Expert Advice on Hospitality Topics

Inventory Valuation Made Easy

Daunted by the pros and cons of the various accounting procedures used in today's liquor, wine and beverage industry? No need. Choose the approach that best meets the requirements of your establishment. Keep it simple. The following methods are tried and tested. They are also known for their ability to control cash flow and to reduce overall costs.

• FIFO (first in, first out). This means that items in storage are valued at the level of the most-recently purchased items. FIFO helps maximize profits by extending inventory value, particularly when inflation is high. A word of warning, though: Make sure that all profits are accurately recorded and that all drinks are rotated on a strictly first-in, first-out basis.

• LIFO (last in, first out). Here, the most-recent items are recorded as the first ones used. This method is useful when prices are rising, fast. Rotate stock on a FIFO basis, but make sure that the value of the inventory reflects the oldest purchase prices. If your product valuation is keenly affected by inflation, use LIFO!

• Actual Method. With the Actual Method, the inventory is valued at actual cost. It's a bit time consuming, unless you have a computerized system - even then, the Actual Method is probably not the best choice for reducing costs.

• Last Price Method. Similar to FIFO, this is one of the most commonly used accounting procedures used in the beverage industry today. It involves using the last purchase price to extend inventory value.

• Computerized packages. Whatever your choice of method, a good-off-the-shelf package for calculating inventory values is a must.

Controlling Bar Inventory

Wastage, spillage, employee theft, oversights and inefficiency are most likely to occur in the working environment of a busy bar. Improved management of bar inventory can make a big impact on profits. Even one bottle of liquor represents a substantial profit - or loss. Introduce a few changes behind the bar. Small adjustments can make a big difference!

• Security-mark bottles. Security-mark every bottle of liquor destined for the bar when it is received into the storeroom. This identifying mark, stamp or nonremovable label (placed on the bottom or side of the bottle) proves that the bottle belongs to your operation. If you are using a computer-controlled inventory system, consider using a bar-coded label for better inventory control.

• Unauthorized sales. Empty bottles returned without a mark indicate that bar staff may possibly be serving liquor from unauthorized bottles. It is not unknown for employees to bring in their own bottles in the hope of making a fast buck!

• Control cards. All inventory requisitioned by the bar must be recorded in the perpetual inventory, usually by computer. A backup card system can act as an invaluable "double check." Don't make it complicated. All you need is a date and signature against the item.

• Bin cards. Bin cards give you extra control over high-value items. Fix small index cards (known in the trade as bin cards) to the shelves where such items are located. Keep a careful eye on the running totals.

• Backup liquor. Even on a typical busy night, one bottle of premium liquor and two to six bottles of well liquor is sufficient backup.

• Accurate records. Distinguish clearly between unopened and opened bottles when valuing inventory. Opened bottles should be measured to the nearest tenth of a bottle, using dipsticks or by weight.

Revise your existing issuing procedures. You'll be surprised at how much cost trimming you can achieve in this area. Issuing procedures are particularly vulnerable to employee theft and wastage. Establish a simple issuing procedure that focuses on reducing costs. Keep the following basic records:

• End of shift. Bartenders need to record the name of each liquor, wine and beverage emptied during their shifts. They should also note the number of empty bottles and the size of the bottles. Make bartenders responsible for this activity. They will feel accountable.

• Manager authorization. Managers should check empty bottles against the beverage requisition form at the end of each shift. It is much easier and more cost-effective for resolving any problems immediately than letting minor queries develop into major problems at a later date.

• Issuing replacement stock. Either the manager or the bartender is the best person to return empty bottles and the completed requisition form to the storeroom. The person replacing the empties should check all the information on the requisition and issue replacements, bottle for bottle.

• Breakage. It is important to account for breakage each time the requisition form is completed. Not only does it give you tighter control over cash flow, it also helps identify potential (and costly) problem areas - sooner rather than later.

• Daily cost keeping. Calculate, on a daily basis, the total cost of inventory issued. This should be viewed as a separate management or administrative function. It provides an essential "cross-check."

• Computerized issuing. A manual issuing procedure works well in many small establish­ ments. But, if you have the resources, opt for a computerized system. It will quickly repay your investment. For information about computerized solutions, contact:

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.

Inventory Levels Affect Cash Flow

The aim is to maintain that fine balance between J. running out and holding too much stock. Get it wrong, and you'll find that your working capital isn't working for you! Remember, the larger your inventory, the more difficult it is to control.

• Keep inventory at a minimum level. But not so low that you risk running out. Recommended inventory for high-turnover brands is approximate­ly one to two weeks' worth of stock.

• Jump in with special promotions. If you think you've miscalculated and overstocked, shift the inventory sooner rather than later, while it still has high value.

• Get to know the drinking patterns of your regular patrons. This information helps you calculate the bar pars or minimum inventory levels for each bar and the main stockroom.

• The perpetual inventory is a valuable tool. Keeping tabs on the flow of liquor, wines and beverages through your operation is probably the best way of knowing where to pitch inventory levels. Monitor stock daily.

• Weekly deliveries. In the drinks industry, this is the norm. Work your inventory levels around these weekly deliveries and avoid the cardinal sin of running out.

Manage Your Stock Wisely and Maximize Profits

Your challenge, in a nutshell, is to order liquor, wine and other beverages in the right size and quantity and at the right time and price.

• Inventory deliveries - timing. Schedule well liquor, beer and house wine deliveries for the same day each week, ideally a couple days after you place the order.

• Well liquor quantities. Order items with a short turnover rate, such as well liquor, in bulk. Well liquor moves fast, offering you a great opportunity to boost cash flow. Take advantage of case discounts. Also, consider larger 1.75-liter bottles instead of the usual 1-liter bottles if you think your turnover warrants it. There are big savings to be made in this area. Use larger bottles for special promotions.

• Beer is different. In order to sell beer at its freshest, arrange for deliveries on a weekly basis, or dally, if your establishment has the capacity to cope with the extra workload. Little and often is better when it comes to maximizing on beer profits.

• Wine. Order house wine weekly, other wine bottles by the case once a month. Only buy special vintage wines once or twice a year. Take a specialist's advice before stocking up on expensive wines. They can cost you dearly.

• Liquor and liqueurs. The following is a useful guideline: If it takes less than five weeks to turn a product, order by the case. If it takes longer than five weeks to sell a particular brand of spirits, order by the liter.

Track Inventory - Track Costs

In order to control inventory, you need to know exactly what stock you have/had and where it is or when you sold it (known in the trade as "cradle-to-grave" accounting). To operate a cost-effective tracking procedure, it is crucial that you document all liquor, wines and beverages as they progress through the inventory cycle. Choose whatever tracking method works best for your establishment, but don't think you can do without some form of system. You can't. On a positive note, however, developing such a system is one of the best ways of keeping a tight rein on expenditure. Follow this six-step guideline and you shouldn't go wrong! There are several cheap, off-the-shelf forms that you can use to help you with your record keeping.

• Step 1: Purchase order. The purchase order is the first form in the cycle. It provides a detailed record of every item purchased.
• Step 2: Perpetual inventory. This second form tracks the movement of liquor, wines and beverages from the storeroom to various locations within the establishment. It also tracks each product's turnover rate. The perpetual inventory is also used for accounting purposes.
• Step 3: Requisition form. This records the actual transfer of inventory from the storeroom to a specific location within the operation. This form is also used to record breakage.
• Step 4: Bar par form. This records the quantity of each brand of liquor, wine or beverage currently stocked behind the bar.
• Step 5: Depletion allowance form. This form is used to track the amount of spillage and wastage and to record any complimentary drinks.
• Step 6: Physical inventory form. Used primarily when completing end-of-period accounts, it records the result of physical stock audits.

Monthly and Annual Inventory Control

Daily inventory control is the first, essential step towards keeping costs in check. In fact, no business can function without daily records. But, look ahead. To maximize control of overall costs, establish sound monthly and annual inventory procedures. Drain every dime out of your liquor, wine and beverage inventory -long-term!

• Monthly inventory. Month-end figures are crucial for determining the financial success of your operation. Devise a simple monthly inventory sheet and use it, without fall.
• Physical count. Carry out a monthly physical bottle count. Check totals against the perpetual inventory figures.
• The "Cyclops." This handheld scanner reads the Universal Pricing Code (UPC). It can really speed up the monthly stock check!
• Weighing scale. Use a precision liquor-weighing scale. These devices are extremely fast and easy to use. They can calculate to within 1/40 of a fluid ounce.
• Annual inventory. Use annual inventory figures to review overall costs. For example, now is the time to consider price increases or to discontinue lines that are no longer cost-effective.
• Resolve queries. Merely recording monthly and annual inventory figures is not enough. Resolve any discrepancies immediately. It all adds up!

General Inventory Procedures

Minor overall changes can result in major cost reductions. Take a fresh look at your existing inventory system. In every establishment, there is general room for improvement. For minimum effort, you can get maximum value out of your stock.

• Timing. Move all drinks to a designated storage area as soon as they arrive. Don't let stock hang around. Drinks (and wine especially) need to be stored in an ambient environment, or their quality can deteriorate rapidly - and so can your profits! Also, unattended drinks, languishing in receiving areas, present a great temptation. Liquor is high on any thief s hit list.

• Faulty goods. When receiving merchandise, look out for cracked and chipped bottles, mislabeled boxes, outdated or cloudy beer, correct type and vintage of wine, raised corks, leaking and weeping bottles, damaged labels and wrong-size bottles. Contact the supplier immediately about any dis­ crepancies.

• Storage area. Your storage area must be fit for its purpose. Poor storage conditions can result in poor quality, breakage and escalating costs.

• Security. Basic, but obvious. A good security system removes temptation and reduces the risk of external break-ins.

• Rotate stock. First in, first out. This is important and avoids wastage, overstocking and running out. Pay special attention to beers: their shelf-life is limited. Most beverages, also, have no longer than a month before the sell-by date.

• Control. Large or small, every drinks outlet needs some form of control procedure. Track your products from the moment they arrive at your premises to when they are sold. While this doesn't have to be complicated, the key to any good control system is to make sure that all the liquors, wines and beverages are located in the right place at the right time and are being rotated properly.

Make the Most of Your Storage Areas

• Location. Define storage areas. Are you using the most convenient areas for storage? Rethink. Centrally located storerooms and walk-in coolers make ideal storage areas. Easy access saves time and money.
• Other storage areas. "Storage" means more than an area for dumping received goods! Storage locations include shelves, workstations, reach-in refrigerators and behind the bar. Keep all these areas accessible and clutter-free. It speeds up your operation and reduces breakage.
• High-value wines. Consider separate cellaring for prestige wines, somewhere away from the busy "shop floor" environment. As turnover of such wines is slower, accessibility is not top priority. More important is security and perfect storage conditions (even vibrations can affect the quality of good wines!).
• Extra security. All drinks should be stored in a secure area. Organize the layout of storage areas to offer maximum security for liquor and high-value wines. Only personnel who need keys should have them.
• Quantity. Drinks can be stored in bulk in the main storage area. Drinks in general storage areas, such as behind the bar, are better stored in the units or quantities in which they are sold.
• Environment. Know your product and store it accordingly. Maintain proper temperatures, humidity and ventilation. Wine is particularly sensitive to environmental influences. It can easily absorb odors from nearby food storage areas. Poor storage practices can quickly reduce the quality of stored inventory - and nothing affects profits like quality!

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.

As a purchasing manager, it is important to set standards. Decide up front exactly what types of drinks you need to purchase and the conditions under which you will place an order. These are your purchase specifications.

• Consult fellow members of staff. Their input is important. Of course you want them on your side, but oftentimes, it is they who know best what will sell (and what won't!).

• Purchase specifications must reflect the image of your establishment. Consider your target audience, the standards it demands and the price it is prepared to pay.

• Keep a written copy. It represents your establish­ment's overall purchasing standards and rules. It doesn't have to be a lengthy document; a few bulleted points will do.

• Purchase specifications should focus on the following areas: quality, quantity, consistency, reliability of vendors and availability of merchandise.

• Document your purchase specifications to vendors. Vendors need to be reminded of the standards you expect from them. Specs are also useful in the event of a dispute.

• Back up your purchase specification document with an additional product information list. Tabulate the information in chart format. Include information such as brand, country of origin, alcohol content (where applicable) and, in the case of wines, year and vintage. Use it to jog your memory when writing out purchase orders or placing orders by phone. This type of handy list can also help you spot "substitutes" when you receive the goods!