One of the most important elements of running a successful bar is to control and maintain a low liquor cost.
Liquor cost is essential the prices you pay vendors for the alcohol you purchase and sell in your bar or restaurant. The percentage of liquor cost against your sales is the number that is important.
Calculating liquor costs is an important skill for any bar or restaurant manager. Let's look at the most important liquor cost formulas and how to calculate important metrics.
A Quick Overview of Liquor Costs
Before we dive into pour cost formulas, let's get on the same page regarding liquor costs in general.
The reason your liquor cost percentage is so important is because it is a factor that determines your profits.
Profit margin is an important term for restaurants and bars. And liquor cost is one of the biggest factors to affect profit margins.
The profit margin on alcohol sales by taking the gross profit from a sale of drink like a cocktail or bottle of wine, and subtracting the liquor cost from that gross profit to provide the net profit margin.
How to Calculate Liquor Cost
This is a pretty common question we hear at Backbar. And it's a good one.
There are a few things to consider when dealing with liquor cost. But one simple, big picture method to find pour costs, which is how many restaurant and bar operators do it, is to look at the annual sales performance of their venue. Here's how you would calculate that:
|Cost of Goods Sold||= Liquor Cost Percentage|
Here's an example.
If in a year, your bar sold $10,000 worth of alcohol inventory, and that inventory generated $50,000 of sales, then your beverage cost percentage is 20 percent. Which means 80 percent of your alcohol sales are gross profits.
10,000 / 50,000 = .2 or 20 percent
Factoring For Inventory Not Sold
Liquor cost is important for measuring a bar programs success, but it only really measures what you've sold.
Another important factor is the dead stock, or inventory that isn't sold and is just taking up space in the liquor room.
Understanding liquor costs also help maximize gross profit margin percentage, but not necessarily your gross profits themselves. A business runs on dollars generated, not just percentages.
So it's important to sell down inventory and not overstock your supply.
A shortcut way to get an estimate of your liquor costs by including all inventory purchased as a cost (instead of a fixed asset) is to just utilize your total purchases within a period divided by the total sales. This estimate will be better over a longer time period like a year (one month is likely too short unless your monthly purchases and sales are very consistent).
|Purchases||= Liquor Cost Percentage|
While the formula above can give you a quick estimate including all your purchases (even if not yet sold), there are better ways to get an understanding of your inventory utilization.
One of the most important metrics is Inventory Turnover which tells you how many times you have sold and replaced your inventory within a specific time period. This is a measure of how efficient you are using your inventory (and thus how efficiently you are using your cash). In general, a higher inventory turnover is better, signaling you don't have a lot of money tied up in inventory that isn't selling.
|COGS||= Inventory Turnover|
Average Inventory Value
In the above formula, Average Inventory Value is simply the average of inventory between the starting and ending inventory dates used to calculate COGS.
A different way to look at utilization of inventory is to calculate Inventory Turnover Days, which is a measure of how many days products sit in inventory before being sold. The shorter the better. To calculate this, simply take the number of days between inventory periods and divide by the Inventory Turnover.
|# Days in Period||= Avg Days in Inventory|
It's helpful to calculate your liquor costs and inventory turnover so you can understand the full picture of your costs and how efficient you are buying and selling products to maximize your gross profit margin. You can then focus on how to improve those profit margins by finding lower price points to purchase at, increasing the price you sell products at, or focusing marketing and sales efforts on the products that yield the highest margins.
As mentioned in the previous section, it is helpful to calculate these metrics not only for all alcohol sales combined, but also for various product categories and drink types (glass vs. bottle, keg vs. can/bottle, wine vs. beer vs. spirits).
How to Calculate Cost Per Ounce
We mentioned that the above formula for liquor cost percentage is a big picture way to approach calculating costs. But another important element of costs is to find the cost per ounce for the liquor you purchase as you will need this for pricing.
Because you don't always sell liquor, wine, and draft beer in their original whole containers, knowing your cost per ounce will help you accurately price your drinks so you can make the desired margins.
Here's the formula for finding cost per ounce of liquor:
|Container Cost||= Cost per Ounce|
Ounces per Container
For an example, let's use Belvedere vodka. If your bar stocks Belvedere in 750ml bottles, and you pay $20 per bottle then here is your cost per ounce:
$20 / 25.4oz = 79 cents
So one ounce of Belvedere costs you .79 cents. If you do a 2 oz pour for a shot, then a shot of Belvedere costs $1.58
This can also be done for wine or draft beer. You just have to determine the number of ounces in your bottle or container. Here's a quick guide with the volume in ounces for common bottle and keg sizes.
Costing for Different Drink Types
Knowing that you can go granular when looking at pour costs, like looking at your cost per ounce, it's important to point out that you can (and should) look at your pour costs by different types of alcohol. Your costs and potential profits for wine and beer will be different, and both those drink types will have different costs than your spirits.
So it's important to track your costs and margins by drink types so you know which drinks perform the best at your bar. And be sure to consider mixed drinks with spirits as well, because the cost of the mixed drink not only comes from the alcohol, but all other ingredients as well. You can even look at individual products to see which items are your best performers.