I recently wrote about Bar Inventory Accounting and while that post and many others in our Backbar Academy discuss best practices for doing inventory efficiently and accurately, I realized there isn't much on the web discussing measuring performance of bar inventory. Specifically, now that you have a method down for counting and recording inventory, how do you put that to use for your restaurant or bar. In this post I'll answer some important questions such as...
- How can you use inventory data to improve profitability and cash flow?
- How much inventory should you have on hand?
- How do you know if you have too much or too little inventory?
- What inventory metrics or KPIs should you track and how do you track them?
The Importance of Inventory KPIs
KPIs, or Key Performance Indicators, are important in every business, but especially for inventory in the hospitality industry. Since you'll be counting inventory and calculating values the same way every month, KPIs allow you to quickly gauge your current performance, compare against past performance, and forecast and make adjustments for future improvements. KPI is just a fancy word for metric, which is really nothing more than a formula. But KPIs are meant to be looked at regularly so you always have a handle on your beverage inventory performance at any time.
As with all reporting and analysis, there are a number of ways you can organize or group your KPIs. You will need to decide how granular to get in analyzing your metrics based on your specific beverage program. The more granular you get, the more insight you will have to your beverage program to make improvements, but if you aren't using software to automatically calculate the metrics, you'll spend a lot of time compiling your data.
At the top level you can just look at your KPIs for your entire beverage program. What is your total average inventory or inventory turnover. Going another level deeper, you can (and should) look at the KPIs based on beverage types: wines, beers and spirits. If you are using software like Backbar or have the time to do it yourself, you can then analyze your KPIs one level deeper, based on type of wine (red vs. white vs. sparkling), spirits (tequila vs. vodka vs. whiskey) or beer (IPAs vs. stout vs. lager). You can also decide to group your KPIs by other attributes, such as draft vs. bottled beer, or top shelf vs. well liquor.
The Bar Inventory KPIs You Want to Track
Fortunately, you don't need to reinvent the wheel here and you don't need to come up with fancy KPIs on your own. Many of the inventory performance metrics for restaurants and bars are the same or similar as many other industries. Below are my recommendations for bar inventory KPIs with a quick explanation of what they cover. Below I'll go into more detail on each, including how to calculate them and how to use them.
|Inventory On Hand (Value)||The amount of inventory available at a given point in time|
|Usage||How much inventory was used between two points in time|
|Service Level (Safety Stock)||Measure of minimum inventory needed to avoid stock-outs|
|Pour Cost & Gross Margin||The cost of each sale (or how much you pocket from each sale)|
|Variance / Shrinkage||Missing inventory (money lost) due to loss or theft|
|Inventory Turnover||How fast you are selling and replacing your inventory|
|Average Days to Sell (Inventory Turn Days)||How many days products sit in inventory before being sold|
Inventory On Hand
We'll start with a seemingly easy one, Inventory On Hand. This is just the amount or value of inventory you have at a given point of time. Backbar would calculate this for you using FIFO costs, but if using spreadsheets this will simply be the sum of all your products' quantity times their cost.
What's not so easy is figuring out what the number tells you. If your inventory value is $50,000 is that good or bad? Just knowing a single number doesn't tell you anything about your performance. Most of the KPIs listed above need context...
- What type of bar or restaurant do you have?
- What kind of sales volume does your bar do?
- How many different selections of products do you carry?
- Do you ever run out of stock of any items?
- How consistent does your inventory value stay? Do you ever see big spikes or drops?
As we look at the other KPIs it will become clearer how Inventory on Hand can be used. In general, we want a lower inventory value, because inventory is just cash sitting on a shelf that can't be used for anything else. But too low of inventory and you'll run out of stock or won't have a selection large enough to meet the expectations of your customers.
Many managers and owners only look at sales when considering bar performance, but usage is equally, if not more, important. In a perfect world, products sold would equal products used, but this world ain't perfect and your staff aren't robots who can make a perfect pour every time. Usage is calculated with the formula:
Starting Inventory + Purchases - Ending Inventory
This will give you how much of your products were used, including any shrinkage from loss or theft. Understanding your usage at the product and category level is critical for maintaining the right amount of inventory.
Service Level, Safety Stock and Par Levels
Service level (or sometimes called safety stock) is the amount of inventory you need to have so that you don't run out of stock and can't serve customers. If you frequently run out of things, customers won't be happy and won't continue to visit. In the restaurant and bar industry we generally use the term par levels. Par levels are examined on a product-by-product basis. You need to know how many cans of beer X do I need, or how many bottles of whiskey Y do I need to serve customers. More importantly, you should use pars to figure out when you need to re-order products and how much you should order.
So how should you set par values? You should base them off of your usage, which we discussed above. You want enough so you don't run out of stock, but not so much it's sitting on shelves for long periods. If the product is generally available and you can order it weekly, your par level for a product may be 2x your weekly usage. If there is risk that you may not be able to get a delivery of a product quickly, you may wish to make the par level higher, such as 3-4x your weekly usage.
Pro Tip: While your par levels can help you determine when to reorder to avoid stock outs, you may sometimes wish to order higher quantities to get better pricing. Many distributors charge case breakage fees resulting in higher costs for individual bottles. This is especially useful for high volume products like your well liquor. Be careful though not to over-order on lower volume or more expensive products just to avoid case breakage fees. It's usually not worth it. Better you pay an extra few bucks than have an extra $500 in inventory sitting on your shelf for a year.
Pour Cost and Gross Margin
In the bar industry we typically use the term pour cost, while in accounting and business we would use gross margin. They measure the same thing from two different perspectives. In other posts I have talked in-depth on how to calculate these so I'll skip that for now (for a quick reference see our Liquor Cost Formula Cheat Sheet).
Your pour cost tells you what your cost is for every dollar in sales. For example, a 25% pour cost means that every dollar in sales costs you 25 cents. Your gross margin is how much money you make from your sales after subtracting your direct costs. A gross margin of 80% means that after costs for a drink (liquor, ingredients, etc...) you keep 80% of what the customer paid.
Pour Cost or Gross Margin is one KPI that does give you a lot of information on it's own. And it's a metric that you can continually work to improve. You want to analyze pour cost by product type, such as wines, beers and spirits. There are two ways to lower your pour cost:
- Increase prices
- Reduce costs of items you are selling
However, as you increase your prices you may deter customers and bring in less sales. As you reduce costs (for example by putting less liquor in a cocktail) you may likewise deter customers and lower sales. Successful restaurants and bars find the equilibrium between prices, costs and sales. You want to minimize pour costs while maximizing sales.
So how do you know if your pour cost is good? In general you should always be looking for ways to lower pour costs without sacrificing top line sales. However, we've pulled together some industry average liquor costs so you can see how you compare to other bars in our Liquor Cost Guide.
Pro Tip: Don't only think about setting drink prices based on a target pour cost for each drink individually. Look at your beverage program holistically. There may be some cocktails where you can't reduce costs without impacting customer satisfaction. For example, most serious whiskey drinkers probably wouldn't be happy with a strongly diluted whiskey cocktail. Conversely, there may be different customer expectations on a fruity drink, where you can have a lower pour cost by using soda or juices. If you're having trouble lowering pour costs down to where you want them with your current menu, try introducing some new drinks rather than reduce the quality or increase the prices of existing drinks.
Variance and Shrinkage
Variance, or shrinkage, is the percentage of inventory that is listed in records (for example invoiced from vendors) but is not physically in inventory. Product that you have paid for, should have, but don't. Generally attributed to loss or theft. In a bar there are many things that could lead to shrinkage:
- Miscounting during inventory counts
- Supplier fraud (when a vendor bills for more products than it sends)
- Overpouring drinks
- Giving out free drinks
- A bottle falling off a shelf and breaking
Not measuring inventory turns and related metrics is a big mistake far too many restaurant owners and managers make. Why is measuring inventory turnover so important? Because it's the best way to understand your inventory efficiency, helping you identify how much inventory you should have and how much you should order.
A large number of restaurants go out of business prematurely because they have too much inventory. They may not acknowledge it, but it's true, especially for upscale and fine dining restaurants. What do almost all restaurants that go out of business have in common... they run out of money. And often they have $50k or $100k or $200k of wine and liquor sitting in a storage room, when they could have instead used that money to grow sales and extend their runway to profitability.
Inventory Turnover is a ratio that shows how many times inventory was sold and replaced during a specific time period. Usually, but not always, the higher the turnover ratio the better. This KPI tells you how fast you are selling your inventory. If your ratio is too low, you have weak sales and/or excess inventory. If your ratio is high, it indicates strong sales and efficient use of inventory. Again, you don't want inventory just sitting around, so the faster you repeatedly sell and replace inventory, the better.
Average Days to Sell (Inventory Turn Days)
There are a lot of different names for this KPI, but they answer the same question: how long does it take to turn your inventory into sales. Whereas the previous KPI gave a ratio, this instead gives you the answer in days. The fewer number of days, the better. Since most restaurants and bars order products once a week, at a bare minimum your average days to sell would be 7 (otherwise you'd run out of products before you got more in stock).
If your days to sell inventory number is high, it may indicate that you are managing inventory inefficiently. However, there is no optimal number because the days to sell will vary depending on products. More expensive products typically sell slower than lower-priced products. A good number for your well vodka may be 15 days, while a good number for your top shelf vodka may be 45 days.
Recommendations for measuring and improving bar inventory performance
- Decide what KPIs are important for your business and how granular you want to measure each of them.
- Create a KPI dashboard or regular report on a monthly basis to examine your KPI performance.
- First identify your product usage. Use this to set your par levels.
- Identify an optimal amount of inventory to have on hand. For most restaurants and bars this will be 2-4x weekly usage.
- Measure pour costs and shrinkage. You can't improve what you don't measure. Then find ways to lower both metrics.
- Measure your Inventory Turnover. Watch out for your rate creeping down over time, which I see often as programs get complacent or don't monitor their efficiency closely enough.
- Share your KPIs with all applicable staff regularly. Even if you own the place or oversee the entire beverage program, many people on your team have an impact on your KPIs. It helps when they know what you are measuring and aiming to achieve and keeps everyone working towards shared goals.