Liquor cost is one of the primary ways in which bars evaluate their performance. Ultimately, the lower your liquor cost, the greater the profits you will generate from each drink. As a result, it is in your best interests to carefully monitor your bar’s liquor cost and take advantage of any potential opportunities to lower it.
Essentially, liquor cost measures how much you spend on a product to generate each dollar in sales. For example, if you spend 50 cents on a Jack Daniels cocktail that sells for $5.00, then your liquor cost for that drink is 10%. In other words, for every dollar of sales generated by that drink, your cost is 10 cents.
How to Calculate Liquor Cost
Calculating your liquor cost is accomplished by dividing the value of the product used by the sales of that product for a particular time period. The typical time period most bars use for calculating liquor cost is one month, although 1- and 2-week time periods also work well. For example, if your bar uses $5,000 of liquor one month and generates $25,000 in liquor sales, then your liquor cost is 20%.
In order to calculate your liquor cost, you will need several figures. Your liquor sales can be pulled from your POS report. In order to determine the value of product used, you will need to evaluate the following factors for the time period in question:
• Starting value of the product
• Ending value of the product
• Value of deliveries
The starting and ending values of each product will help you account for the change in inventory during the time period being analyzed. However, in order to ensure this figure is accurate, it is important to include the value of all deliveries received as well.
Problems Calculating Liquor Cost
It is common for bars to experience a bouncing liquor cost. This occurs when your liquor cost varies substantially from month to month. In most instances, a bouncing liquor cost is caused by using a poor liquor inventory system that fails to provide you with highly detailed, accurate data.
Human error is inevitable in the process of taking inventory and calculating liquor cost. Therefore, it is important to use a sophisticated liquor inventory system that minimizes these errors and allows you to easily find and correct errors when they occur.
Bar-i’s liquor inventory software provides you with an efficient and organized system for taking inventory. We then analyze this data along with your POS reports in order to provide you with a detailed assessment of how each product in your bar is performing. This level of detail also makes it much easier to identify errors when they do occur so that you can correct them quickly and have an accurate liquor cost to use when making purchasing and pricing decisions.
In Part 2 of this blog, we will discuss some of the common problems encountered when calculating liquor cost and provide you with some useful tips to eliminate these problems.
Please contact Bar-i today or call us at 303-219-0196 to schedule a free consultation. We provide services to bars nationwide from our offices in Denver, Colorado.