Figuring Costs

It is surprising how many bars, restaurants, and nightclubs operate without the owners, managers, or both knowing how to figure out their costs every week. I assume they just wing it when trying to figure out if they made the correct amount of percentage profit for the week, or made any profit at all.

In addition, many don’t know how to price their drinks or their food to begin with, let alone trying to figure if they made money. At this point, it doesn’t matter why this education has slipped through the cracks, but to remedy it. By knowing your cost’s every week, it is a signal to you, the operator, on how you are doing, and it also signals possible theft that is going on in your establishment.

If your goods to sell are priced correctly, at the percentage of profit you desire to make on your goods, then at the end of the week, you should achieve that percentage of profit. If you fall short of that percentage of profit, then something is wrong.

And at this point it is up to you to figure out what went wrong. Did an excess amount of food get thrown away because it spoiled? And if it did, why was that? Did any of your product get stolen? And if so, are you taking steps to stop this from happening again?

You can’t survive in this industry without getting the profits you are supposed to, all of the time! And yes, this is a job in of itself, and can be time consuming. But it’s your money, and no one is going to watch it like you.

Now to the money. Everyone uses about the same percentage of profit but the term “about” makes a huge difference in your profits. Bars and clubs located in smaller towns are generally running a 25% liquor cost, as they don’t want to be too high priced for what their market will bare.

Ideally you should run a 20% liquor cost and that will give you a good profit and not be too high priced. And then you get into franchises, hotels, and larger cities, where they will run an 18% liquor cost. You may even see it lower.

The percentage of you liquor cost will determine your profitability and your success. The other thing is the terminology of “liquor cost”. I use that term as a total of alcoholic beverages, to include liquor, beer, draft, and wine. Now some operators like to run a different percentage for each of those. I think it is silly. That is just my opinion. If you are running a 20% liquor cost across the board, you are doing well.

You will also find that businesses in larger cities, resorts, hotels, upscale restaurants, etc. may even run on a lower percentage of cost. As I said before, the area you are in and the type of business you operate, will dictate what you can charge for your goods and services.

Now, how to figure this out. Let’s say you have a bottle of liquor that costs you $26.35. What do you charge for a drink? Well. What is the size of the bottle? Is it a 750ml, or is a 1 litre?

A 750ml bottle will give you 25 plus ounces in a bottle. I don’t worry about the fraction of an ounce past the whole ounces as I let it go and determine it as spillage, as there will be some. In a 1 liter bottle you will get 33 plus ounces in a bottle.

So lets say you have a 1 liter bottle that costs you $26.35 and you pour an ounce and a quarter shot in a ten ounce glass.

33 ounces divided by 1.25 ounce you pour =26.6 drinks can be poured from that bottle.

$26.35 per bottle divided by 26.6 drinks per bottle =.99 per 1¼ ounce shot

Formula: Take the cost of the shot, .99 , and divide it by the percentage of cost you are using, .20 = $4.95 price per drink.

The Formula: cost of 1 ¼ oz shot = .99 .20 cost percentage =$4.95

Easy right? But now comes some common sense pricing. You can use this formula for most everything, except for bottom shelf (rail liquor). If you use some real cheap stuff, of which I do not advise, you will have to establish a minimum price for a drink as the cheap rail liquor, when using this formula, will come out to be like a dollar a drink to charge, and you can’t charge that! So make your minimum, like $3-4.00 or whatever will be competitive. It’s your call.

You will make a ton here on rail liquor, but this will offset what you won’t make on wine, as it will be so expensive. You can drop your wine to a 25% liquor cost, so you don’t scare away those who drink wine by pricing too high. By raising the percentage number, it lowers the drink price, as the percentage of actual cost is higher.

Also the high percentage of profit on rail liquor gives you the flexibility to lower the price you charge on expensive top shelf liquor, or mixed drinks. Is this mandatory? No. Some people will charge this price no matter how much it comes to. I was always flexible here, as I wanted to make a good profit, but also wanted to take care of my customers who would drink more expensive liquors or wine.

If they can afford to drink this top shelf liquor and wine, then charge them, some people say. Yes, and no. Yes, make money, but no one like to be raped. Make it expensive, make money, but make it affordable. That’s my thought, but you need to do what you need to do.

Kegs. A keg of beer has about 2000 ounces in it. If you pour a 16 ounce draft: take 2000 and divide it by 16 ounces and you get 125 glasses of beer.

But by the time you drain your system every day by pouring out a couple glasses of beer in the lines left over from the night before, and add in spillage, hopefully very little, you will end up with 120 glasses of beer. An average keg will cost $65.00, so a draft will cost you about .54 cents a draft.

The longer the keg is on tap that you have to drain out the old beer out of the lines from the night before, and poor pouring habits, you very well will not end up with 120 glasses of beer. So your ideal cost of .54 cents per glass may end up more like .60 cents per glass.

So do you remember the formula? It’s the same for all products when you are trying to figure out what to charge for an item based on the percentage of cost you want to work from. We’ll do it again here.

We know that a glass of 16 oz draft beer is going to cost you about .60 cents from a keg that costs you $65.00. (see above)

Formula: cost of 16 oz draft = .60 .20 (cost percentage) =$3.00 price

Bottled/Can Beer. An average cost of a case of beer is $16.00 and like all cases of beer there are 24 servings per case. Take the cost of the case and divide it by the number of cans/ bottles, 16 divided by 24 = .66 cents per unit. We’ll round off to .67 cents each. Divide .67 by .20 and you should charge $3.35 for that beer if you are working from a 20% cost.

The Formula: cost of beer per can/bottle = .67 .20 (cost percentage) =$3.35 price

This formula, Cost divided by Cost Percentage = Sales PriceWorks for all items you want to price out.

Food works on the same premise. You have to break down the cost per meal. For example, if you are selling a chicken sandwich take the cost of the case and divide the number of pieces that come in the case and this will give you the cost per piece of chicken.

FOOD: So now that you have the cost of the piece of chicken, you need to figure out what else goes with that meal. You need to add the cost of the roll the chicken goes on, any produce, or any sides that come with this meal. For the sake of argument, we’ll say that fries comes with it too.

For instance, let’s say your piece of chicken costs you $1.10, and add .60 cents for the roll, add another .30 cents for the vegetable topping and condiments, and .35 cents for the portion of fries you give. We have a total of $2.35 in cost for this meal. And let’s say you are working from a 30% food cost, so what do you charge for the sandwich platter?

The Formula: cost of the food = $2.35 .30 (cost percentage) =$7.83 price

But booze cost may run from eighteen to twenty five percent, depending on what you want to work on, and your area.

Food is different and runs higher. The food costs percentage run from twenty eight to thirty five percent, and sometimes forty percent. Of course the lower your costs the more money you make.

OK, we are done with how to price your products. Now we have to see how you did at the end of the week to see if you are staying within the percentages of cost. Are you making the money you are supposed to?

You are at the end of the week, the dreaded Monday’s with all the closing of the week prior, and all the paper work. But look at it as a good day as this is the day you see how much money you just made for all your hard work. So we’ll do an example.

Example:

Opening alcohol inventory last Monday morning $ 7,252+ Purchases $ 3,872

Total available for sale $11,124

-Closing inventory value this Monday morning -$ 7,051Liquor Cost $4,073

$7,051 Liquor Cost (COGS – Cost of goods sold)$30,255 (Gross Liquor Sales) =23.3% cost

So for this example, you are working on a 20% liquor cost and your cost for the week was 23.3%. So you are over, and have lost 3.3%. Something happened. Your bartenders are giving drinks away, over pouring, or it has been stolen. There are no other reasons!

You use this same formula when figuring out your food costs to see where you are. This in mandatory and has to be done every week! Without you doing this every week you will never know if you have problems.