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, it’s imperative that you gain a true handle on how to control COGS in your restaurant. There are very distinct nuances related to the management of food and beverage costs; throughout this post, we will focus our attention more specifically on how to calculate and control liquor cost.
Managing your profitability with regard to beer, liquor, wine, as well as any non-alcoholic beverages, represents the single greatest 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 accurately manage your spend, and find cost savings opportunities for your business.
Liquor Cost Formula
(Beginning Inventory + Purchases – Ending Inventory) / Sales = Pour Cost/Liquor Cost or COGS i.e. your product usage
Liquor Cost Formula In Action
Let’s review an example of the Liquor Cost Formula in a real-like scenario. What’s your liquor cost, or what’s your Liquor PC, 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
Liquor Cost Formula: ($1,906 + $6,398 – $2,425) / $23,000 = Your PC of $5,879 i.e. 25.56%
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Why You Should Know Your Restaurant Liquor Cost (or Pour Cost)
Having a keen understanding of your liquor cost enables you to protect your franchise players (liquor items) and ensure your restaurant is profitable.
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 for each food menu item sold. This means the labor needed to make and deliver each drink is significantly less than each menu item.
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 business priorities in the restaurant industry are hotly debated, 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
The following best inventory practices should always be implemented 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 enables you to view the relationship between your purchasing dollars against your sales revenue.
- Consistency in Counting – Always have two people count and record in a consistent manner each week. This 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. This 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 shows you if a team member has a pension to give away a specific type of alcohol. It also helps to control waste or spill. For an added benefit it is always recommended to provide 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.
Proper Liquor Purchasing Strategy
Using your COGS to influence your purchasing strategy is a great way of turning data insights into tangible cost savings.
Track your restaurant’s sales and spend on a weekly basis in a weekly purchase journal. This will help zero in low on slow-selling items and make spending cuts accordingly.
Finally, using a declining budget based on forecasted sales each week allows you to keep Inventory levels lower. It also helps you to more easily track variances in your inventory, and keep cash in the bank. As an added 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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