These questions, along with roughly eight out of every ten questions asked by owners in our industry, can all be answered through understanding and analyzing your bar's liquor cost. Subscribe now to get unlimited access to the best stories for free. Restaurant Solutions is backed by a team of experts that focus on educating our clients on how to continually succeed, and our dedicated professionals provide every RSI client with the knowledge and assistance they need to reach their financial goals each and every day! My contribution margin in this example is 94.2%. Formula for Variable Costs . Receive a valuable complimentary consultation with David to discover how he can support your organization with personalized coaching. The company also wants to determine the cost-minimizing mix and the minimum efficient scale. For example. Get all the best stories for free. Then ask yourself whether your menu prices are comparable to the true cost of the item, or whether you need to make some adjustments to both the ingredients and the price. -Once you do inventory for month 1 and find out you poured out 10 bottles of 1L Bacardi X, which costs you $8/bottle: Your COGS is $80 Your Usage is 10 bottles of Bacardi X (size 1L) Let’s pretend sales is $500 for the month. Here’s a step-by-step look at how to implement this formula: 1. If you would like a copy of any of the following send me an email at david@hotelfinancialcoach.com, Visit my website today for a copy of my FREE guidebook Use the following formula to calculate average cost per unit: Average Cost Per Unit = Total Production Cost / Number of Units Produced. Total Variable Cost = Total Quantity of Output x Variable Cost Per Unit of Output . But another important element of costs is to find the cost per ounce for the liquor you purchase as you will need this for pricing. Some examples of the fixed cost of production are selling expense, rent expense, depreciation cost, etc. Consider a full or half day hospitality financial leadership workshop. Although this is a specific itemized example, remember that our average pour cost of 16.67% is an average, meaning it probably wouldn’t work to price all our drinks exactly at 16.67%. Are you thinking about your management team and what to engage them with this year? The following best practices should always be implemented behind the bar. My contribution margin on this example is 65.8%, my beer cost is 35.2%. A 26-ounce bottle of Smirnoff costs our hotel $8. Email: david@hotelfinancialcoach.com www.hotelfinancialcoach.com, Your email address will not be published. As an added bonus, having an inventory system will ensure that your stock value (total sum of inventory value) is accurate against your purchases for that week. When it comes to their cost you are well-advised to look in the two-way mirror and see their contribution as the bigger part of their story and not their cost. Another way to establish the contribution markup is to express this as (11.00 – 1.71 = $9.29). I bet most of them do not. Required fields are marked *. Give the coach a call and let’s get going! Do you need a dynamic speaker with a unique and creative financial message for your next hospitality event? In this example, 75% of your maximum budget is devoted to everything but food cost. This system identifies what items are included in each part of the beverage cost formula. To control my portion, I always want to use a shot glass properly or— better still—an electronic portion device. Once you have those details, use the following food cost formula to calculate your food cost percentage: Opening Inventory Value + Cost of Purchases – Closing Inventory Value = Usage Amount. Think about your local car dealer. If you’ve managed a bar or restaurant for longer than a minute, you’ve undoubtedly asked or been asked, “what’s your PC?” or, “what’s your Beverage Cost?” or perhaps, “what is your COGS?”. Beverage cost was always a slightly complex beast and often misunderstood. We pour 1.5-ounce drinks in my establishment. Yes, I’d like a demo of Toast, a restaurant technology platform. The third and final part of the family we will look at is the contribution from wine. If a bottle of beer costs me $2.05 and I sell it for $6.00, the math is. For example, your total fixed costs are $50,000 and you produced 100,000 cans of your beverage. Now that you have an understanding of how to calculate your liquor costs, let’s press on and address the reasons why it’s important to know your liquor cost, and some of our best practices for managing liquor costs successfully. That was largely because this poor cousin to food cost was shrouded in a bit of mystery and mystique, like a secret lost cocktail recipe. Think about that for a moment: It takes a lot less to earn the 75 cents on each liquor item sold, than it does to earn 65-70 cents for each food menu item sold. Sydney Lynn, Senior Client Advisor, and Matt Vannini, Partner - Strategic Development Officer, are members of the team of restaurant accounting experts at Restaurant Solutions Inc. Their mission is to provide a cost-effective restaurant management system and service for independent restaurants that our competitors are unable to replicate. How to Calculate Restaurant Performance Metrics. Multiply your cost per milliliter (0.0507) by 30 to find out how much the liquor costs you per ounce. Liquor: $1906 + $6398 - $2425 / $23,000 = $5879 (25.56%). Let’s put a face on this formula. 100% - 75% = 25%; If your monthly budget is $70,000, you can afford to spend up to $70,000 x 0.25 = $17,500 on food cost to reach the 5% profit ($70,000 x 0.05 = $3,500) every month. Your beverage operation is no different. Do they understand the difference between the contribution margin and the beverage cost? Your fixed cost per unit is 100,000 divided by $50,000, or 50 cents. The question that I first want to ask you is this: Who in your establishment has produced and propagated the beverage contribution margin strategy? To calculate the allocation amount, divide the total fixed costs by the number of units produced. Costs incurred by businesses consist of fixed and variable costs. Knowing the answer, and how to calculate your liquor cost, can be the difference between life and death in the restaurant industry. To make up for this anticipated loss, we should increase our beer price by 20% (in this case, $1.00) to ensure we achieve a 20% pour cost and an 80% profit. In the first example, I am going to use a vodka tonic—it is in the liquor family. This leaves you with 75 cents of gross margin. When I serve wine, I always want to use a 5-ounce carafe or a portioning device to ensure my quantities are always correct. Also known as COGS, your Cost of Goods (the cost of the goods you purchase and use to create revenue), is the nucleus of every successful restaurant. The Seven Secrets to Create a Financially Engaged Leadership Team in Your Hotel Here is a liquor cost formula to track your spending, inventory, and find ways to save. Divide the first (purchases – inventory) number by the revenues. Using the example above, we know that for every dollar in sales roughly 25 cents is used to pay for the liquor. When a client presents themselves with a budget and needs your help to put together their event, you have an excellent opportunity to steer them in the highest profitable direction. So, how do exactly can you calculate your bar's liquor cost? Food cost is essentially the total cost of your food net of the existing Inventory. Having a keen understanding of your liquor cost enables you to protect your franchise players (liquor items) and ensure your restaurant is profitable. There are very specific nuances related to the management of food and beverage costs; today we’re going to focus our attention on liquor costs. We sell each highball for $8. What is the food cost formula and how can you use it to calculate your restaurants food cost percentage. Beverage Cost = Cost of alcohol sales / Total alcohol sales. – Always having two people count and record the same way every week provides you the accuracy you need to readily spot anomalies in your bottle usage and stock value. Here’s an example for calculating your liquor cost. Formula to Calculate Average Total Cost. In the house wine example, we produce a gross profit of $9.29 and a gross contribution margin of 84.5%. For an added benefit it is always recommended to provide your bartenders with a Comp Tab. The formula for fixed cost can be calculated by using the following steps: Step 1:Firstly, determine the variable cost of production per unit which can be the aggregate of various cost of production, such as labor cost, raw material cost, commissions, etc. Using your COGS to influence your purchasing strategy is a great way of turning data insights into tangible cost savings. Then add up the cost of all the ingredients. 0.0507 × 30 = $1.52 per ounce. Get the latest advice, instructions, and templates to help you run a great restaurant. Liquor cost of $.42 per portion, beverage cost of 5.8% and a gross contribution margin of $7.53. The first is the inverse of the cost divided by the selling price minus one. Variable vs Fixed Costs in Decision-Making. Most of the time, if not always, beverage costs are not included and are counted separately. There are 35 ounces in a one-liter bottle, so I get 7 glasses per bottle. Managing your profitability with regard to beer, liquor, wine, as well as any non-alcoholic beverages, represents the single greatest differentiator between success in the food-service industry, and being a part of the 26% who don’t make it through the first year. For the last step, follow the pour cost formula that we shared above to calculate your pour cost with the two values you just obtained: $1500 (Inventory Usage in $) ÷ $3800 (Cost of Product Sold) x 100 = 39.5% (Pour Cost) Pour cost is 39.5%. Step 2:Next, determine the number of units produc… See the seven most important restaurant metrics owners need to track and how to calculate them correctly. – The breakage book, also known as a Bottle Book is a tool that allows you to readily check your usage against your sales to clearly see if a team member has a pension to giving away a specific type of alcohol as well as controlling waste or spill. 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