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.

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.

Keep Purchasing Procedures Simple

Whatever the size of your operation, certain repetitive purchasing procedures are unavoidable. At the very minimum, a buyer has to complete a purchasing requisition, a purchase order, a shipping instruction, a receiving report and carry out some form of quality control. Purchasing procedures, however, exist for a good reason. Save time, effort and money by simplifying them.

• Change your attitude. Instead of viewing purchasing procedures as an irritation, think of them as a support system. Accurate documentation in this area has rescued many a business  from the jaws of liquidation.

• Concentrate on basics. Buyers should always have adequate purchasing procedures in place. The key, however, is to avoid overkill. If a certain procedure in the buying cycle is irrelevant to your establishment, get rid of it. A written requisition, for example, may not be necessary if you regularly "call off stock ordered on a contract basis. Adapt and be flexible.

• The purchasing requisition. Save time. Establish a pared-down requisition procedure that identifies ongoing requirements and automatically triggers the purchasing cycle.

• The purchase order. No skimping here! The purchase order is a legal contract between purchaser and vendor. Even in small organiza­tions, the purchase order needs to be put in writing. Get it right. It can save time, hassle and money in the long run. A computer-generated purchase order considerably reduces human error.

• The shipping instruction. Keep it simple. This piece of documentation is merely a confirmation of instructions from the buyer to the seller. Whether handwritten or computerized, the shipping instruction needs only to contain simple information. It should include the purchase order number for the shipment, and it, too, should be numbered for record-keeping purposes.

• The receiving report. Again, simplify. Although an important document in the purchasing cycle, it only needs to contain basic information: the quantity and condition of the merchandise, whether the merchandise tallies with the original purchase order, a record of stock shortages, the recipient's signature and the date of receipt.

Define Your Purchasing Duties

It is all too easy to get bogged down in the day-to-day activities of purchasing. Remind yourself, occasionally, of your areas of responsibility. It helps you to focus on doing a good job.

• Don't lose sight of your overall goal. Your responsibility, as a purchasing manager, is to maximize value so that your establishment gets the most for its money. No more, no less.

• The cycle of duties. Always bear in mind that a purchaser's areas of responsibility cover an entire cycle of activities: identifying the needs of the establishment, planning, sourcing merchandise, purchasing, receiving, storing and issuing.

• Control. Effective management and control of the purchasing cycle, with a constant eye on costs, is your number-one duty.

• Dealing with vendors. The purchasing department (even if you are a one-man band) is responsible for all external dealings with vendors. The purchaser should be able to handle all vendor-related queries.

• Avoid taking your purchasing problems onto the "shop floor." Front-of-house personnel will not appreciate interruptions while they are trying to please customers. Apart from emergencies, keep all purchasing queries for later.

• High standards. It is the purchaser's duty to make sure that all merchandise purchased is fit for its purpose and of a consistently high quality. High standards = good value.

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.