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Restaurant Accounting: For Profit's Sake - Inventory Your Beverage Cost

by Ron Gorodesky and Ed McCarron

Beer Tap with bottles The food and drink is great, the service fabulous and the restaurant is busier than ever - but are you wondering why the bottom-line isn't all it should be?

Alcohol sales (beverage sales) are an easy way to increase profitability because the costs are lower and the gross margin is far greater for beverage than for food. However, beverage costs must be controlled if an operation is to reach maximum potential of gross profit from beverage sales. Every reduction in beverage cost percentage renders a higher gross profit. Beverage costs that are above industry averages can negatively impact your profitability. A profitable restaurant typically generates a 22% to 28% beverage cost. Because of the impact beverage costs can make on an operation, it is important to know where beverage cost falls in relation to total sales on a daily or weekly basis. Beyond the bottom line, beverage costs also reflect an operation's control systems, management skill level, and value provided to the customers.


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Despite its importance, we find many restaurant managers do not calculate beverage cost correctly, or if they do, they do not fully understand the process. If calculated correctly, the ratio can be compared to industry averages and previous performance. Alcoholic beverages are included in beverage cost calculations. Soft drinks, juices, coffees, and other non-alcoholic beverage sales are included in food cost calculations. With an accurate beverage cost, steps can be taken to improve the operation and ultimately improve the bottom line. The following is a step-by-step method for calculating beverage cost including an example and a worksheet to calculate your own beverage cost.

CALCULATING BEVERAGE COST

Keeping in mind that eventually you want to compare your beverage cost with industry averages, how you determine the numbers must be consistent with industry practices. The industry standard is based on the Uniform System of Accounts for Restaurants (a handbook available from the National Restaurant Association). This system clearly identifies what items are included in each part of the beverage cost formula and is briefly outlined below.

Beverage Cost = Cost of Beverage Sales / Total Beverage Sales

GENERAL GUIDELINES

Establish a specific time period for analysis.

The beverage sales and costs should be generated during a set accounting time period of at least two weeks or more typically, every 28 days, or monthly. Soft drinks, juices, coffee, and other non-alcoholic beverage sales are included in food cost calculations, not beverage cost calculations.

STEP BY STEP - CALCULATING BEVERAGE COST

1. TIME FRAME

Working with your accountant and managers, set up a regular time frame to analyze beverage cost. It is critical that the elements of the beverage cost calculation (sales, inventories and purchases) are representative of this time period.

2. BEVERAGE SALES

This is the relatively easy part - total the customer checks or reports from point-of-sale registers - making sure to only include sales generated from beverage sources (sources other than beverage should be allocated to a "food" or "other income" account). Remember to use sales generated only within the allotted time frame.

Example: Beverage Sales (Liquor, Beer, Wine) $1,850

3. COST OF BEVERAGE SALES

The costs associated with beverage sales are comprised of purchases and inventory level adjustments. In our experience, this part of the calculation is often computed incorrectly. Determining the amount of purchases for the time period is straightforward:

Total all beverage purchases (include delivery charges)

Example: Beverage Purchases in past 28 days $500

Equally important, and often not included in determining cost of beverage sales, is the inventory adjustment. Many restaurants consider only purchases in determining beverage cost. This does not create an accurate beverage cost percentage - depending on the day purchases are made and what the cut-off date is for including sales in the beverage cost calculation, your beverage cost could appear higher or lower than it actually is. Additionally, this discrepancy makes it difficult to compare and track beverage costs.

For example, suppose you receive (purchase) all your spirits and wine products on Thursday to prepare for the weekend. The time period for determining beverage cost ends on Friday (the next day). In calculating your beverage cost, it appears much higher than last month. While the increase may be due to theft or another operational issue, most likely it is due to calculating your beverage cost inconsistently and incorrectly. Your purchases reflect a large Thursday delivery, however, you do not log the sales from the weekend to offset these purchases, making your beverage cost appear out of line. Additionally, you have not factored in the inventory adjustment.

Determine Inventory Adjustment
To properly determine beverage cost, a physical inventory of the main bar, service bar and storeroom areas must be conducted at the end of each period.Once you have your ending period inventory level, look at the change from your beginning (start of time period) inventories (bars and storerooms). The key to accurate cost determination is understanding the role inventory levels play. For example, if the beginning inventory level is valued at $100 and four weeks later the ending inventory for the period is valued at $75, the inventory adjustment is the $25 difference - an increase in cost of beverage sales because you used $25 worth of inventory and did not replace it with new purchases.

Considering this change and its effect on cost of beverage sales, apply the difference to the total purchases for the time period, giving you the total cost of beverage sales.

Cost of Beverage Sales =Purchases+/- Inventory Adjustment

(ADD if Beginning Inventory > Ending Inventory, SUBTRACT if Beginning Inventory < Ending Inventory)

Example: Purchases $500 Beginning Inventory $750
Ending Inventory $625
Total = $125

Cost of Beverage Sales =$500+$125
Cost of Beverage Sales =$625

4. BEVERAGE COST PERCENTAGE

The final step - putting the numbers together!

Beverage Cost = Cost of Beverage Sales / Beverage Sales

Example Beverage Cost = $625 / $1,850 = 33.8%




ANALYZING YOUR BEVERAGE COST

What should your beverage cost percentage be? Successful restaurants generate beverage costs in the mid 20% range. However, different types of operations typically run higher or lower percentages - fine dining may run up to 35% (sales of bottles of wine are usually less profitable other alcoholic beverages) whereas brewpub restaurants may run about 15%. Comparing your cost percentage to restaurants with similar menus and service levels provides a more accurate perspective.

For example, the average beverage cost is 32.1% for American/Regional menu themed restaurants and 30.8% for a restaurant in a multi-unit organization.

How can you use your beverage cost percentage? The next step requires compiling the sales and costs consistently and regularly, as comparisons to previous performance can prove very helpful, identifying problems and trends - remembering that a decrease in beverage cost is as important to investigate as an increase. From here, your operation is positioned to tighten its beverage cost by looking closely at various methods used to control beverage cost - with the ultimate goal of positively impacting your bottom line.

CONTROLLING YOUR BEVERAGE COST

There are many methods used to control liquor costs and every operator needs to determine which methods should be implemented. The following are some basic methods that could be applied. A combination of several different controls is the best way to ensure tight control and therefore see the maximum potential liquor sales offer.

1. Par stocked bar

    • The bar should be stocked based on a number of bottles of each brand sold on the busiest day plus a margin for safety.
    • Bottles should only be restocked by managers and only on a bottle for bottle basis.

2. Receiving and storing

    • Purchasing and receiving functions should be undertaken by separate individuals. The beverage buyer should not be the same person receiving the merchandise. A receiving report is generated by the purchasing manager stating the quantities, sizes, and agreed upon prices for the order. The receiver is responsible for inspecting the order when it comes in and making sure it matches the report.
    • All bottles received should be marked in a way that makes the bottle identifiable as a house bottle (to prevent bartenders from bringing in their own bottles and keeping the profits)
    • All received merchandise should then be stored in a locked area where access is limited to as few people as possible (ideally just one), as this allows shortages to be traced.

3. Maintenance

    • A perpetual inventory should be maintained for each time period with adjustments for purchases and requisitions. This perpetual inventory should be compared against a physical inventory at the close of every period and variances should be noted and investigated.

4. Bartending standards

    • All bartenders should be required to complete all transactions for sales immediately, either by opening a tab or accepting payment. Any delay in this makes it easier to "forget" to ring in a sale.
    • Some method of recording sales should be employed in a consistent way. Either red lining a dupe once payment is made or filing copied dupes for each shift.
    • An accurate pouring method should be utilized.
    • Drink recipes should be consistent and readily available.

These methods of control and properly calculating your beverage cost will go a long way in assisting you, the restaurateur, to manage beverage costs and increase profitability.



Restaurant Advisory Services provides full-service consulting services to the restaurant and hospitality industries. The firm offers a full menu of advisory services focusing on every aspect of the life cycle of restaurants and other hospitality organizations, from pre-opening and conceptual planning, to day-to-day operations, to design and brokerage.

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