Reference no: EM131463625

Question: How a company manages its financial and operating performance on a daily basis is very important. Margins in the restaurant business average three to five cents out of every dollar of revenue. When managing pennies, how you account for them is very important if you want to end up with the financial performance needed to grow a successful business. Pizzeria Uno is a good example of a company that has learned to manage its financials very effectively and because of that has grown its business dramatically over the years. The Pizzeria Uno Restaurant Corporation started in 1979 and was taken public in 1987. Currently the chain operates in twenty-nine states and four foreign countries with one hundred sixty-five restaurants, both franchised and company owned. Its average restaurant generates $2 million in revenues annually. Financial management for Uno starts at the store level. The company employs very sophisticated accounting mechanisms in its stores to manage the cost structure of the business.

The management team in each restaurant is primarily responsible for collecting data through point-of-sale computers that drive the collection of data. The data from each store are sent nightly from these computers to a corporate database. The type of information they collect includes sales data (what people are buying), what the company needs to buy to replenish inventories (what items have been sold that day), and labor data including hours and wage rates of employees. Uno has developed a theoretical cost control model which tells it what its food and drink costs should be, based on experience and its menu mix. For example, based on its model, Uno's expects each restaurant to sell twenty ounces of Jack Daniels liquor in a particular day. However, if the cost control system shows that one of its restaurants is incurring a cost for twenty-five ounces of Jack Daniels per day (but selling only twenty ounces), the company is paying for five ounces that cannot be accounted for. Either the drink has been given away or the bartenders have been overportioning the beverages. So, if Uno is planning to run the business at 25 percent of the cost of sales, and the data indicate one of the restaurants is actually running at 27 percent of the cost of sales, then corporate will want to know why there is a discrepancy.

The restaurant business is a cash business, and Uno is able to use working capital to its advantage. Because the company is dealing with rapidly consumed products, it has the luxury of using its vendors'/suppliers' money to fund its operations. As an example, if Uno restaurants buy a food product on a thirty-day net pay basis and sell the item within a day, Uno is going to have the use of that money for a period of more than three weeks. Compare that to a manufacturing company. When an auto company builds an automobile, it has to buy the steel to make the car long before it sells the car. Manufacturing companies have to spend working capital to build up their inventory before they can sell that inventory for cash. Effectively managing its balance sheet is a key component in ensuring that Uno continues to improve shareholder value. Debt is an important tool that it uses to build equity. For example, if Uno can borrow money at 7 percent (approximate short-term interest rate) and put it to use in its restaurants that return 30 percent, it has earned 23 percent on someone else's money-an impressive return on debt.

Building restaurants is very capital intensive. The average Uno restaurant costs $1.6-$1.7 million in upfront capital to build, excluding the land. The company typically buys the land which can be a questionable policy since it does not result in a high return on assets. However, it does allow the company to control its own destiny and future. Also, Uno locks in this large component of its expansion costs forever, plus history shows that land values, more often than not, increase over time. The company uses long-term debt and, in some cases, mortgage debt to finance its land purchases. By using debt, Uno increases its return on equity as long as the company's earnings are larger than the interest charged for the borrowed money. Bottom line, Uno has been able to manage its balance sheet and create situations where it doesn't put the company at risk by overleveraging its debt-equity ratio. Uno uses debt to the benefit of its shareholders to enhance the overall value of the company. Uno's goal is to operate in the top echelon of restaurant companies. It will periodically use a secondary equity offering to fund its growth strategy. The company believes that it can continue to manage its business to improve profitability, return on sales, and return on capital and to drive net income and earnings per share. Uno's stated goal is to grow its business 20-25 percent annually in earnings per share. It plans to do this by managing the balance sheet, being prudent in investments, and aggressively growing revenues. Pizzeria Uno plans to grow to eight hundred restaurants over the next fifteen years. Based on its track record, this does not appear to be an unrealistic goal.15

For more information on this company, go to www.pizzeria-uno .com.

1. What are the primary sources of funds that Pizzeria Uno uses to run its business, and how does it use these funds?

2. How does Uno monitor and evaluate the financial performance of its restaurants?

3. Pizzeria Uno typically buys the land on which it builds new restaurants because "it allows the company to control its own destiny and future." What are some possible disadvantages to this practice?