Understanding your restaurant’s COGS (cost of goods or cost of sales – the cost of the goods you purchase and utilize to create revenue) is the key to success for every well-run restaurant. As every operator knows, industry margins are paper-thin. To become profitable, you must gain an accurate handle on how to control COGS in your restaurant. There are very distinct nuances related to managing food and beverage costs; throughout this post, we will focus our attention more specifically on how to calculate liquor cost and control it.
Managing your profitability concerning all alcoholic beverages, such as beer, liquor, wine, spirits and also any non-alcoholic beverages, represents the single most significant differentiator between success in the food-service industry and being a part of the 26% who don’t make it through the first year.
As the manager of a bar or restaurant, you’ve undoubtedly asked or been asked, “what’s your pour cost percentage?” or “what’s your Beverage Cost?” or perhaps, “what is your COGS?”
Let’s take a look at the liquor cost formula (or pour cost formula), how to use it to manage your spending accurately, and find cost savings opportunities for your business.
Liquor Cost Formula
(Beginning Inventory + Purchases – Ending Inventory) / Sales = Liquor Cost Percentage
Liquor Cost Formula Example
Let’s review an example of how to calculate liquor cost in a real-like scenario. What’s your liquor cost, or what’s your Liquor Cost Percentage, if you were to have the following numerical values:
1. BI (Beginning Inventory) = $1,906
This represents the total stock value of our previous weeks’ inventory
2. P (Purchases) = $6,398
This represents all of the liquor that you purchased during the week
3. EI (Ending Inventory) = $2,425
This represents the total stock value of the current weeks’ inventory
4. Sales (Liquor Sales) = $23,000
This represents the revenue your business brought in from selling beverages assigned to a liquor sales category
Let’s put everything together with the numbers from above:
(Beginning Inventory + Purchases – Ending Inventory) / Sales = Liquor Cost Percentage
($1,906 + $6,398 – $2,425) / $23,000
$5,879 / $23,000 = 25.56% liquor cost percentage
To put it simply, 25.56% is your liquor cost percentage, leaving the remaining 74.44% as gross profit.
Liquor Cost Calculator
Calculate your restaurant liquor costs with the pour cost calculator below! Input the dollar value of your beginning inventory, purchases, ending inventory, and total liquor sales…then click “Calculate Liquor Costs” to reveal your restaurant’s liquor cost percentage!
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Why You Should Know Your Restaurant Liquor Cost (or Pour Cost)
A sharp understanding of your liquor cost enables you to protect your franchise players (liquor items) and ensure your restaurant is profitable through a strategic liquor pricing strategy.
Using the example above, we know that for every $1.00 in sales, roughly $0.25 is used to pay for the liquor. This leaves you with $0.75 of gross margin.
To put that in perspective; It takes far less to earn the $0.75 on each liquor item sold than it does to earn $0.65-$0.70 on each food menu item sold. This means the labor needed to make and deliver each drink is significantly less than each menu item, factor in appropriate liquor pricing and voilà!
Pro Tip: Rather than focusing on discounting booze for Happy Hour, focus on creating a value-driven Happy Hour food menu! Liquor sales contribute to an organization’s NET Profit far more than food sales.
How To Properly Manage Liquor In Restaurants
While operators hotly debate business priorities in the restaurant industry, two that are high on everyone’s list are theft prevention behind the bar and a proper liquor purchasing strategy.
Behind-The-Bar Theft Prevention
Operators should always implement the following best inventory practices behind the bar to mitigate theft:
- Weekly Bar Inventory – Performing weekly bar inventory enables you to readily see the variance in your inventory levels. Additionally, it allows you to view the relationship between your purchasing dollars against your sales revenue. A smart inventory system should allow you to perform this task with ease.
- Consistency in Counting – Always have two people count and consistently record each week. Consistency provides you the accuracy you need to readily spot anomalies in your bottle usage and stock value.
- Repair & Maintenance Issues – Counting weekly keeps you aware of your surrounding facilities and equipment. It also helps to set you up for proactive preventative maintenance concerns.
- Breakage Book & Comp Tabs – The breakage book, also known as a Bottle Book, is a tool that allows you to readily check your usage against your sales. This log shows if a team member has a pension to give away a specific type of alcohol. It also helps to control waste or spill. We also recommend providing your bartenders with a Comp Tab. Comp Tabs enable your bartenders to build your business while you maintain control of how much product is being given away or promoted to do so.
What are some other ways you can control beverage costs and help ensure your restaurant’s liquor cost formula works out in your favor? Aside from the “crunch the numbers” method shared above, there are a few things you can do to calculate liquor costs accurately for accounting purposes.
Create dynamic relationships with your vendors & suppliers
At RASI, we’re aware of the importance of strategic – and streamlined – relationships with your vendors. Distributor partners help restaurants stay on track with COGS and other expenses related to food, ingredients, and menu items, and the same holds true for alcohol & liquor costs.
For example, you should run a regular ordering report on when your peak liquor purchases are, then work with your suppliers to see if you qualify for any special bulk discounts. Strategies like this will turn up favorable results when you get out the trusty liquor cost calculator!
Run regular liquor & alcohol inventory checks
RASI recommends weekly inventory checks for booth food and liquor inventory. This particular expense is a crucial part of all restaurant budgets.
Tracking liquor inventory regularly with reliable accounting software is the preferred method here, since even one “small” line item mistake can negatively impact your restaurant finances. Regular tracking of this inventory is essential to help calculate liquor costs down to the exact dollar amount – which every restaurant should strive for!
Consistent cocktail serving
Want to really get your liquor cost percentage locked in? It’s all about standard liquor pours. When you calculate liquor costs, you might not have any idea of how many cocktails your source bottles are actually making. Follow these three steps to ensure all beverage costs are accounted for:
Measure, measure, and measure some more
In other words, use standard barware to make sure all cocktail recipes are getting the right amount of alcohol. This ensures a happy customer base, not to mention the most accurate liquor cost formula possible. Too much alcohol, and you’ll lose money quickly. Not enough, and patrons will go elsewhere for better drinks.
Make house cocktails in advance
This smart method makes it easier to calculate liquor costs – and your servers will appreciate the convenience of pre-made drinks, too! Speed up service without sacrificing accuracy – make your best-selling drinks in advance of a busy night!
Auto pour spouts
Another way to reduce waste is with regular, consistent pours, courtesy of electronic pour spouts. Pro tip: keep them as discreet as possible, since many patrons frown upon this “impersonal” method of serving drinks. You can always use auto spouts for pre-made drinks before opening.
Proper Liquor Purchasing Strategy
Using your COGS to influence your purchasing strategy is an excellent way of turning data insights into tangible cost savings.
Track your restaurant’s sales and spend every week in a weekly purchase journal. A Weekly Purchase Journal will help zero in low on slow-selling items and make spending cuts accordingly.
Finally, a declining budget based on forecasted sales each week allows you to keep Inventory levels lower. It also helps you track variances in your inventory more easily and keep cash in the bank. As a bonus, having an inventory system will ensure that your stock value (total sum of inventory value) is accurate against your purchases for that week.
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