How to track inventory costs for craft cocktails.
In an article written many years ago Jeffrey Morgenthaler wrote about how to calculate Pour Cost.
In the broadest sense this number gives you the ending value of your change in inventory, or how much money you took in vs how much booze actually went out the door. Pour cost can reasonably be considered a kind of gross return on inventory. While I’m sure that comparing this number month to month will tell you a bit about how your drinks are selling in aggregate they don’t tell you the whole story about your inventory use.
The reasons for this are due to the varied ways in which inventory can be taken. You are probably shaking your head right now asking, “Isn’t there only one way to count?” If accounting classes have taught me anything it is that there are as many ways to count as there are types of business.
For instance, in some states the price of a given bottle of liquor isn’t going to change much month to month. In others the cost of a bottle can be based almost entirely on the volume of liquor you are buying. So a bottle purchased on the 1st of the month doesn’t exactly have the same value as one purchased on the 20th even if your own prices don’t change. This can be especially important in a bar where the price of a shot can vary drastically based on label or age.
In some other places I have seen distributors make deals where a case will be purchased at full price, a second at half and a third is given free as a purchase incentive. Keep in mind I have no idea if that is even legal in the places where it happens but it does happen somewhere. How do you price a bottle from one of those cases?
The answer has to do with how you handle your inventory. There are three main methods recognized in accounting. First In/First Out (FIFO), First In/Last Out (FILO), and Weighted Average.
Take the second example above and enter the cases into inventory as they are purchased. A bottle from case 1 costs $20, case 2 costs $10 and case 3 is $0. Under FIFO the bottles from case 1 are used up first which means that the drinks made from those bottles will have a normal cost but as you use up that first case the value of your inventory will decline more quickly. Say you use 1.5 cases a month, Month 1’s ending inventory will be a lot lower. Then in month 2 you will see very little decline at all as that third case doesn’t change your inventory values at all. This isn’t a bad thing it simply means you’re loading all the savings into the first case and taking a hit on the third.
Under FILO the reverse happens. The newest bottles are always the first ones to go so if they are the least expensive then your inventory numbers will always be high compared to your sales giving you a high pour cost. If the new bottles are always more expensive than the old it will drive you pour cost down. This can have a bigger impact on items that have a variable price but aren’t totally used up before restocking.
Weighted average is possibly the best option overall. The numbers it provides are more even and representative of the general cost of a product regardless of how much of a swing in price it has. The downside is that it requires a little more math to figure out. In our example above the three cases are added together and averaged. So each bottle is $10 ($30/3). This means that you have a more regular number to use when figuring out individual drink costing and that you aren’t going to get wild swings every time an older bottle is used that throws a kink in your numbers.
Putting it together
Why is this important? It becomes important because the per ounce cost of a given bottle is going to vary every time you restock. Seldom will the price of a bottle or case remain static for a long period of time. Before you can accurately count your pour cost/profit margin you need to now if the value of that inventory changed because of a change in the cost of the bottles themselves.
What does pour cost tell you?
Pour cost is an after action number. Meaning that it doesn’t really help you to plan your purchasing, your menu, or your staffing. It tells you if you were making money on the stuff you bought since the last time you did inventory. A lot of factors can impact this number. Some bottles may be initially expensive but lack a demand at the time of purchase. This is going to drive up your starting inventory numbers and your ending inventory numbers without really impacting your sales. Similarly a cocktail that has very little actual alcohol in it but has a high cost because of time intensive craft ingredients and preparation may drive up your sales without impacting your inventory in a big way. In most cases pour cost is simply a quick way to tell if you’re making money or not. It might also be a lead in to finding shrinkage from over-pours and unrecorded “comped” drinks.
Pulling from the shelf
It is important to note that one bottle of a given brand of booze is much like another. If you have 10 bottles of the same Grey Goose expression on the shelf and each one cost you a different amount it doesn’t really matter which one is which. As any bottle is used the inventory method determines in what order they are deducted from your spreadsheet. I have run into people who get really anal about pulling the oldest bottle first when they’re using FIFO but unless your product expires in some way this isn’t really necessary. If the expressions are different then there is a difference and the bottles should be inventoried as separate items, this might be true of a specific barrel number, bottling year or blend.
Next up: How this relates to menu creation and drink costing.