Predicting business failure in the food service industry

Abstract

This research was an attempt to identify those financial ratios which are the best predictors of impending failure in the food service industry. This study had two major objectives. The first was to determine which financial statement items and ratios show the greatest magnitude of difference between failed and nonfailed restaurants. The second objective was to determine which ratios show the most significant decline prior to failure and are therefore the best predictors of impending failure.

The methodology employed was a univariate approach based upon the work of William H. Beaver (1966, 1968). Data was gathered from the financial statements of failed, nonfailed and total failure restaurants in three food service organizations. A methodology for classifying restaurants as failed or nonfailed is also presented.

Data analysis confirmed that differences in financial statement items and ratios do exist between nonfailed and total failure restaurants. Trend analysis showed that certain ratios give more indication of decline prior to failure than others. This research also showed that graph analysis as well as a comparison of each month with the same month from the previous year can be used to predict impending failure.

The implications of these findings to a food service manager and the strengths and weaknesses of this study are discussed. Suggestions for future research are also given.