1. How can GoodFood be classified in the typology of organizations?
GoodFood complements its relatively small volume flow of goods (food and beverages) with services (cooking, serving) thus it can be classified as a service organization with a limited flow of goods. More precisely as food and beverages are purchased and owned by the restaurant it can be classified as a service organization with a limited flow of own goods.
2. a. What risks inherent to this type of organization apply to GoodFood?
Risks inherent to this type of organization include:
- Insufficient quality or amount of ingredients which could lead to unsatisfied customers and loss of reputation and/or revenues
- Most ingredients are perishable thus loss of value of ingredients occur if they are not used on time
- Customers do not receive what they ordered (misalignment between customer orders and meals prepared) and therefore are dissatisfied and meals have to be returned and prepared again which means loss of assets
- Incomplete documentation of waiters (when orders are not documented thus sales are not recognized) can lead to loss of assets and revenues
- Incomplete cash collection by waiters lead to loss of assets
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- Theft of ingredients or cash by personnel leading to loss of assets
- Since sales transactions are relatively simple personnel usually performs more than one duty (servers take orders, serve meals, and collect cash) which gives opportunity to fraud
b. What risks are specific for GoodFood? Besides the above mentioned general risks for service organizations with a limited flow of own goods, some specific risks apply to GoodFood.
- Royal accepts payments on account with 30 days payment term. As it is difficult to estimate the creditworthiness of a customer entering a restaurant this might result in irrecoverable debts for the company (loss of assets and revenue).
- Dealing with accounts receivable also means additional work to the company as AR and cash settlements need to be segregated and registered separately. (otherwise it gives opportunity for theft)
- Changing menus (all meals in Royal and special dishes in Premier) means careful planning of ingredient purchases is essential
- Chef is responsible for the menu composition and the methods of preparation of the dishes. As these are not standard dishes, mistakes in ingredients and/or cooking are more likely to happen.
3. Discuss the necessary administrative and organizational conditions for GoodFood.
Certain administrative and organizational conditions must be met for the internal controls to be effective. These conditions involve the computer security measures, the proper segregation of duties, appropriate management guidelines and adequate budgeting. Computer security measures should be applied, back-up systems should be in place (for example in case of blackouts) and access to computers has to be restricted. Functions that should be segregated include the purchasing of ingredients, quality checks of those ingredients, their storage, and preparation of meals, taking orders, collecting cash from customers, safeguarding cash, recording transactions and performing checks on all processes. As the restaurants are relatively big and employ quite a few people these segregations are possible. As there is no separate receiving department, quality checks of ingredients should be carried out by the chef and the manager. In case of Royal, there should be an additional accounts receivable department dealing with the credit sales. Management should establish guidelines relating to meal and drink prices (and possible discounts), purchasing of ingredients (including re-order points), storage of perishable ingredients, access to ingredients, selection of quality suppliers, order acceptance and dress code for waiters, acceptance and handling of cash and tips, health and hygiene regulation and dealing with customer complaints.
Budgeting should include the preparation of the annual master budget and constituent budgets such as the sales budget, the purchase budget, cost budget (including personnel costs, depreciation and costs of ingredients) and the cash budget. Management should authorize the budgets and the prices.
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4. Describe the required internal controls, including the system of segregation of duties, adequate procedures, reconciliations, and analytical review procedures. Make sure to distinguish between the situation at Royal and that at Premier.
Internal controls that need to be put in place to mitigate the applicable risks: Risk: Insufficient quality or amount of ingredients – quality of ingredients is especially important in case of Royal, as it is an exclusive restaurant, but Premier should also have the following controls in place:
- Independent quality checks of the ingredients by the chef and the manager (as there is no separate receiving function)
- Implementation of a customer satisfaction measurement system
- Adequate inventory planning of ingredients
- Purchase of ingredients from reliable vendors
- Periodic reviews by accounting department of customer orders that were not executed because of insufficient inventory of ingredients
Risk: ingredients are perishable – both Royal and Premier
- Adequate facilities to store perishable ingredients (cold store)
- Daily consultation between chef and the purchaser about perishable ingredients that are needed for the day
- Implementation of a destruction procedure for rejected ingredients
- Analytical review of the quantity of rejected ingredients which is essential for planning of future purchases
Risk: theft of ingredients by personnel – both Royal and Premier
- Minimize entry to storage facility – only storeroom and cold store employees should have access to storage facility
- Receipts of ingredients should be documented as well as deliveries to the kitchen
- A system of granting discharge when ingredients are transferred between storage facility and kitchen
- Periodic inventory counts of ingredients
Risk: misalignment between customer orders and meals prepared – both Royal and Premier
- Manager supervision of misaligned orders
- Documentation of returns to kitchen
- Guidelines for personnel about careful acceptance and documentation of orders
- Implementation of a customer satisfaction system
Risk: incomplete documentation of orders by waiters – both Royal and Premier
- Segregation of duties between order acceptance (waiters), preparation of meals (kitchen) and recording of activities (accounting)
- Observations by manager of order documentation by waiters
- Implementation of code of conduct regarding order documentation
- Analytical review by head of accounting department of revenues and order-size per waiter
Risk: theft of cash – both Royal and Premier
- Cash needs to be stored in a locked cash drawer
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- Daily cash counts
- Observation by manager of cash collection by waiters
Risk: incomplete cash collection by waiters – both Royal and Premier
- Observation by manager of cash collection by waiters
- Analytical review of cash deficits per waiter
Risk: relatively simple sales transactions - both Royal and Premier
- Use of cash register recording all transactions
- Segregation of duties between waiters and kitchen
Risk: credit sales – only Royal
- It is difficult to estimate the creditworthiness of a customer entering a restaurant this might result in irrecoverable debts for the company. To mitigate this risk Royal could for example offer credit sales for regular costumers only.
- Royal should have separate personnel dealing with the follow-up of accounts receivable, depending on the type of payment they may need a separate cash receipts function (in case of checks, not necessary in case of bank transfers)
Risk: Changing menus - (all meals in Royal and special dishes in Premier)
- Careful planning of ingredient purchases is essential
- Chefs should decide well in advance on the meals and communicate with the purchasing department regarding the ingredients
Risk: Chef is responsible for the menu composition and the methods of preparation of the dishes - (all meals in Royal and special dishes in Premier)
- As these are not standard dishes, mistakes in ingredients and/or cooking are more likely to happen. Therefore creating a recipe for them is essential which can help purchasing and cooking.
- Management should supervise these decisions so it is not entirely up to the chef
5. Describe the information requirements of this company’s management.
As the restaurants operate a POS system, management has instant access to sales information. Management should authorize budgets and prices and periodically the head of the accounting department should analyze and report to management on any differences between the budgets and the actual sales results. Other analytical reviews prepared by the accounting department (such as quantities of rejected ingredients, customer orders not executed due to insufficient inventory level, revenues and order-size per waiter, cash deficit per waiter) and documentation by personnel (such as documentation of meal returns, order documentation of waiters and inventory counts) as well as customer satisfaction measurement results should be available to management.