Post Shift Shot #92 - Inventory Management

My first Post Shift Shot in a while, wanted to tackle Inventory Management this week due to people reopening, struggling with inventory and cash flow. Wanted to give 5 pointers including some that I got from peer, Sean Finter of Barmetrix this week.

For most managers and bartenders, bar inventory whether it is weekly or monthly can be very tedious; hours spent usually long before or after the bar is in operations, counting bottles and points of bottle. Taking proper inventory is especially important for bars, where over pouring, spilt and free drinks are commonplace and sometime accepted culture in many establishments. Any drinks that aren’t accounted for throughout the night, week or month hurt the bottom line and with the “new normal” in the industry beginning to roll out; these bottom line deficiencies will add up quickly and what may have been swept under the rug pre Covid will be a death knell now.

Bar Inventory and Costings Overview

Bar inventory is much more than just maintaining enough on-hand inventory to operate and generate sales. Having strong inventory counting and reporting gives you an insight into one of the most profitable and misunderstood areas in most restaurants and bars. Bar inventory reporting helps with strategic planning for budgets, projections and programming; on the surface it defines how your bar is performing financially, your purchasing costs and the overall cost of goods but as you dig deeper and evaluate the final figures, it can show you spillage and spoilage, sets minimum inventory trends, pinpoint the popularity of all drinks and even show macro market trends in drinking and spending habits. Fully understanding your inventory is much more than top line revenue, variances in costings and counting bottles.

The first step to understanding your inventory, is to create categories within your bar inventory. Liquor, Beer, Wine and Non-Alcoholic/Ingredients are the usual categories that most bars use as the overview for the products they stock, you can also go into more specific sub-categories such as red wine, white wine, whiskies etc. These sub categories can be very helpful post inventory in focusing on small variances within the larger categories but all this is very dependant on how deep you want to get on your POS back end programming as, with all the pieces in the inventory puzzle, you need the specific sales figures for those sub categories to use against the final inventory figures. Below are the two formulas to calculate your stock usage in dollars and the cost of goods percentage (COGS%).

Stock Usage = (Starting inventory + Liquor Purchased) – Ending Inventory

Then you take the stock usage figure and divide it by sales in that category.

Cost of Goods % (COGS%) = Stock Usage / Sales

Most restaurants have their own Cost of Goods budgets set in place and they are very specific to your venue, a beer heavy business may run slightly hire COGS based on contribution whereas a cocktail bar will be focussed heavily on liquor and ingredient costs (something that can go unchecked when you start adding in fresh squeezed juices, bitters and peripheral ingredients for prep). Your budgets are based on your business, your breakeven points, and overhead costs. Once you have mastered these two formulas, you can positively pinpoint where you have deficiencies, possible spills, spoilage, and theft and where you can improve the overall health of your bar and business.

The Psychology of Bar Operations

The long term, “old school” psychology of bar operations in many venues is a culture of buying drinks for loyal guests, staff drinks post shift, beer over pouring because the taps foam, wine spoilage all not being accounted for. Sean Finter of Barmetrix goes deep into the psychology of “justified theft” comes from lack of transparency from ownership and management, “bartenders and servers see owners and managers comping tables, buying drinks, setting a tone and culture that allows people who in their employ to see this as an acceptable practice”; transparency from ownership is more important then ever in communicating their goals and results to their staff.

Finter goes on by saying, “bartenders handle two things, cash/credit and inventory, we wouldn’t just dump nightly cash into a bucket and count and balance it at the end of the week or month but some reason, we treat inventory is differently. In most ways, inventory should be treated even more importantly than cash. End of night sales and cash is the result of selling inventory, but we treat our base products so blasé”. Fundamentally changing the culture of bar operations should always be a paramount mission for any operators, but even more so in this post Covid world of reduced capacity, minimal staff and maximising every cent in sales.

Quarterly Check ups

Quarterly check-ups of your costings in your inventory management systems is the bare minimum to successful long-term achievement of budgetary goals. In British Columbia, pricing for liquor, wine and beer change regularly and can be everything from one dollar to ten; if these price increases aren’t kept in check with regularly re-costing of ingredients, the variances in costings can be very damaging to your bottom line. Taking the time to check on every bottle every single quarter will help to continually increase your profitability and your efficiencies when it comes to inventory management.

Along with quarterly recostings comes realigning of budgets including acceptable variances. As an owner or a manager, what is an acceptable variance on your inventory? One, two, five percent? When creating your quarterly budgets, include purchasing budgets, category COGS, overall COGS and what you class as an acceptable variance in inventory. Inventory variances can be alleviated several ways, creating systems whether on paper or in the POS to account for comped drinks, spills, spoilage and research and development. All these factors into variances at the time of inventory and come directly out of your bottom line, a 1% variance can end up costing thousands of dollars by the end of the year. Inventory variance through proper management should be kept to an absolute minimum, anything more than zero is lost profit.

Inventory Systems

There is a myriad of inventory systems on the market, both here in BC and across the globe. From high concept Excel spreadsheets to fully automated digital systems. When finding what works for you best, you have to take into account a number of attributes; is your management team skilled enough to create and build working, deliverable spreadsheets themselves, do you have the time to do inventory whether it be weekly or monthly and most importantly, can these systems reduce inventory variances and save you money. Finding a system, whether old or new, the most important question is “Does this system give me more value than it costs”.

If you are running a relatively transient staff, not having a bar manager to handle inventory and reporting, hiring an outside bipartisan company to handle your inventory is one of the most efficient ways to shrink variances, have direct reporting showing what is red flagged for that period and overall making your business more cost effective. If you have a hands-on bar manager with Excel skills who is constantly plugged into your establishment and can deliver the reports you need for your business, then continue with that method. But, if you have any variances in your inventory, revaluating the way you count and report is imperative; you would not allow $100 variances in cash outs, do not do it with your stock.

Post Covid and New Legislation Changes

Dead stock that has been sitting for the last three months of lock downs has been inevitable, moving product has been difficult even with the legislation changes of take out liquor delivery with food orders. If you are still doing delivery services, pricing your wine 10-15% above cost to move it is a smart business pivot, turning stock that has most likely been paid for on credit card to liquid cashflow is most important during this time.

Another legislation change that has loosened up inventory into cash flow is the short term opening of on-premise licensees being able to sell to other licensees including liquor stores. This is perfect for any venue that has yet to open, or with a diminished capacity to move inventory to other venues and turn it into cashflow. These legislation changes including wholesale pricing are the necessary steps to brining sustainability to the industry during these times.

Inventory management is not difficult, but it is still a hugely overlooked section of bar operations in the industry. Creating a business model where every aspect of the business is viewed as equally important in realistic net profits is a culture shift that many will have to adopt over the next six to twelve months to stay open. At the very beginning of my career, I was told by one of my owners something that still resonates with me today and that was “Watch the pennies, the dollars look after themselves”.

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Share a dram with the hospitality industry’s top global talents: bartenders, venue owners, distillers and industry aficionados. Shawn Soole has lived, breathed, and imbibed hospitality for decades. Now, he delves into the advice, opinions, and provocative stories that are helping to define the creative, culturally-necessary space of ‘modern hospitality’—covering topics from front-of-house service, to back-end business operations, and every inch between.

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