Does the thought of sitting down and creating a purchasing budget stress you out to the point that you find literally anything else to do? Or worse, take your best guess on the numbers rather than getting the real numbers? It can be tricky to know where to start with writing a budget, but once you have it that will be your holy grail to guide you to a profitable business.
Why You Need a Purchasing Budget
Setting a purchasing budget is the skeleton of your establishment. It allows you to track your spending habits, set goals and pars, know when you exceed those goals, and gives you the ability to recover from unexpected events or expenses. The most important part: it leads to profitability.
Obviously the goal of any restaurant or bar is to make a profit and keep costs as low as possible. Without a budget that is extremely difficult to know if you are staying on track. Profits come from the money left over after you take out your operating expenses. These expenses are basically everything that keeps your establishment up and running (labor, inventory, rent, utilities, etc.).
When we talk about profit we talk about two kinds: profit and profit margin. Your profit is displayed as a dollar amount and the profit margin is the amount of profit expressed as a percentage of annual sales.
What is a profit margin?
Profit margin refers to a percentage of revenue after expenses are taken out.
The average profit margin for a restaurant usually falls somewhere between 3-5%. The higher the profit margin the more efficient your restaurant or bar is to converting sales into actual profit. The formula for the profit margin is...
(Total Sales - Total Expenses)/Total Sales = Profit Margin
There are two kinds of profit we look at in the restaurant industry: gross profit and net profit.
Gross profit is what is leftover after taking out all costs of goods sold (COGS). These costs include any money spent on supplies for food and drink ingredients to prepare menu items. For a bar program these include:
This is just a small piece to your business costs and can be used to assess the financial health of your restaurant. The formula for gross profit is...
(Net Sales - COGS)/Net Sales
Net profit is when you take all of your expenses from running your restaurant and deduct them from your gross profit. You will need to track all of your expenses and keep track of expenses that are controllable and which are not. These expenses include:
- Insurance costs
- Administrative costs
This shows the actual profitability of your restaurant and ability to turn income to profit. The money that is leftover can go towards expanding, replacing equipment, or other expenses you may have. The formula for net profit is...
Total Revenue - Total Expenses = Net Profit
Once you have calculated or figured out the profit margins for your restaurant you can start to make changes by decreasing costs or increasing sales volume. Focusing on one or both of these will help to improve your profit margins and allows for more leeway in your budget.
Setting Your Purchasing Budgets
When setting your purchasing budgets, the first thing you want to do is look at last years sales performance. It is probably most helpful to break them down by month and week and if you wanted to go even further, by day. This will help you to see what you are spending on average so there are no surprises at the end of the year. You also want to look at all of your expenses, fixed and variable, to predict future profits.
What are fixed costs?
Fixed costs are costs that probably are not going to change or rarely do change. These costs are easier to budget for since they do not really change.
- Property taxes
- Licenses (food and beverage)
- Salary employee payroll
What are variable costs?
Variable costs are costs that fluctuate and are harder to budget for because they vary depending on output. These costs are also easier for restaurant operators to reduce.
- Hourly employee payroll
- Food costs
- Paper products
To start creating a budget, gather your sales for the last year. You can start with any month and track sales and expenses for 12 months. Once you have those numbers you will do three things:
- Forecast sales
- Create projected budget
- Populate budget
Sales forecasting means estimating future sales based on previous sales data so you can make more informed decisions and anticipate what you will need. If you are a new restaurant or bar you will have to use market analysis and competitor research to develop your forecast. If you are already established, you can use your sales data to make predictions.
Forecasting also helps you make important business decisions from previous sales data like setting a par for your bar items, how to better staff your restaurant and profit expectations.
One thing to consider is if your restaurant or bar has a peak season or not. If it does not, you can use the previous months sales to forecast the following months. If your restaurant or bar is seasonal you will want to compare the same months to predict sales.
If January is your peak month you can look at the sales from the previous January and apply them to the following January. Also keep in mind any holidays or events that might keep you busier than normally expected.
Say your sales in January 2017 were $15,738 and in January 2018 they were $16,293. The percentage difference would be 4% (16,293 - 15,738/15,738).
To forecast for the 2019 year, you would take the 2018 sales data multiplied by the percentage increase. In this case it would be an increase of 4% to the 2018 amount (16,293 x 4% = 651.72). So the 2019 projected sales would be $16,944.72 (16,293 + 651.72).
Creating Your Projected Budget
Now that you have analyzed your data and projected your sales, by tracking your expenses you can make a projected budget. You can do this on a spreadsheet to make it easiest to see everything in one place.
In the columns going across you will have your projected budgets for the months you are comparing and the year, followed by the actual amount so you can see the difference in the projections and the actual budget. The columns you might want to include for the items you are budgeting are:
- Budget % (Cost percentage from cost forecast of year you are looking at)
- Budget monthly (projected sales from sales forecast)
- Budget year (projected total sales from sales forecast)
- Actual monthly (record once actuals are known)
- Actual year to date
- Variance (actual monthly - budget monthly)
- Actual % of sales (actual monthly cost / actual monthly sales)
In the rows going down will be all of your expenses so you can see how much of your budget they take up and if you have any profits left after they are taken out. The rows you might want to include are:
- Beverage Sales
- Beverage Costs
- Payroll Costs
- Controllable Expenses
- Occupancy Costs
- Total Expenses
Your expenses and costs might be slightly different or you may have more categories, but this gives you a general idea. Using a spreadsheet will show you if you are building a profit or losing money and will show specifically where you are above or below your budget. You can also divide it into weekly or whatever way helps you to see your expenses and budget.
Populate Your Budget
Now the fun part: you get to fill the budget. Using a solution like Backbar, you can use reports to track purchase history and usage to see what you order more frequently and go through more often. These reports will display how much product has been used over a defined period of time.
Looking at product usage will help you determine what types of liquor to stock your bar with. You can look to see which specific types of wines, beers, or spirits you are selling more of for a designated period of time. This is helpful if you carry multiple kinds of spirits like vodka or whiskey. For example, you can see that you go through more Tito's than another other kind of vodka, so you know you need more Tito's on hand than Absolute from your usage report.
If you prefer the pen and paper method, you can take your starting inventory for a certain period of time and ending inventory, keeping track of your purchases. This will show you how much of one product you went through during that time period to see which products are of higher usage to set pars and stock your bar.
You can use past inventory data and usage trends to predict sales in the future in terms of month, week and day, preparing you to make better decision when it comes to purchasing. Using a tool like this will also shows you how much you spend on each distributor so you can quickly see if you are staying within your budget.