# 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.

By Elizabeth Godsmark
Atlantic Publishing

Accounting (bookkeeping) theft is a major concern within the beverage industry. From falsifying daily inventory records to complicated auditing abuse, this area of theft is often the most difficult to detect. Sometimes, it is the managers themselves who are behind the scams. Owners need to be aware of the following possibilities:

• Sales records - falsifying daily sales records and stealing the difference between recorded and actual cash received.
• Inflating overtime - adding overtime or extra hours to payroll records in order to increase wages.
• Discounts - recording higher-than-actual discounts when reimbursement checks from credit card companies are deposited.
• Forging signatures - making checks payable to oneself, then forging signatures or using signed blank checks, then destroying paid checks returned from the bank.
• Falsifying bank statement reconciliations - overrecording deposits that have not been recorded, underrecording outstanding checks or even deliberately miscalculating reconciliation worksheets with the intention of covering cash shortages.
• Overpaying suppliers' invoices - then converting the suppliers' refund check for personal use.
• Resubmitting invoices - duplicating requests for payment and splitting the difference with dishonest suppliers.
• Dummy companies - setting up "dummy" companies and using them to submit invoices for payment.
• "Padding" the payroll - issuing checks for fictitious members of staff or employees who no longer work for the company.

By Elizabeth Godsmark
Atlantic Publishing

### Part 4 of 4: Trim Liquor Costs

Liquor prices don't vary a great deal from one wholesaler to another. Packaging and size also tend to be fairly consistent. So, what can you do about reducing liquor costs in your operation? The answer is quite a lot! It's a misconception in the liquor trade that your options are limited when it comes to selling liquor. Consider the following opportunities:

• Bulk buys. Purchase staple liquors, such as whiskey, gin, vodka, brandy, rum and other popular spirits (e.g., fruit brandies) in bulk. They have a long shelf life and you know you can sell them within a reasonable period of time.
• Trends. Stay ahead of consumption trends. Respond quickly. For example, the current trend in the United States is toward "light" spirits such as 80-and 86-proof whiskies, instead of 100-proof (50 percent alcohol) bonded whiskies. Wholesalers, too, are keen to promote these alternatives.
• Distilled spirits. Their shelf life is exceptionally long. Buy distilled whenever possible, and minimize wastage.
• Well liquors. Which well liquors you choose can really make a difference in reducing costs. But don't buy at any price and compromise on quality.Your reputation is at stake. Customers often judge an establishment by the quality of its well liquor.
• Call liquors. Increase margins on call liquors (brand names). Guests who ask for Gordon's gin or Jack Daniel's whiskey, for example, are loyal to the brand and will probably not question the price.

By Chris Parry
Atlantic Publishing

### Upsizing is Essential

When you go to the movies, quite often you can buy a double-sized popcorn for only \$0.75 more than the \$3.50 regular size. This would seem to be an astonishing bonus for the customer, so why does the cinema operator push this "up-sizing" so hard? Quite simply, because they're selling about \$0.04 worth of popcorn for that extra \$0.75. That second portion might not bring as large a profit margin as the first, but it's still profit. Your drinks run the same way - if you can get another buck out of a customer selling a drink that costs you \$0.45 to prepare, it's worth doing.

• Consider the cost per ounce of your well spirits. Let's assume you're using El Cheapo brand tequila at a base cost of \$7.54 a liter. That would mean that an ounce of that spirit is costing your establishment \$0.22, while a more-expensive brand of tequila, let's say Cuervo for the sake of this example, might come at a base cost of \$14 per liter, or \$0.41 per shot. Common thinking might lead you to say that by using the cheaper tequila you're saving yourself \$0.19 on every drink sold. But, if you consider the alternative of up-selling the more expensive spirit for an extra \$0.80 or so, you're actually making an extra \$0.61 profit on every up-sized drink.

• Offer your customers a discount to spend more than they planned. This works in other areas, too. Turning a single into a double for an additional dollar, or selling half-price burgers with every shot of a specific brand of spirit, brings you more money per order, while bringing your customers added value. Your profit margin might not be as high, but you'll be extracting more money from your customers than they might otherwise have spent - a definite win-win.

• Up-selling. Most bar customers will bring out more money than they initially want to spend -just in case - especially those that don't have easy access to it through ATM machines and credit cards, so it's imperative that your staff don't let those customers walk out the door having spent less than they planned. Incentives for up-selling are commonplace in the theater and fast-food industries, so why not offer your staff an incentive to up-sell and watch your better staff earn a few extra dollars while earning you hundreds?

• Incentives. For example, if a member of your staff engages someone in conversation and discovers they're looking for somewhere to hold a private function, birthday party, girls' night out - any large gathering of people - there's certainly no harm in making it worth their while to bring that prospective client to you. Twenty dollars here, \$50 there - even a percentage of the bar take - if you offer the incentives, you'll be surprised how far people will go to bring you new business.

By Chris Parry
Atlantic Publishing

### Structuring a Price List

Guesswork just won't do in today's corporate world. Figuring that if your scotch costs you \$14 a bottle you can sell a shot for \$3, is just a little hit-and-miss when you take in all the other potential costs, like rent, insurance and wages, that your establishment has to cover over the course of a month. It's possible you might be able to charge less than \$3, but it's also possible you should be charging way more. Take these factors into account when making your next price list adjustment:

• Market positioning. Take a look around at what your competitors are charging. Figure out if you need to undercut them or match their level. Does your establishment give added value enough to increase your prices and still draw a good crowd? Are you a level above them in terms of services and product? Are you evenly matched? Are you looking for a more "low rent" crowd? Price accordingly.
• The competition. They're not always right, but if they've been around a while, your direct competitors probably have a good gauge of what your local customers are prepared to pay for a drink. Take the time to look around and take particular note of any specials they offer on certain nights.
• Customer demographics. Are your patrons blue-collar workers? Are they white-collar? Do they have families to get home to or are they likely to stay all night and spend every penny? Are they young adults or senior citizens? These all impact what you can charge without losing clientele, and you should have the information already from your market research.
• Embrace simplicity. It's far better for your customers and staff to have to deal with a simple pricing structure as opposed to forcing them to break their brains over an intricate maze of differently priced products. Set across- the-board levels of prices; for example, well spirits might cost \$3, middle-shelf \$3.50 and top-shelf \$4. Of course there's always going to be the occasional variation, but for the most part, a three-tiered system gives you flexibility in pricing without your staff continually needing to check a price list or hand out handfuls of change.
• Include tax in your pricing. There's nothing worse than getting \$0.84 change from a five- dollar bill on every drink you buy and getting home with a pocket full of silver and copper. If you're going to set your prices at a round level, include the tax in that price so you can use price levels to your advantage. If your alcohol tax rate is 10 percent, the non-tax price for a shot that costs your patrons \$3.50 would be \$3.18 (\$3.18 plus tax of \$0.32 equals \$3.49). Let your accountant do the math, not your bar staff. Sales tax is a complicated matter that varies dramatically from state to state. Prior to estab­lishing the net price inclusive of tax, discuss the issue with your accountant and state Department of Revenue. Don't find out later in a five-year audit that you've been calculating the tax incorrectly.

By Chris Parry
Atlantic Publishing

### Part 2 of 2: Protecting Your Profits

Your profit margin, like that of any business, is fragile at best. You can sit down with a calculator and try to calculate the exact percentage you'd like to see on each drink. But in practice, a little splash too much here and there can see you falling perilously close to a loss. Follow these rules and you'll be that much more likely to see your bottom line behind the bar match that of your balance sheet estimations.
• Watch what your staff pours. Regularly measure what they consider an ounce. If just one bartender overpours 40 shots a night by 25 percent, you've given away ten drinks for nothing. This kind of waste can get very expensive, especially if you have a large bar staff and they're all pouring more than 40 drinks per night.
• Have your staff keep all the liquor in the glass. Many staff members get lazy as the night wears on, and inevitably they'll start taking shortcuts. One shortcut many take is to line up three or four glasses and pour one after the other in a straight line without raising the head of the bottle. While this may save them a second or two, it also pours a lot of your product directly onto the bar surface, not to mention down the sides of the glasses that your customers are about to put in their hands. It also means your customers are far less likely to get what they've paid for. Don't let it happen.
• There are alternatives to free-pouring. While free-pouring certainly is more stylish and perhaps faster than measured pouring, it is also definitely far from accurate. As bar staff generally tend to err on the side of caution, they usually pour too much rather than too little. Control-pour spouts, such as Posi-Pour spouts, are a little more expensive than the usual free-pour, but they give a far more accurate pour without the need for clunky overhead systems or sophisticated electronics - and at much the same speed as free-pourers.
• Liquor control system. If you really want to keep an eye on your outgoings, a liquor inventory control system may be your answer. The price of setting these systems up, and maintaining them, can be significant. Then again, you get what you pay for.

By Chris Parry
Atlantic Publishing

### Part 1 of 2: The Profits

What does each drink cost you?