses.

Understanding the Costing Function in Food and Beverage Industry in Saudi Arabia

It is pivotal in the dynamic landscape of food and beverage industry in Saudi Arabia, to effectively manage costing to maximize profits and sustain in this highly competitive market. Cost management includes identification, measurement, and monitoring every expense related to production and delivery of food and beverages.

Key Costing Metrics for Food and Beverage Costing in KSA

To compel in highly competitive industry of food and beverages in KSA, it is essential for businesses to plan and optimize operations effectively. Periodic calculation of costing metrics for food and beverage industry in Saudi Arabia is important to enhance profitability, making it relatively easier for businesses to determine their potential shortcomings. The following are key costing metrics:

• Food Cost Percentage is calculated by dividing the total cost of food by the total revenue and it measures the percentage of revenue spent on food. If the food cost percentage is low, better profitability is indicated.
• The Labor Cost Percentage measures the percentage of revenue which is spent on labor and is calculated by dividing the total labor cost by the total revenue. In especially the labor-incentive operations like restaurants, the higher labor cost percentage may indicate negative impact on the profitability of business.
• Prime Cost (Food cost + Labor cost) is basically measured to calculate the total cost of direct input. A high prime cost may indicate inefficiencies in resource management of food and beverage businesses.
• Contribution Margin measures the profitability of each product, and it is calculated by subtracting the variable costs (food, beverage, and direct labor) from the selling price. The higher contribution margin depicts increased profitability.
• Gross Profit Margin provides the estimate of overall profitability of the business before the deduction of overhead costs. It is calculated by subtracting the total cost of goods sold (food, beverage, and direct labor) from the total revenue. A higher gross profit margin indicates better overall profitability.
• The Beverage Cost Percentage is crucial for businesses dealing with alcoholic beverages in the food and beverage industry as it may be subject to license fees and additional taxes.

Accounting companies in Saudi Arabia providing services to the food and beverages businesses are required to keep track and analyze these metrics to enhance internal control and optimize profits.

Challenges In Food and Beverage Industry In KSA

The food and beverage industry in Saudi Arabia is combatting with multiple challenges due to its volatile market conditions and extreme dependence on external socio-economic factors. Saudi Arabia heavily rely on the import of food products and any supply chain disruption could have deleterious impact on food and beverage industry in Saudi Arabia. Amidst Russian-Ukraine conflict and in the wake of pandemic, the food and beverage industry in KSA had to suffer due to supply chain disruption, inflation and labor shortages.

The volatility and the condition nature of the food and beverage businesses in KSA sparks the need to maintain strong internal controls, efficient operations and effective strategies in order to strive in the market.

Best Practices for Accurate Accounting

To ensure the operational efficiency of the food and beverage businesses in Saudi Arabia, it is important to navigate best accounting practices for your business. Accounting companies in Saudi Arabia could be game changer for your food and beverage businesses.

Here’s how:

• Implement cost reduction strategies: While accounting for the food and beverage industry in KSA, it is pivotal to focus on the cost minimizing strategies to reduce expenses and eventually maximize profits. Especially in the face of rising costs and market volatility, this approach enhances the overall performance and customer satisfaction as well. These strategies may include labor cost management, overhead cost control, standardization of recipes and portion control and implementation of cost accounting systems, consequently strengthening the internal control and contributing to profitability of the business.
• Optimize supply chain management: To avoid the supply chain disruption, it is extremely important for food and beverage businesses in Saudi Arabia to optimize the supply chain management. This involves inventory management, effective risk management, strong supplier relationship management, accurate forecasting based on analysis of vast data sets, and proactive informed decision making. This optimization would save businesses from the shortcomings of food shortages and inflation.
• Leverage technology: The innovation of technology has opened new pathways to combat accounting challenges faced by the food and beverage industry in KSA. The costing software, automation, real-time tracking, smart factories, ILoT, AI and machine learning has completely evolved the cost accounting procedures and strategies. The integration of modern technology tends to reduce errors and mitigate risks by enhancing data-driven decision making, cost savings and improved efficiency thus increasing the overall performance and profits of the food and beverage businesses in KSA.
• Maintain a well-trained workforce: It is important for the food and beverage businesses in Saudi Arabia to train and empower staff members to ensure better inventory handling, efficiency, overall productivity and adherence to food safety standards. A well-trained workforce is more likely to reduce operational costs and maintain high-quality production.
• Inventory management: It is another key aspect of ensuring efficient and accurate costing. It is crucial for food and beverage businesses to keep regular track of inventory to maintain optimal inventory levels and prevent understocking, spoilage, waste and overstocking. This poses minimum strain on COGS, hence maximizing profits.
• Choose the ideal suppliers: To avoid supply chain disruptions it is imperative to choose suppliers based on quality, hygiene, lead time and coordination. The ideal suppliers ensure high quality and contribute to cost-savings
• Compliance and Reporting: For food and beverage businesses compliance, reporting and auditing are crucial factors. This involves proper documentation of all transactions, tax and other regulatory compliance. The regular audits especially of supply chain departments help in detection of risks, frauds, mismanagement and weak areas of internal control. It also assists in identifying cost-reduction opportunities.
• Payroll Management: Food and beverage business in Saudi Arabia must ensure effective payroll management to optimize labor costs such that they comply with legal requirements and budget allocations.
• Financial Health Analysis: An overall analysis of the food and beverage businesses in KSA provides a clearer picture of the company’s financial position. This involves the keen analysis of cash flow, profits, and other essential metrics of decision making.

KSA specifications

Zakat & Tax Compliance

For the food and beverage businesses operating in Saudi Arabia, compliance to tax and zakat is extremely important to avoid penalties and legal action against your business. The tax professionals from various accounting firms in KSA can help you ensure tax compliance.

Tech Solutions

The innovation of technology has made it easier for accounting firms in Saudi Arabia to streamline accounting operations for the food and beverage businesses. The following software is a game changer for such businesses.

Cost accounting software

Cost accounting software helps F&B businesses track, analyze, and control costs associated with production and operations. This software provides insights into cost structures, enabling better financial decision-making.

Inventory Management systems

The usage of inventory management systems makes it easier to track stock levels, sales, deliveries and helps to ensure that businesses maintain optimal levels of inventory.

POS- costing features

The use of POS systems is crucial for businesses dealing with food and beverages as it comes with an integrated costing feature that helps with sale tracking, COGS reporting, menu engineering and integrated payments.

Labor management systems

Labore management systems are built to optimize workforce schedule, manage payroll, keep a track of workhours making it ideal for the food and beverage businesses in KSA to control labor costs.

How can Professionals help?

As discussed previously, the food and beverage business in Saudi Arabia is subject to various challenges putting undue strain on business management to manage day-to-day tasks and optimize business operations. The accounting companies in KSA can come through and help food and beverage businesses optimize their accounting and costing procedures allowing them to focus on their core task — to keep people fed and happy!

Conclusion

In the vibrant Saudi culinary landscape, food and beverage costing is pivotal in driving success. By formulating comprehensive strategies, the food and beverage businesses could excel in the volatile market they operate in. Allying with the accounting companies in Saudi Arabia facilitates the food and beverage businesses to embark on a journey of operational excellence.

About Us

SS&Co. KSA offers tailored financial advisory services to help F&B businesses optimize their operations and increase capital efficiency. Through short-term, high-impact strategies, we create momentum by freeing up capital, reducing costs, and simplifying the organization. SS&Co. drives transformative value for F&B clients by unlocking capital, enhancing growth strategies, and developing high-performing teams aligned with long-term success.