Restaurants and bars are in the business of generating a decent profit for their owners and investors. Calculating all expenses, monitoring the profit and loss statement on a daily basis, and taking inventory at the appropriate time all contribute to a profitable bottom line.
Monitoring the liquor cost is an important part of a bar’s profitability. Bartender over-pouring, theft, and free drinks all contribute to a poor liquor cost – and bottom line profits.
So, How Do You Calculate a Bar’s Liquor Cost?
A bar’s liquor cost is calculated by adding up the cost of products associated with alcoholic beverages, usually liquor, beer, and wine, and then dividing into sales. There is an exact formula for this, as it’s a bit more complicated, and I’ll walk you through the steps.
Calculating liquor costs, also known as pouring costs, is something that seasoned bartenders are aware of, and they know how important it is to a bar’s profitability.
For those of you just entering the bartending field, it’s important that you know the basic formula. You never know – a bar manager may ask you for a reasonable explanation of the formula during the hiring process.
I’m going to explain the formula below, and then walk you through a hypothetical monthly inventory within a fictitious company. It’s really not that hard, so take your time and you’ll be up to speed in no time.
Liquor Cost Formula
Opening Inventory + Purchases – Closing Inventory = Product Use
Divide Product Use into Sales and you’re left with the liquor cost
For this example, let’s say that it’s early morning on March 1st, and Mark’s Bar needs to take a monthly inventory in order to calculate their liquor cost. We need to find four figures – or sets of numbers:
As you can see, we need the total dollar amounts of two inventory’s, one month of sales, and one month of purchases. So far, so good. Let’s plug in those numbers into our fictitious bar’s numbers for the month of February. But first, we need to take a physical inventory.
Early in the morning on March 1st, Mark and his bar manager make their way through the entire bar, back bar, bar coolers, walk-in coolers and liquor and wine storage rooms.
They take a physical inventory of all liquor, beer, and wine on hand. This is easy, as they have pre-made templates of every product the bar sells as well as the wholesale cost (the amount Mark’s Bar paid for the item).
The dollar amount of total inventory on hand is $30,000. This amount is designated as the closing inventory.
Mark takes this inventory sheet to the back office and finds two more figures: February’s total dollar purchases of liquor, beer, and wine, and January’s closing inventory dollar amount. (Yes, January!). More on that later.
The purchase numbers will be taken directly from February’s debit purchase records, or monthly invoices, or even the almost completed profit & loss statement. Many times, the controller, or accountant, has these figures ready. This amount comes to $20,000.
Mark finds the closing inventory total dollar amount, which he himself took a month ago from late-night January 31st. That amount is $35,000. This becomes February’s opening inventory.
They are the exact same amount. Just remember that “Last month’s closing inventory is this month’s opening inventory.” Simple
Now we need the sales figures for the month of February. Mark’s Bar did $125,000 in liquor, beer, and wine sales for the month of February. This is the total amount of bar sales for the month that was entered into the cash register or POS by all employees.
Remember that there are no food sales here. Strictly liquor, beer, and wine. Most likely, the kitchen manager is conducting a food inventory at the same time the bar manager is taking the liquor inventory.
Crunching the Numbers
We now have the figures we need and can calculate our liquor cost:
Opening Inventory + Purchases – Closing Inventory = Product Use. Divide Product Use into Sales and you’re left with the liquor cost.
So, based on the numbers we compiled and added up:
$35,000 + $20,000 – $30,000 = $25,000 (Inventory Use)
$25,000 ÷ $125,000 = .20 or 20% Liquor Cost
A couple of things worth noting. The inventory that Mark and his Bar Manager just took, the February closing inventory for the month of February, now becomes March’s opening inventory.
This continues on through every month. Many bars will take a bi-monthly inventory, or even a weekly inventory, to keep an even tighter control on their pouring costs.
A 20% overall liquor cost is, generally speaking, very good. However, there are additional ways to really narrow down the difference between “what is our liquor cost” and “what SHOULD our liquor cost be.” Calculating variance costs will do that for us, but that’s a discussion for a different article.
Why Even Take an Inventory?
Why do bars take inventory? The simple answer is to maintain the profitability of the bar and provide a healthy bottom line to owners and investors. It’s that simple.
If management is not staying on top of this, the bar simply cannot maintain a consistent, profitable pouring cost. Let’s be clear here: Failing to take consistent inventory at least once per month will cost you money. A lot of money.
Bar Managers also have to stay on top of their drink pricing tiers. Call liquors, Top-Shelf liquors, etc. Setting the proper drink price for their customers has a lot to do with liquor cost and bottom-line profits.
If bar owners and managers would calculate a monthly inventory, every month, they could eliminate a lot of theft and over-pouring issues. When employees know that you’re taking inventory and looking at how much liquor they are pouring or giving away – they take notice.
There are too many bar owners out there that simply take their purchases and divide into sales. Really? In the example above, $20.000 divided into $125,000 = .16, or 16% pouring cost.
What if the next month he does the same amount in sales but he purchased $35,000 in goods? That’s a 28% liquor cost. The owner would chalk it up to having had to buy more goods because the previous month he allowed his inventory to dwindle down to the point of running out of some types of liquor. That’s no way to run a business.
Who Should Take the Inventory?
Obviously, management should be involved in the process. It is not recommended that employees do it unsupervised – or even help you do it. After all, they’re the ones dispensing the product and may have ulterior motives for not taking an accurate inventory. It just makes good sense not to assign this task to bartenders.
Many bar owners will contract with a third party to conduct the inventory for them. This has many advantages.
First, the company has no vested interest in the bar. Secondly, most of these companies have the latest software to aid them in the process of getting an accurate count.
Some will take just the physical inventory and that’s it. Others will have access to your overall numbers and provide you with a print out of your liquor cost.
Contracting with an outside company also means that you don’t have to do it! Personally, I would rather purchase or rent the latest software and conduct the inventory myself.
This helps me keep a finger on the overall process. And, it gives me a very good idea of how all products are stored and what I need to start moving out of inventory. For example, come up with some drink specials for that off-brand liquor that’s just sitting there. A great system that many bars use is called BackBar.
Remember that the main goal of taking a physical inventory is to get an accurate count of your monthly usage, and then crunching those numbers to find out where you can improve profitability.
Inaccurate, inconsistent inventory practices leave a lot of room for error and theft – and have no place in a professionally run establishment.
Maintaining a Profitable Pouring Cost
Besides taking a consistent, accurate inventory, bar managers can do many other things to maintain a healthy pouring cost. Proper training of employees, spot checking bartenders, and smart purchasing. Understanding the difference between pouring cost and gross profit goes a long way towards staying profitable.
Bar establishments place different priorities on different areas of the bar’s overall operations. Many Bar Managers are not that concerned with pouring costs if it is in line with the industry. Big mistake. Many “corporate theme restaurants and bars” have their own way of doing things and sometimes that gets in the way.
I have found that local bars have the best handle on their pouring costs. Their employees stick around, are very aware of the standards set forth by management, and have a thorough understanding of how pouring costs affect the profitability of the bar.
Many bar owners in these types of bars allow their bartenders to over-pour and give out free drinks AS LONG AS IT’S ACCOUNTED FOR!
Related Bartending Questions
How can I further track my bar profits? Finding your liquor cost variance is one way. This is done through a really good POS system, spot checking your bartenders, and finding the actual pouring cost of each individual bottle of liquor.
What are the causes of high pouring costs? Usually theft, over-pouring, and free drinks. These offenses are almost always committed by the bar’s bartenders. Here’s some more ways that Bartenders Rip Off the House.
These are things that can be almost entirely eliminated by conducting accurate, consistent inventories – and making sure that your employees know that you’re watching.