How to calculate beverage costs & manage inventory.
Controlling costs and managing your inventory the right way raises potential profits.
The food and drink is great, the service fabulous and your restaurant or bar is busier than ever - but are you still wondering why your bottom line profits aren't all that they should be?
Alcohol sales (beverage sales) are an easy way to increase profitability because the costs are lower and the gross margin for alcohol sales is far greater than for food products.
However, beverage costs must be controlled if an operation is to reach maximum potential of gross profit from alcohol sales. Every reduction in cost renders a higher gross profit.
Alcohol beverage costs that are above industry averages can negatively impact your profitability.
A tight controlled and highly profitable bar typically generates a 20% or lower liquor cost.
Because of the impact alcohol costs can make on an operation, it is important to know where beverage cost falls in relation to total sales on a daily or weekly basis.
Beyond the bottom line of profitability, liquor costs also reflect an operation's control systems, management skill level, and value provided to your customers on a daily basis.
Despite its importance, Bar Cop finds many restaurant and bar managers do not calculate alcohol cost correctly, or if they do, they do not fully understand the process.
If calculated correctly, the ratio can be compared to industry averages and previous performance.
Alcoholic beverages are included in beverage cost calculations.
Soft drinks, juices, coffees and other non-alcoholic beverage sales are included in food cost calculations.
With an accurate beverage cost, steps can be taken to improve the operation and ultimately improve the bottom line.
The following is a step-by-step method for calculating alcohol or beverage cost.
Keeping in mind that eventually you want to compare your alcohol cost with industry averages, how you determine the numbers must be consistent with industry practices.
This system identifies what items are included in each part of the beverage cost formula.
Beverage Cost = Cost of alcohol sales / Total alcohol sales
You must first establish a specific time period for analysis. The beverage sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days, or monthly.
Calculating alcohol (beverage cost):
Time frame: Working with your managers, set up a regular time frame to analyze your beverage cost.
It is critical that the elements of the beverage cost calculation (sales, inventories and purchases) are representative of this time period.
Alcohol sales: This is the relatively easy part - total the customer checks or reports from your POS - making sure to only include sales generated from alcohol sources. Remember to use sales only generated within the allotted time frame you have chosen.
Example: Alcohol sales (liquor, beer and wine) $1,850
Cost of alcohol sales: The costs associated with alcohol sales are comprised of purchases and inventory level adjustments.
In our experience, this part of the calculation is often computed incorrectly. Determining the amount of purchases for the time period is straightforward:
Total all beverage purchases (include delivery charges)
Example: Alcohol purchases in past 28 days = $500
Equally important, and often not included in determining cost of beverage sales, is the inventory adjustment.
Many restaurants and bars consider only purchases in determining beverage cost.
This does not create an accurate beverage cost percentage - depending on the day purchases are made and what the cut-off date is for including sales in the beverage cost calculation, your beverage cost could appear higher or lower than it actually is.
For example, suppose you receive (purchase) all of your spirits and wine products on Thursday to prepare for the weekend.
The time period you chose for determining beverage costs ends on Friday (the next day).
In calculating your beverage cost, it appears much higher than last month.
While the increase may be due to theft or another operational issue, most likely it is due to calculating your beverage cost inconsistently and incorrectly.
Your purchases reflect a large Thursday delivery, however, you do not log the sales form the weekend to offset these purchases, making your beverage cost appear out of line.
Additionally, you have not factored in the inventory adjustment.
Determine inventory adjustment: To properly determine beverage cost, a physical inventory of the main bars, service bars and storeroom areas must be conducted at the end of each time period.
It is no longer standard practice to use point count systems by eyeballing and visually guessing the liquid level remaining in an open bottle.
For an accurate inventory and beverage cost, it is imperative to weigh liquor bottles and weigh beer kegs then subtract the tare weight of the product container and finally adjust for densities for the exact fluid ounce of liquid left. An automated bar inventory software application can simplify this process for you.
Once you have your ending period inventory level, look at the change from your beginning (start of time period) inventories.
The key to accurate cost determination is understanding the role inventory levels play.
For example, if your beginning inventory level is valued at $ 100 and four weeks later the ending inventory for the period is valued at $ 75, the adjustment is the $ 25 difference - an increase in cost of alcohol sales because you used $ 25 worth of inventory and did not replace it with new purchases.
Considering this change and its effect on cost of alcohol sales, apply the difference to the total purchases for the time period, giving you the total cost of beverage sales.
Cost of alcohol sales = Purchases +/- Inventory adjustment
- Add if beginning inventory is GREATER than ending inventory.
- Subtract if Ending inventory is GREATER than beginning inventory.
Purchases $ 500 / Beginning Inventory $ 750
Ending inventory $ 625
$ 750 - $ 625 = $ 125
Cost of beverage sales = $ 500 + $ 125 = $ 625
Beverage cost = Cost of beverage sales / beverage sales
Beverage cost = $ 625 / $ 1,850 = 33.8 %
Analyzing your beverage cost: What should your beverage cost percentage be?
Successful restaurants generate beverage costs in the low 20 % range and under.
However, different types of operations typically run higher or lower percentages - fine dining typically will run higher because of more wine sales (less profitable than other beverages) while brew pubs may run much lower.
Compare your cost percentage to places with similar menus/service levels to provide a more accurate perspective.
How can you use your beverage cost percentage?
The next step requires compiling the sales and costs consistently and regularly, as comparisons to previous performance can prove very helpful, identifying problems and trends - remembering that a decrease in beverage cost can be as important to investigate as an increase.
From here, your operation is positioned to tighten its beverage cost by performing proper inventory procedures and using the necessary software it takes to calculate your alcohol line.
Controlling your beverage cost: There are many methods used to control liquor costs and every operator needs to determine which methods should be implemented. Most important is implementing bar inventory control software to accurately manage each inventory periods calculations.
The following are some basic methods that can also be applied. A combination of several different controls is the best way to ensure tight control and therefore see the maximum potential liquor sales offer.
1) Par stocked bar: The bar should be stocked based on a number of bottles of each brand sold on the busiest day plus a margin of safety.
Bottles should only be restocked by managers and only on a bottle for bottle basis.
2) Receiving and storing: Separate individuals should undertake the purchasing and receiving functions.
The beverage buyer should not be the same person receiving the merchandise.
All bottles received should be sticker marked and then be stored in a locked area where access is limited to as few people as possible (ideally just one), as this allows shortages to be traced.
3) Maintenance: A perpetual inventory should be maintained for each time period using new standard weigh and calculate system with adjustments for purchases and requisitions.
This inventory should be compared against a physical inventory at the close of every period and variances should be noted and investigated.
These methods of control will go a long way in assisting you in managing your beverage costs and increase profitability.
If you have any questions on how to manage your bar inventory better by ending theft and profiting more, contact us... we'd love to chat