Par levels are a phrase you'll hear often when working at a bar or restaurant. But it's more than an industry term. Knowing how to calculate par levels for bar inventory is an important skill that will keep your bar properly stocked and your customers happy. This post will cover useful topics like calculating par levels and how to create a par level sheet in excel or with any spreadsheet tool.
What is a Par Level?
Par is an inventory control strategy that identifies the minimum quantity of a product needed to meet customer demand.
Remember supply and demand from Economics 101? That's par levels at work, it's the minimum supply that meets demand.
Why Par Levels are useful:
- Determines how often you should order a product
- How much of that product you should order
- Reduces overstock and stock shortages
- Helps you establish a purchasing budget
- Reduces spoilage and waste when used for food and other perishables
Setting pars also helps reduce the stress of managing bar inventory by making the decision for you of when to order a product. Reducing stress from decision-making fatigue is worthwhile on its own.
How to Calculate Par Levels
Setting accurate par levels requires a bit of research into the sales trends of your bar.
You'll need to run reports from your Point of Sale system, as well as review inventory totals from past months, and take a look at your order history with distributors.
Take a look at your sales reports from your POS to see how much of a product you sell on a daily, weekly, and monthly basis. This will give you a good guideline to setting par levels.
Don't forget to account for use of products in cocktails, or miscellaneous sales of a product.
Inventory Usage Rate
This is a great method for finding par levels. Usage rate, also known as depletion rate, tells you how much of a product you go through in a given time period.
Here's the inventory usage rate formula:
Opening Inventory + Purchases Received - Closing Inventory = Inventory Usage
I'll use Maker's Mark as an example to show you how to put this formula to use.
Start by taking inventory of how much Maker's Mark you have in stock, or look up your inventory total from your most recent inventory session.
Say your previous inventory session took place at the end of last month. At that time you counted 10 bottles of Maker's in stock. That total would be the Opening Inventory used in this formula.
Then, on the second week of the month, you had 8 bottles of Maker's in stock, and you decided to order a 12-bottle case of the bourbon. These 12 bottles would be your Purchases Received.
At the end of the month you take inventory again, and count 16 bottles of Maker's Mark in stock. This total is your Closing Inventory.
Punching in those numbers into the formula gives you...
10 + 12 - 16 = 6
So the monthly usage rate for Maker's Mark is 6 bottles.
With that calculation, you now know that it's not necessary to order a case of Maker's every month, especially when you have 8 bottles still in stock.
Inventory Turnover Ratio
Inventory turnover is another useful method for calculating what your bar's par levels should be.
Turnover ratio shows you how many times your bar or restaurant has sold and replaced inventory during a specific period of time. And this number deals with the dollar value of inventory you have in stock, not just the number of products you have in stock.
There are a couple steps in this formula.
Step 1 - Average Inventory
First you must find your average inventory for a time period.
Here's how to find your average inventory:
(Beginning Inventory Value + Ending Inventory Value) / 2 = Average Inventory Value
We'll use the numbers from the Maker's Mark example above. And for the example we'll say that a bottle of Maker's Mark costs you $30.00
($300 + $480) / 2 = $390.00
So $390.00 is the average inventory of Maker's Mark you had in stock for this month.
Step 2 - Cost of Goods Sold
To determine your Cost of Goods Sold, or COGS, you'll use the same formula for inventory usage rate, but instead you'll use the dollar value of the inventory and purchases instead of the inventory counts.
Here's what we find for COGS
$300 + $360 - $480 = $180
$180 is your cost of goods sold for Maker's Mark for this time period.
Step 3 - Inventory Turnover
Now that you've found your average inventory you can determine your inventory turnover. For this you'll divide your COGS by the average inventory and then multiple it by the days in your set time period.
For this example, we'll say there were 30 days between our opening and closing inventory.
Here's the inventory turnover formula:
Cost of Goods Sold / Average Inventory x Days in Period= Inventory Turnoverni
Here's what we find for Inventory Turnover Ratio
$180 / $390 = 0.46
The inventory turnover ratio is .46
What Does This Mean?
This ratio number might be awkward to interpret if you're not use to this sort of financial calculation. But essentially the .46 means you only went through 46%, or less than half of your inventory in the 30 days we calculated.
To take it a step further, let's calculate our inventory turnover to tell us how long it would take to sell through are inventory.
Take the number of days in your time period (30) and divide it by our inventory turnover ratio.
30 / .46 = 65
So it would take you about 65 days to sell through your average inventory of Maker's Mark, which we found to be 13 bottles.
It also means that this examples a showcases what bad inventory management looks like. You want to have to have a lower turnover rate for inventory because it means you sell through inventory at a faster rate, which, of course, means you make reap the sales of your product investments quickly.
Which means you sell about 1.4 bottles of Maker's Mark per week.
Setting Your Par Levels
Once you've researched and performed calculations on your sales and inventory, you can use the findings to establish accurate par levels to manage inventory.
With the Maker's Mark example, we found that we sell an average of 1.4 bottles of Maker's Mark every week.
If you place orders weekly then you'll need a minimum of 1.4 bottles on hand at all times. But you'll want to control for any unexpected events like an uptick in sales or a distributor issue, so we recommend a safety factor of 1.5x - 3x depending on the product and supplier.
For Maker's, considering it's a well established brand with a built in customer base and strong distribution network, a safety factor of 2x seems appropriate. This would set the par at 2.8 bottles, which would be rounded up to 3 bottles.
Our par level for Maker's Mark is 3 bottles.
Once you approach, or dip below 3 bottles of Maker's Mark, you'll want to order more.
How Par Levels Impact Alcohol Purchases
Establishing par levels is part of a purchasing strategy for placing orders with liquor distributors.
Your par levels will determine how often you order an item and in what quantity.
One thing to consider is split case fees. These are charges that many distributors will apply to your costs for "splitting a case" or purchasing individual bottles of a product instead of a full case.
So it's important to consider if it's worth a split case fee. It's rarely worth the split case fee, unless it's an item you rarely sell but want to keep in stock, like a really expensive bottle of Cognac.
Or if your venue's finances are in dire straights. But you'll have to know how many bottles come per case.
Factors That Affect Inventory Pars
Is a product often out of stock with a supplier? If so, you may want to establish a higher safety factor for this product as a cushion to prevent becoming out of stock.
Weather can have a big impact on your sales. And you don't want it to become a natural disaster.
Drink preferences can change, as well as the volume of traffic your venue has. Understand how weather affects your inventory and adjust par levels accordingly.
Events, Specials, and Holidays
If you host special events, like tasting dinners, or run nightly specials on a product this could have an affect on how you order.
Holidays can also have a big impact. A restaurant that is popular for brunch will probably go through a lot more sparkling wine on Mother's Day than a normal Sunday brunch. So you can forget your par levels and order a higher amount to account for the change in sales.
Remember to track all uses of a product. For example, if you use Maker's Mark in a house cocktail, that usage won't necessarily show up in a sales report for Maker's Mark sales. That's why looking at usage rates and inventory turnover is a helpful supplement to sales reports.
If any programming or usage rates change, you'll want to adjust your par levels.
Creating a Par Level Worksheet
A par level worksheet for bar inventory will help you control your purchases and simplify your ordering strategy.
For the worksheet, you'll want to list the following information: