As a bar owner, your goal is to create a welcoming atmosphere that attracts customers and generates profits. But running a successful bar requires more than just great ambiance and exceptional customer service.
You also need to keep track of your inventory costs to ensure that you're making money.
As a general rule of thumb, the cost of the alcohol inventory in your bar should be 20 percent or less of sales.
But to know what your bar inventory cost is, you first need to understand how to calculate it.
Once you learn this, you can use this information to compare yourself against industry averages and your bar’s past performance. This will allow you to gain control over your business and increase your profitability.
So let’s look at how to determine bar inventory cost and use this knowledge to make informed decisions that will maximize your profits.
How to Calculate Bar Inventory Cost
As with any calculation, you need a formula. To calculate the cost of your bar inventory, use the following equation:
Bar Inventory Cost = Cost Of Goods Sold / Total Sales
This equation can be used to find the inventory cost of any inventory item but for the purposes of this article, we are focusing solely on alcohol sales and costs.
Now that you know the base equation, let’s get started using it.
Step 1: Choose a Timeframe
The first step in calculating your bar inventory cost is to determine the specific time period you are analyzing. The time period you choose should be consistent so that you can compare your calculations one period over the next. Depending on your inventory size, how busy you are and staff availability, a time period of one week to four weeks is suggested.
But remember, consistency is key. If you choose two weeks, stick to two weeks. You can’t do inventory in two weeks then again in four weeks and then again in three weeks. This will make it difficult to draw any helpful conclusions.
Step 2: Take a Physical Inventory Count
Next, you need to take a physical inventory count of your bar at the designated interval. This means counting every bottle, can, and keg in your stock. You'll need to record the quantity of each item and their corresponding cost.
Multiply the quantity by the cost to get the value of inventory for each item. Add all of your item values together to get your total inventory value.
Although this process may seem time-consuming, it's crucial for accurate calculations.
Step 3: Calculate Your Cost of Goods Sold (COGS)
Once you have completed your inventory count, you can start calculating the numbers needed to fill in your formula (Bar Inventory Cost = Cost of Goods Sold / Total Sales). We’ll start with Cost of Goods Sold (COGS).
COGS is the total cost of all the products sold in a specific period, and it's an essential metric for any bar owner.
To calculate COGS, use the following formula:
COGS = (Beginning Bar Inventory Value + Bar Inventory Purchases) - Ending Bar Inventory Value
Your beginning bar inventory is the ending inventory from your previous period. If you are already in full operation and haven’t kept proper inventory records, you will have to complete your inventory twice before being able to calculate your cost of goods sold.
While it’s up to you whether you include inventory, we recommend you do as freight is part of the cost of being able to sell alcohol.
Step 4: Determine Your Sales
Once you have your cost of goods sold, you need to determine your sales for the same period. This is simply the total of all the alcoholic beverages you have sold in the chosen timeframe and can be determined by adding up your alcohol bills.
Step 5: Calculate Your Inventory Cost
With these numbers, you can now calculate your inventory cost. To do this, simply divide your COGS by your sales.
For example, you’ve decided you want to know your bar inventory cost. You did inventory and your total inventory value is $2,005. Two weeks later, you do inventory again and your total inventory value is $2,520. During this time, you have purchased $6,495 worth of alcohol.
During the same period, you sold $24,000 worth of alcohol.
- Beginning Bar Inventory Value is $2,005
- Bar Inventory Purchases are $6,495
- Ending Bar Inventory Value is $2,520
- Sales are $24,000
Bar Inventory Cost = Cost Of Goods Sold / Total Sales
Bar Inventory Cost = [(Beginning Bar Inventory Value + Bar Inventory Purchases) - Ending Bar Inventory Value] / Total Sales
- Bar Inventory Cost = [($2,005 + $6,495) - $2,520] / $24,000
- Bar Inventory Cost = [($8,500) - $2,520] / $24,000
- Bar Inventory Cost = [($5,980] / $24,000
- Bar Inventory Cost = 0.2492 or 24.92%
This means your bar inventory cost is 24.92% of your revenues. If you want to lower this cost, you must either increase your prices or find a way to lower costs. This may be achieved by finding a less expensive vendor, buying bulk or through other strategies.
You can take it a step further by calculating inventory cost by item. This will help you identify which products have higher bar inventory costs and are costing you more, allowing you to make informed decisions about pricing and promotions.
Using Inventory Management Software to Speed Up Bar Inventory Cost Calculations
Inventory management software can help you calculate bar inventory cost by:
- Maintaining real-time inventory records to reduce the frequency of physical counts
- Speeding up physical counts when they are needed
- Maintaining a record of quantity and prices of each item in stock
- Keeping a record of all purchases
- Automating calculations for bar inventory cost and other key metrics
- Providing real time bar inventory cost for a given times frame by item or item category in a few simple clicks
This saves time and reduces the risk of errors that can occur when counting inventory manually.
By following these steps and regularly tracking your bar inventory cost you can gain control over your business and make better informed decisions that will help maximize your profits.
With increased control and profitability, your bar will thrive, and you can be confident in the success of your business.
Interested in learning more about how you can improve your inventory management processes, and utilize technology, to improve profitability? Get in touch with Sculpture Hospitality today.