By on Jul 10, 2010 with Comments 4
Understanding liquor inventory and bar inventory may be confusing if you are just getting into the business. Recently, I had a man by the name of Steve consulted me with questions he had.
Although I wrote a lot about inventory control/understanding inventory, evidently I didn’t break down enough for a beginner. I could have swore I did, but leafing through the pages here, I thought I would write this to break it down more simply.
SO let’s start at the beginning. The inventory, or supplies that you have in your business are needed to operate. Without supplies, you have nothing to sell. These of course cost money. As anyone who gets into business is doing so to make money, they need to make enough money to pay bills such as the inventory of the products you are selling, but to also pay payroll, insurance, utilities, etc and make a profit. Are you with me so far?
Now in order to make this money, not only does the owner need to have supplies on hand, but they need to make a certain percentage of profit for each item they sell. By charging enough per item, and if business is good, they will be able to pay their bills, and make a profit. OK?
Here in lies the problem. The supplies, or inventory, are actually money. It did cost money to purchase these items, and therefore the owners have money, or inventory, sitting on the shelves, or in coolers, etc.
For items that are perishable, meaning items that will go stale within a certain amount of time, it is important that you don’t purchase too much. If you do, before you can sell it all, it will go stale and you won’t be able to serve to your customers. Therefore, if it goes stale and you have to throw it away, it’s like throwing money in the garbage. Owners don’t like that too much.
This is why owners hire managers. Managers are supposed to see what items are selling, how much of the items are selling, and to order the right amount, so they are not throwing supplies/money away. By watching sales of individual items, it gives the managers the information for him to know how much of a certain item to have on hand every week, without having to throw little or any away. They call that the “par” of that individual item.
For perishable items like food, you have to be as precise as possible, in order that you have as little waste as possible. Remember, if you are throwing things away, you are throwing away the owners money.
Also, it is very important, especially in food products, to always be watching your numbers of sales on items. You may a product that sells well and on your inventory sheet it tells you that you need to have, let’s say, three cases of a product. But, as time goes by, the sales of this item may dwindle and therefore instead of having a par of three cases, you may need to adjust your par for that item to be one case.
Some perishable items can be saved by freezing. If the product approaches its shelf life, which means the number of days that it is good, you can freeze until needed. But items like mild, and produce, can’t be frozen and you will have to throw away.
Back to the bar. In a perfect world the owner would buy his supplies, charge the customer what they need to to make his business profitable, and that’s it. But, when dealing with humans, you also have to deal with theft.
In the bar business, it is notorious for theft in one form or another. They will steal the booze, they will give the booze away, or they won’t ring up the booze, and take the cash.
Many larger companies hire “secret shoppers” who walk into your place and act like a customer. And they are trained to watch your staff and they know what they are looking for. Then they make a report to the owners of who is doing what.
Many times they send in the same person to start to develop a relationship with the staff, and become “a regular”, and even find out more of what is going on.
In the mean time, the only way to know for sure if you are getting the profit you are supposed to be getting, is by doing inventory. Figures don’t lie! If you have priced your booze to reflect a 20% booze cost, and at the end of the week you run your numbers and you have a 29% booze cost, your inventory is being stolen in some way. This is why you do inventory. Do you understand now?
So how do you start an inventory from scratch? I can tell you it’s a pain. And it takes time to put together. And even though it’s an additional pain to do this inventory every week, it also requires time to keep up with price changes that can happen weekly in some cases. Although most price changes in the liquor business are very slight, and don’t happen too often, you will still need to update your costs of products every quarter. (every 3 months)
So what information do you need, and how do you begin? Well, hopefully you know how to use Excel. Using this software will enable you to input information and calculate your costs so you don’t have to do it manually. If you don’t know how to use Excel, you can hire someone to create an inventory sheet for you. You will need to hand write your sheet of inventory and explain to the person the calculations you will need.
Chances are after you explain to the person what you are trying to accomplish, they will understand enough to write the correct formula’s. I have always done this myself, but I am sure there is software you can purchase where you can just input the information and it will calculate it for you.
The first thing you need to do is to write a list of all the products in a category that you need to keep inventory of. Basically everything. But you can do this in steps. Develop inventory for the most important things first. In the bar business it is going to be the booze. So start with an inventory sheet that will contain liquor, wine, and beer. Although they will be like three separate inventory sheets, do these first.
The information you will need to put this together is going to be the product name, the pack size, the cost of the item, the cost per ounce for liquor, draft beer, and wine, and the cost per bottle for beer. In addition, you will need to know what sales cost you need to operate on. In smaller towns it may be 25% and in larger cities it may be 15%.
Without throwing a wrench into the mix, starting an inventory has many variables. It’s like hiring a carpenter. You hire two carpenters to build you a box. The both build you a great box, but they both build them differently. The final product is the same, but done differently.
I know a man that actually weighs his kegs with a bathroom scale. Bizarre? I think so, but that is me. He could not stomach the thought that he didn’t get every cent out of everything. Personally, for the about of hours and tracking down pennies was a waste of time. Tripping over dollars to save pennies.
Lets say you want to operate on a 20% booze cost. For me, I would charge prices to reflect a 20% cost for most of my items. But I didn’t use this same percentage to reflect my rail liquor as by doing so, you would be selling the drinks way to cheap. An example would be the price of a rail bottle of vodka. It may only cost you $6.00 for a litre. That would break down to about .18 cents an ounce. So if you pour a one ounce shot for a drink, you would charge the customer about .90 cents for the drink to reflect a 20% booze cost! Of course that would be stupid. So you charge your customer more.
That can be done either by charging what the going rate is with your competition, or you can make it $1.00 cheaper then a standard middle shelf item like Bacardi Rum or Jack Daniels, or you can work on a different percentage like 5%. Your cost of sales can’t be across the board as it will never make any sense. Common sense has to prevail.
Another unusual item is wine. I never priced my wine to reflect say a 20% booze cost as the price of wine to the customer gets extremely high. I never had that many people who would drink wine compared to the sales of other products so I would operate on a 30% cost of sales. This again is your choice. Some places charge for it and some give wine sales a break. I used to use it as a marketing ploy to have good wine but was not expensive at my place.
Another unusual item is the very high priced liquors today that have become very popular. Again, depending on where you live, it reflects if you can, or want to, run on the cost of sales that most of your items run on. You could run on a little higher cost of sales here and still make a ton of money. They say life is full of choices, so this is yours.
Honestly, to make things make sense, you should develop a couple of percentages, for the unusual products, that you can live with rather then winging it.
If I was making a ton on rail liquor, I had the levity to charge a little less for my wine and still screw up my cost of sales. I would roll everything into one “cost of sales”. I worked on 20%. Yours may be different. At the end of the week, I would achieve a 20% cost of sales. If it varies, then I know there is problems.
Some people would keep a spillage sheet to write down what was spilled, or dropped, or the beer you had to run through the draft lines starting the day or when cleaning it, but I didn’t. It was too small of an amount. You could spend all day every day tracking things and counting things. I managed my own places and had a great staff. If something spilled it spilled. Period! Unless excessive, it wouldn’t make one tenth of one percent difference in percentages for the week. In other words, it’s not worth the effort to track it.
I used inventory sheets to order product only, not to figure costs as I knew where I was daily because I was the one who was there and managing. I knew off the top of my head where I was.
But if you are an employee in the corporate franchised environment, they will count everything. And I mean everything. Besides, it’s good to know how your place is supposed to operate. This knowledge is good for the newbies.
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