For your profit’s sake calculate your liquor cost correctly

Alcohol sales are an easy way to increase profit in a restaurant business as the costs are lower and the gross margins are far greater for liquor than for food. However, the liquor cost should be controlled if one has to reach the maximum potential of gross profits from its sale. Every reduction in alcohol cost percentage renders a higher gross profit. Beverage costs that are higher than the industry averages can negatively impact your profitability.

Typically, a profitable restaurant generates 22%-28% liquor cost. As beverage cost has an impact on an operation, it is important to know where beverage cost falls in relation to total sales on daily or weekly basis. It also reflects the restaurants control system, management skill and value provided to customers. Therefore it is vital that the restaurant managers understand the importance of calculating the liquor cost correctly.

Calculating Beverage Cost

Beverage Cost = Cost of Beverage Sales/Total Beverage Sales.

Have a time period for the analysis. The liquor cost and sales that are generated for the period of two weeks or a month should be set as your accounting period. Non alcoholic beverages, soft drinks, juices etc are included in the food cost calculations and not in the liquor cost calculation.

~ Time Frame: Set up a regular time frame to analyze your beverage cost. It is important that the elements that make up the beverage cost,: sales, inventory and purchases are representative of this time period.

~Liquor Sales: Use the sales generated during the allotted time frame. To do this total the customer checks or reports from point-of-sales register, taking care to include sales from only the alcoholic beverages, other sales generated will go into the food account. For example, beverage sales (beer, wines, liquor) is 2200$ during the time period.

~Cost of Beverage Sales: This comprises of purchases and inventory level adjustments. Experience says that it is this part of calculation that is often incorrect. Determining the amount of purchase including delivery charges is straight forward. Equally important is the inventory adjustment which is often ignored. Many restaurant managers only include purchases in determining the beverage cost. This does not lead to accurate beverage cost percentage – depending on the day the purchases are made and what the cut off date is for including sales in beverage cost calculations, your beverage or liquor cost can be higher or lower than the actual figures. And this makes it difficult to compare and track beverage costs.

For example you make a purchase of all your spirits and wines on Thursday to prepare for the weekend rush, the time period for determining beverage cost ends on Friday. So when you calculate your liquor cost, it appears much higher than last month. Your purchases show a large delivery on Thursday, however you do not log the sales from the weekend to off set these large amount of purchase thus making your beverage cost out of line. In addition to this if you have not included your inventory adjustments the calculation is sure to be incorrect.

Inventory Adjustment: To correctly determine the beverage cost, inventory of the bar and store room area must be done at the end of each period. Once you have ending period inventory level, look at the change from the beginning (start of time period) inventories (bars and storerooms). Understand that the key to correct cost determination is knowing the role of inventory.

Thus, Cost of Beverage Sales = Purchase + – Inventory Adjustment. (Add is beginning inventory is greater than ending inventory and Subtract if beginning inventory is less that ending inventory).

These methods of properly calculating your liquor cost will help you as a restaurateur to manage the liquor cost and increase your profitability.