Expert Advice on Hospitality Topics

How Keeping Close Tabs On Your Liquor Supply Can Both Cut Costs & Generate Revenue

Industry studies have consistently shown that a full 25% to 30% of a bar's liquor inventory never converts into registered sales. That is the equivalent of about six to eight 1.25 oz portions per bottle (which should yield at least 25 portions.) This loss of liquor volume--due to unauthorized comps, over-pouring, spillage or theft--should be of great concern to any bar manager.

By Elizabeth Godsmark
Atlantic Publishing

The Basic Mathematics of Profitability

A typical beverage operation generates a constant stream of data and information, endless columns of figures and daily records. But you'd be surprised how few managers actually do anything with these figures, let alone fully grasp their implications. So how can you tell if you're operating profitably? The answer is you can't, unless, of course, you get to grips with some basic mathematics. For a start, you'll need to know how to perform a few simple calculations, such as working out an item's cost percentage. You don't need to be a mathe­matician to figure the following straightforward formulas:

• Cost per ounce. This is the basic unit cost of a drink. For example, to calculate the cost per ounce of a liter bottle, divide the wholesale cost of the bottle by 33.8 ounces, or in the case of a 750ml bottle, by 25.4 ounces. The figure you arrive at is the cost per ounce.
• Cost per portion. To be able to price a certain drink, you must first calculate the base cost of the serving. Use the cost per ounce to work out the cost per portion. For example, if the cost per ounce is \$0.60 and the recipe requires 1.5 ounces, then the portion cost is \$0.90.
• Cost percentage. Master this formula. You cannot function without it! To calculate the cost percentage of an item, divide the product's cost (or portion's cost) by its sale price and then multiply by 100. This simple calculation gives you the cost percentage. Profitability hangs on this key calculation. This calculation is the most frequently used formula in the beverage industry. It indicates the profit margin of any drink and represents the difference between the cost of the item and the price for which it is sold. If cost percentage increases, profit margins decrease..

Measuring Bottle Yield

You know the theory: to obtain the cost per ounce, you must divide the cost of the bottle by the number of ounces in the bottle. Fine, so far. But sometimes, in practice, the final sales volumes and profits can seem disappointing. You're confused because you have done everything by the book, and now, somehow, the figures don't quite add up. Get wise.

• Consider evaporation and spillage. When calculating a bottle's cost per ounce, the secret is to deduct an ounce or two up front, before dividing, to allow for evaporation or spillage. Although this will slightly increase the cost per ounce, it will also give you a more realistic starting point.
• Calculation errors. Slight variations can easily creep into a calculation involving both liters and ounces. For example, assume a highball contains 1-1/2 ounces of spirit (or 45ml): using ounces, a liter bottle yields 22.54 measures, whereas, using milliliters, the bottle gives 22.22 measures. Tip: "round down" in the interests of reality.
• Maximize potential yield. You know that a bottle of liquor yields so many measures at a certain cost. However, you also know that sloppy pouring methods can wipe out potential profits. The best way to overcome this problem is to standardize portion serving as much as possible. You've paid for the liquor and want maximum returns.
• Buy big. High-turnover liquor, wines and spirits should always be purchased in larger bottles for better yield per measure.

Gross Profits: The Lowdown

There is no better indicator of a business's success than its gross profit figure. By definition, gross profit is the cash difference between an item or portion cost and its sales price. All attempts to reduce costs should focus on this gross profit figure. Get to grips with how to figure out some important calculations related to gross profits.

• Gross profit. To calculate a drink's gross profit, simply subtract its portion cost from its sale price.
• Gross profit margin. This figure represents the percentage amount of profit made by the sale. Divide the amount of profit by the sales price and then multiply by 100. The result is the gross profit margin.
• Sales percentage profits. To calculate the selling price (based on the required gross profit margin), divide the portion cost by the gross profit margin percentage "reciprocal," i.e., the figure you get from subtracting the target gross margin from 100.
• Cost multiplier. This calculation is often used in the beverage industry to figure out the target selling price for a drink based on its portion cost. Divide the cost percentage you require by 100 and then multiply the result by the portion cost of the product.
• Mixed-drink prime ingredient costing. A calculation used to determine the target sales price for a mixed drink that has only one main ingredient, such as gin and tonic or scotch on the rocks. All you have to do is divide the drink's portion cost by the target cost percentage.

This article is an excerpt from the Food Service Professional Guide to Controlling Liquor Wine & Beverage Costs, authored by Elizabeth Godsmark, published by Atlantic Publishing Company. This excerpt has been reprinted with permission of the publisher. To purchase this book go to:

By Elizabeth Godsmark
Atlantic Publishing

Part 4 of 6: Securing Inventory to Reduce Pilferage

Don't leave stock security to chance. Any slackness in this area can seriously dent profits. Your central storeroom may well be as secure as a vault, but this isn't good enough. Tight security is essential in all locations where inventory is stored - from reception to behind the bar. Design a security system that ensures that all liquor, wines and beverages stay in their correct location throughout the operation. The following security techniques will help reduce pilferage:

• Storeroom keys. Change locks and combinations regularly. Insist that all keys remain on the premises at all times.
• Roll-down screens and lockable cabinets. Keep high-value inventory inaccessible to cleaning staff and other employees when the bar is closed.
• Limit access. Only key members of staff, such as management, receiving and storage personnel, should be allowed to enter the storeroom. It is also a good idea to limit the issuing of inventory to specific, set times.
• Lockable refrigerators and walk-in coolers. All storage areas should be completely lockable. Alternatively, have at least one lockable shelf for the highest-value inventory.
• Bar stock security. Danger zone! Keep the quantity of liquor and beverages stored behind the bar to a workable minimum.
• Investigate state-of-the-art locking devices. They may prove a sound long-term investment. Systems that involve combinations, codes, PINs and swipe cards are becoming increasingly popular.

By Elizabeth Godsmark
Atlantic Publishing

Part 7 of 7: Reduce Purchase Costs

The purchasing department is the linchpin when it comes to reducing costs. It is much easier to control costs in this area than anywhere else in the operation. The bottom line is that astute buying techniques offer the best opportunity for a business to increase its overall profits.

• Monitor market trends. An upsurge in popularity of a certain beverage can lead to increased competition amongst vendors. Play them off against each other occasionally. Negotiate. You have nothing to lose!
• Welcome new ideas. Purchasers should always be on the lookout for new ideas and new ways of reducing costs. Don't close your door to sales rep­resentatives. They may genuinely have something of interest to your establishment. Consider their promotional discounts.
• "Opportunity buys." Don't rule them out. Take a look at items that may soon be discontinued or overstocked merchandise where a supplier has simply miscalculated demand. You could make big savings.
• Cooperative purchasing. Consider "pool" purchasing with other enterprises. It can give you added purchasing power.
• Change purchase unit size. Buy drinks in larger volumes. This can trim costs considerably, particu­larly in the case of liquor purchases where sell-by dates tend to be more generous.
• Place multiple orders. Consider buying your full range of drinks from one wholesaler. It may offer you amazing reductions, especially if it's keen to do business with you on a repeat basis.
By Elizabeth Godsmark
Atlantic Publishing

Part 3 of 7: Securing Purchasing Procedures

A Good Purchasing Security System Can Save You Big Bucks

Build security into your purchasing procedures. The choiceof security system, however, depends a lot upon the size of your operation. If you are the "head cook and bottle washer" of a small establishment, security is a much simpler issue. If, however, you are part of a larger enterprise where a number of personnel are involved in purchasing, then security becomes a major concern. If this is your lot, give the following issues serious consideration:

• Set up a reliable purchasing control system. Whether your chosen system is manually operated or computerized, it must be free from loopholes.
• Beware of bogus documentation. Make sure that routine purchasing procedures are accurately documented from start to finish. Attention to detail in this area will help alert you to breaches of security. Be constantly on the lookout for
calculation "errors," deliberate duplication, "incorrect" invoices and bogus credit requests. These are all common ploys used by unscrupulous purchasers and vendors.
• Beware of the possibility of kickbacks. Some buyers have been known to "work" with suppliers in return for benefits such as money or gifts. Unfortunately, it happens all too often. Such "practiced" buyers and sellers are often masters of disguise, so don't be green, be keen!
• Beware of purchaser theft. This can take several forms. Purchasers may order merchandise for their own personal use or they may buy wholesale with the intent to "selling on." A carefully designed purchasing system will take care of most of these problems.
By Elizabeth Godsmark
Atlantic Publishing

Part 2 of 7: Buy Quality

The quality of the merchandise purchased sets the tone and standards for the whole establishment. Don't leave quality to chance. Mistakes can be expensive. Word spreads fast and you want a good reputation!

• Be up-front about quality. Make a conscious decision to purchase "quality" merchandise at the stage when the goals of the business are being established.
• The products you are buying must be suitable for their intended use. Studies have proven that the more suitable a product, the higher its quality. Make sure that the quality of any product measures up to the needs of your establishment.
• Quality must apply throughout the establish­ment. When it comes to quality, don't concentrate on alcohol beverages alone. Of course the types of wines, spirits, beers and liqueurs you sell are all crucially important; but don't forget the non­alcoholic beverages, such as quality coffee and soft drinks. Consumers in this sector of the market are a discerning and vociferous bunch! Something as simple as a poor cup of coffee can drive a customer away, never to return.
• Don't compromise on quality. Don't be distracted by poor-quality "offers" or bulk buys that you think, on the spur of the moment, might just "do." They won't. You'll end up regretting the purchase.
• Evaluate each product's quality in relation to cost. The most expensive product is not necessarily the best product for your enterprise. When making purchasing decisions, there is no need to sacrifice quality.
• Look at quality from a clientele perspective. What level of quality do your guests expect? Meet their requirements.
• Review your vendors for quality. Do you suffer from wastage due to poor quality products? Assess the quality level of potential vendors by first asking for samples. Document quality specifications to vendors. It is important to avoid misunderstand­ings.

By Elizabeth Godsmark
Atlantic Publishing

Part 1 of 7: Customize a Buying Strategy That Reduces Costs and Controls Inventory

Do you have a purchasing strategy? If not, you need one - NOW! It's never too late. A good buying plan is one of the quickest (and easiest) ways to reduce costs and make sure that your establishment gets the most for its money. Remember, the best place to control costs is in the purchasing department. The plan doesn't have to be complicated - just well thought out and straight­forward to implement. A few bulleted points will do. Keep your plan simple and stick to it.

• Use a simple five-prong purchasing strategy.

You want to buy:

• The right product
• Of the right quality
• At the right price
• At the right time
• From the right source

• Think of purchasing as a cycle, not a one-off  activity. Purchasing is not just a matter of  phoning or e-mailing through another order. You  don't want to run out, nor do you want to  overstock.
• Purchasing is not a separate activity. What, how and when you buy must always (yes, always!) reflect the overall goals of your establishment. Trends change - so must you, the purchaser.
• Commit your purchasing strategy in writing. Write your plan down on paper; save it on your computer, or any place where it is easily accessible. You never know when other members of staff will need to deputize.
• Step back. Get an overview. Ask yourself whether you're buying on the basis of long-term fixed prices  or current market prices. You should be doing both.

Although it's not always the easiest thing to do when you're busy, the introduction of even a few basic "tightening up" procedures can make the purchasing manager's life a whole lot easier - and reduce costs!

• Use your written purchasing strategy as a step-by-step guide. It saves time and money in the long  run. Even if you are 100 percent familiar with your establishment's current purchasing procedures, it's all too easy to overlook a crucial link in the procedure and end up wasting time backtracking  or duplicating effort.
• Reassess your timing techniques. Timing is crucial. Tune in to the drinks' market price fluctuations. The wine industry in particular is prone to seasonal fluctuations. Also consider the bulk  buying of soft drinks in anticipation of the summer season.
• Review your purchasing schedule regularly. Consumption of liquor, wines and beverages fluctuates, from month to month and year to year. A buying pattern that worked well last year may be be way off the mark today. Consider whether it is better to buy daily, weekly, or in the case of certain drinks, monthly.
• Take a fresh look at the layout of your purchase order. Is it accurately laid out, and are your instructions easy to follow? Remove any ambiguity - and remove the unnecessary hassle of processing "returns."
• Check out your vendors. Do they have a good track record for quality and reliability? Are they easy to deal with when things go wrong? Update your vendor contact list regularly, and always remain alert to possible new suppliers. Keep existing vendors on their toes!

This article is an excerpt from the Food Service Professional Guide to Controlling Liquor Wine & Beverage Costs, authored by Elizabeth Godsmark, published by Atlantic Publishing Company. This excerpt has been reprinted with permission of the publisher. To purchase this book go to: