Inventory Usage Rate is the Formula for a Successful Bar

Mar 30, 2020 // by Kyle Thacker

Topics: Bar Inventory

Imagine that your bar's liquor inventory is perfectly managed:

Your shelves are clear of overstocked liquor bottles that you don't need. You never run out of menu items unexpectedly during service. Your liquor costs are so low that you deserve a Fields Medal in mathematics for the genius management of your numbers. You may never reach that ideal, but tracking usage rates for bar inventory is the best way to get close.

 

Managing bar inventory is the key to success

 

For bar operators to run a successful (profitable) bar, they need to effectively manage their inventory with a cost-conscious and profit-focused strategy. 

 

Costs for bars come from a variety of factors. But one of the most important costs is liquor cost, also called pour cost. Liquor cost can fluctuate dramatically if there isn't consistent oversight. And if costs are high, then it's harder to turn profits.

Read more about liquor costs

The best way to maintain low liquor costs is to efficiently manage your liquor inventory.

 

Here's what smart inventory management looks like:

 

  • Avoid carrying unnecessary and overstocked products
  • A budget is in place and adhered to for purchasing from vendors
  • The products you carry are priced so you can generate profits
  • You have the inventory volume to meet demand
  • You have a consistent schedule for taking inventory counts
  • You track usage rates and monitor liquor costs

 

How to Calculate Inventory Usage Rate 

 

Inventory usage is the pace at which product volume is sold through. For example, you could calculate the usage rate of Tito's vodka to know how quickly you pour through a bottle or case of Tito's.

 

Knowing this rate will tell you how much Tito's to keep in stock, how often you should order it, and the amount of Tito's you should order.

 

Because usage rate is a calculation that tells you how much a product you use over a certain time period, you need to know a few data points to frame your time period before you can arrive at this magic usage rate number.

 

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Here's the formula to calculate inventory usage rate:

 

   Opening Inventory 

+ Purchases Received 

- Closing Inventory

= Inventory Usage

 

  • Opening Inventory 
    • You need to know how much a product you have on hand at the start of your time period. For most bar operators, inventory is taken monthly, so we'll use a month as our time period in this example. Opening inventory is the quantity of a product you had on hand at the beginning of the month.

  • Purchases Received
    • If you ordered a product during the month, you need to know the quantity you ordered.

  • Closing Inventory
    • When you take inventory again at the end of the month, the quantity you count is your closing inventory.

 

 

Example of Using Usage Rate 

 

Opening Inventory: To continue with our Tito's example from earlier, let's say you count 7.5 bottles of Tito's in your bar. Your opening inventory count for Tito's is 7.5. Now we have the first number for our usage rate formula. 

 

Purchases Received: Two weeks after inventory, you've sold through a few bottles of Tito's, so you order a case of 12 bottles of Tito's. Your purchases received for Tito's is 12. Now we have our second number for usage rates.

 

Closing Inventory: Now the end of the month has come and it's time to take your closing inventory. You have 13.4 bottles of Tito's at closing inventory, which gives us the final piece for the usage rate formula.

 

We can plug in our numbers to the formula to find the usage Rate for Tito's.

 

  7.5

+12

- 13.4

= 6.1

Your monthly usage rate for Tito's is 6.1 bottles.

 

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How to take advantage of usage rates

 

Now that you know how to calculate usage rates you can start to use them to find out a lot of useful information. 

 

From our example above, if you divide your monthly usage rate of 6.1 bottles of Tito's by 4, you can calculate that you just over a 1.5 bottles a week of Tito's vodka. So you know that you should have about 2 bottles of Tito's in house each week to meet demand.

 

Setting Par Levels

 

Knowing the volume of a product to have on hand is called a Par Level. You can use usage rates to find par levels and then use pars so you know when you need to order more product. 

 

Reducing Excess Inventory

 

If you find the usage rates for all your products, you can determine which products are overstocked and need to be sold down. 

 

Tracking Performance at High Levels

 

Usage rate isn't just useful at the individual product level, it's also important to view usage at higher levels to analyze bar performance. With the same formula, you can track usage rates for beverage types like wine, spirits, beer, and go a little deeper to see performance for beverage subtypes like whiskey, vodka, and gin. 

 

Setting Budgets

 

Knowing how much volume of a product you pour through and need to carry also tells you the dollar value of that product. If a bottle of Tito's costs $20, then at 6.1 bottles a month, you sell through $122.00 of Tito's a month. You can use this number to determine how much money to spend on purchasing new Tito's each month so you're not overspending. 

 

The Easiest Way to Track Usage Rates

 

It's a lot of work to calculate usage rates for every product behind the bar on a month-to-month basis, and then to use those numbers to find par levels, excess inventory, etc. 

 

To help manage your bar and optimize your profits, the easiest way to do so is to rely on bar inventory software. 

 

With Backbar, you can use our bar inventory platform to automatically track usage rates find suggested par levels, track bar performance at multiple levels and more. 

 

Kyle Thacker

About the author, Kyle Thacker

Kyle is the Marketing Director for Backbar. Before helping Backbar connect with the restaurant industry, he managed multiple bars in Chicago, with a love of whiskey and cocktails.

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