How to Calculate Liquor Cost in Your Bar or Restaurant?

“Quick summary” Every bar manager or owner should monitor the expense of the alcohol they provide. The simplest definition of liquor cost is the cost of buying alcoholic beverages from wholesalers. Alcohol has a significant profit margin but a high liquor cost—also known as a pour cost or beverage cost which takes up a greater percentage of your profit.

So, in order to get the best results, you should get a solid understanding of how to calculate liquor cost and manage it effectively in your restaurant if you want to become profitable. But to manage it successfully, you must understand what it is, what it means, and how to manage it.

Once you figure out your COGS, manage it accordingly, and price your bar menu correctly, you'll have a consistently successful business with satisfied customers! So, let’s start with the basics of everything you need to know about Liquor cost, how to calculate it, and everything around it.

Liquor Cost Formula

As a business owner, you must know about so many different things, and even if you don’t like math at school, you still need to manage it for your business. Knowing the figures of your liquor cost and other related things can make or break your business.

To liquor cost calculate, you need to use the following formula:

COGS = Opening Inventory + Purchases - Ending Stock ÷ Sales * 100

• Opening Inventory: stands for the stock you have at the start of the week or month, and considering it for calculating your liquor cost is essential.
• Purchases: Then, you need to add up the purchases in the opening Inventory. The purchases include the additional purchases you have made throughout the week or month.
• Ending Inventory: After that, you have to deduct the ending Inventory from the final Inventory, which means the Inventory that is left at the end of the week or month.
• Sales: In order to get the liquor cost, you need to divide the sales from the amount you got after deducing the ending Inventory from the total Inventory and then multiply the answer by 100. The final answer that you got is your liquor cost.

If you are still confused about applying this liquor cost formula, don't worry. Let's see the implementation of the formula in action.

Liquor Cost Formula in Action

The liquor cost calculation formula (as discussed above) is Opening Inventory + Purchases - Ending Inventory ÷ Sales
[OI + P - EI ÷ S * 100]. Let’s understand with real figures and get your liquor cost calculation answers.

• (OI) Opening Inventory: Suppose the opening Inventory for the month of the liquor is $1000.
• (P) Purchases: At the end of the month, you need to add up the ongoing purchases throughout the month to get the COGS of liquor. Suppose the ongoing inventory purchases are around $600; then the final figure is $1000 + $600 = $1600
• (EI) Ending Inventory: The remaining inventory should be subtracted at the end of the month. Suppose the ending inventory is around $300; then the final amount would be $1300($1600-$300)
• (S) Sales: At the end, to get your final answer, you need to divide your sales by the total amount and then multiply the 100. Suppose your sales for this month are $5000. So, the final answer would be 26%. ($1300 ÷ 5000 * 100). 26% is your COGS, and the remaining 74% would be your profit or Gross Margin.

Let’s simplify: $1000 + $600 - $300 ÷ $5000 * 100 = $1300 i.e. 26%

Why You Should Know Your Restaurant Liquor Cost?

Knowing exactly how to calculate your liquor costs can help you protect your Inventory and ensure your restaurant is successful.

Your bar may experience problems with spills, overpours, unreported comps, unfavorable pricing on the menu, and even theft. Any of the elements above can affect your liquor pour cost numbers.

Let’s understand with a quick example:

Let's assume that the cost of making one cocktail, including labor, is $3. You're selling less of your product if your bartenders are overpouring drinks or giving them away for free. But you continue to pay your vendors the same sum for it.

It decreases the price of your liquor and reduces your earnings. For this reason, you must understand menu pricing and how to account for shrinkage.

However, knowing the exact costs of alcohol helps you identify inefficiencies and find solutions to eradicate those efficiencies.

How to Properly Manage Liquor in Restaurants?

There are so many things and steps you should keep in mind to manage liquor in your restaurant properly. It is a kind of responsibility that you need to handle effectively, which ensures your establishment runs without many hassles.

To properly manage liquor in the restaurant, you need to follow the three important steps such as end-to-end inventory tracking, prepping the right strategies for storing, and leveraging best practices for managing liquor business operations.

1. End-to-End Inventory Checking

Checking your inventory is essential to managing the liquor in your restaurant business because it has a significant impact on your costs and profits.

Tracking liquor inventory regularly with a dependable POS system is the preferable technique here because even minor errors can adversely affect your earnings and expenses. Therefore, regularly tracking this inventory is necessary to calculate liquor costs to the precise dollar amount, which is what every business aims for!

2. Set Guidelines for Proper Storing

Storing your liquor in the right place is very important to preserve its quality.

Here are some standard guidelines you should follow for storing liquor:

• Make sure to store it in a cool, dry place away from direct sunlight. Heat and sunlight can cause chemical reactions in the liquor, which can affect its flavor and quality - so keep these things in mind.
• You shouldn’t store the liquor in a location that is easily accessible to customers or staff members who are not authorized to handle liquor.
• Bottles should be properly sealed after each use to prevent evaporation and preserve the quality of the liquor.

3. Establishing Clear Policies and Procedures

Having clear policies and procedures for handling liquor is important for ensuring that all staff members are on the same page and that liquor is handled responsibly and can act quickly and efficiently in any situation that may arise.

You need to effectively handle cash and credit card transactions, including policies on handling cash and credit card transactions, procedures for verifying IDs, handling tips, and processing refunds.

By establishing clear policies and procedures for handling liquor, you can ensure that all staff members are aware of the proper protocols for handling liquor. It can help to prevent accidents, minimize waste, and ensure that customers are served safely and responsibly.

Understanding Liquor Cost

Understanding the liquor cost is another crucial consideration to keep in mind to ensure the nitty gritty of liquor cost and how you can utilize it effectively to decide the right pricing strategy for your drinks at the establishment.

Understanding liquor cost includes considering different factors such as the definition of liquor cost, the importance of calculating liquor cost, and some of the factors affecting liquor cost.

To make it easier for you, we have also included an example; keep reading to know more in detail.

1. The Basics of Liquor Cost

Every bar management should keep track of the expense of liquor. Simply put, liquor cost is the price you pay to buy alcohol from wholesalers. On the internet, you'll hear people discuss the pour cost percentage. You'll also hear about the cost of beverages. They have the same meaning.

It is essential to run a bar, restaurant, or other institution serving alcoholic beverages. The price of liquor varies according to the kind of alcohol, brand, and location.

Liquor cost is a proportion that contrasts the cost of alcohol sales to total alcohol sales over a specific period. It shows you what proportion of your selling price you use to manufacture a drink.

Let’s understand with an example:

If you utilized 25 cents of alcohol and sold it for $1, your beverage cost would be 20%. It is often referred to as beverage cost % or liquor pour cost calculator. The median pour cost for most bars and restaurants ranges between 18 and 24%.

2. Why Is It Important to Calculate Liquor Cost Accurately?

After determining the what, determining the why is also important for your liquor business. As a restaurant or bar owner, you must realize the necessity of keeping your liquor prices under control. The average restaurant spends 18%-24% of its budget on liquor. That's a substantial portion! Understanding liquor expenses is so critical for keeping your business viable.

Not only calculation but the correct calculation of your liquor cost is critical to maximizing profits and staying in business.

Here’s how calculating liquor costs is beneficial for your business:

• Determining the Right Pricing: Knowing your liquor cost allows you to calculate how much profit you make on each drink sold. If your liquor costs are excessively high, your profitability may suffer.

  On the other hand, if your liquor costs are too low, you may be selling your beverages at a reduced price, thus losing money. With accurate costing in hand, you can determine the right price for your products.

• Efficient Menu Planning & Management: Knowing the cost of your liquor will help you organize your menu and identify which beverages are the most profitable. By studying your sales data and liquor costs, you may decide which cocktails to have on your menu and which to eliminate.
• Negotiation With Suppliers: Knowing the pricing of your booze can help you negotiate better deals with your suppliers. You can even choose to compare the prices with other suppliers and get the most bang for your buck.

3. Factors Affecting Liquor Costs (Pour Size and Product Variety)

The cost of alcoholic beverages is influenced by factors such as Consistency & Product variety.

• Consistency and Pour Sizes: Not only for dieting but also for managing liquor pour sizes, portion management is crucial. Standard pour amounts in bars are typically 1.25 or 1.5 ounces, with occasional premium spirit exceptions. Pricing accuracy can be maintained by maintaining consistency in pour sizes and training bartenders appropriately.
• Product Variety and Mix: Liquor prices are influenced by a bar's product mix or the variety of brands and items it offers. More money is spent at upscale bars with a wider selection than dive pubs with fewer options. To balance out costs, you can also pay more for premium alcoholic beverages and craft cocktails.

Calculating Liquor Cost

Calculating liquor cost is an important task for any business that serves alcohol, as it helps determine the profitability of the business. The liquor cost is calculated by determining the total cost of liquor purchases over a specific period and then dividing that cost by the total amount of liquor used during the same period.

This calculation provides the cost per unit of alcohol, which can then be compared to the selling price to determine the profit margin. With this information, you can optimize your operations and maximize your profits.

1. Step-by-step Guide to Calculating Liquor Cost

After understanding liquor cost, and its importance, we will determine how to calculate liquor cost percentage with our step-by-step guide. We will include some of the crucial steps in the step-by-step guide, such as collecting the required data, calculating the usage, calculating COGS, and then comes the liquor cost. We have also added the example to help you understand better, keep reading to know more about it.

2. Collect All the Required Data

To get accurate details, collect, analyze, and take the necessary steps to make changes accordingly.

Here are some of the crucial data that you need to consider for better decisions:

• Sales Data: When you are looking to gather crucial data, you need to find out about the type of alcohol that was sold during the same period, the quality, and some of the popular ones.
• Pour Sizes: You will need to know the standard pour size for each type of alcohol and check if it's standard or if you are putting in extra. Keep in mind that it can vary depending on the type of drink.
• Inventory Levels: You also need to know about the beginning and ending inventory levels of each type of alcohol for a given period.
• Cost Per Bottle: Determining the cost per bottle of each type of alcohol and making sure to include everything, such as product cost, taxes, shipping fees, etc.
• Other Relevant Information: Depending on the establishment, you also need to gather other relevant information, such as discounts, promotions, and waste.

After gathering all this data, you can know how to calculate liquor cost percentage, cost of goods sold (COGS), and liquor cost.

Note: It's important to track this data to ensure accuracy and make informed decisions about pricing and inventory management.

3. Calculate Your Total Liquor Usage

To determine the liquor cost, you need to calculate liquor usage effectively to get accurate results.

The amount of liquor used in preparing a drink is multiplied by the cost of the liquor per unit to get the cost of the drink. You may calculate the cost of each drink and your total liquor cost by estimating your liquor consumption.

Here’s the detailed guide to calculating liquor usage:

• To calculate the liquor usage, you need to calculate the amount of liquor used in each drink. Opt for the right tools to measure the amount of liquor in each drink accurately.
• Consistently record the usage of liquor used throughout the particular time period in each drink on a spreadsheet or through a POS system.
• After that, you need to convert the amount of liquor used to the standard unit, such as ounces or milliliters, for easy calculation.
• Multiply the amount of liquor used by the cost of the liquor per unit to determine the cost of the drink.
• Repeat this same process for all drinks served to calculate the total liquor usage for a given period, such as a day or week.

Here’s an example:

To make one drink, suppose you need 2 oz of vodka and 4 oz of orange juice. Assuming vodka costs $0.50 ÷ oz and orange juice costs $0.10÷oz, the liquor cost of each drink is $1.20.

4. Calculate the Cost of Goods Sold (COGS)

Determining your COGS is another important concept to learn when evaluating your liquor cost. Simply checking your Cost of Goods Sold, or COGS, for a specific financial period will give you a good idea of your costs.

The direct expenses for all things relevant to what it takes to sell drinks are defined as the Cost of Goods Sold (COGS) for liquor costs.

Accounting-wise, the direct costs include not just the liquor but also mixing devices and items, consumables (straws, glasses, etc...), and anything else directly required to manufacture and sell the cocktail. You determine it by taking your initial Inventory, deducting your final Inventory, and including any purchases you made during the period in between.

Starting Inventory + Purchases - Ending Inventory = COGS

Each drink requires a different calculation, as it varies based on their pricing. So, do it accordingly.

Let's say a bar starts the month of May with an inventory of $2,000 worth of liquor. During May, they purchase $4,000 worth of liquor, and at the end of May, their Inventory is worth $3,000.

To calculate the COGS for May using the formula, we can plug in the numbers:

Therefore, the COGS for the bar during the month of May was $3,000.

5. Calculate Liquor Cost

After determining the liquor usage and COGS, you need to calculate the liquor cost or, say, the pour cost of your restaurant or bar. Profit margin is an important phase in restaurants and bars, and one of the greatest elements influencing profit margins is liquor cost. If you're considering opening a liquor store, it's important to understand the potential profit margin you will earn.

This can be determined by calculating the difference between the cost of the liquor and the price at which you sell it. By managing your liquor cost-effectively, you can increase your profit margin and ensure the success of your liquor store.

Here’s the formula for liquor cost calculation:

Liquor cost = (Beginning Inventory + Purchases - Ending Inventory) ÷ Total sales * 100

The average liquor pours cost percentage is considered to be between 18% to 20%. If your liquor cost percentage is higher or lower than this, you should take considerable actions to manage things accordingly.

To determine the cost of beverages sold, you must know the total amount of liquor purchased as well as the inventory value at the start and end of the period. The gross profit margin is the difference between sales revenue and the cost of products sold plus the cost of alcohol. The pour cost percentage is the proportion of the cost of alcohol sold to the income generated.

6. Let’s Understand With Example Calculation

Now that you know everything about the definition and importance of calculating liquor cost, let’s make it easy by taking an example.

Beginning inventory = $2,000

Purchases = $4,000

Ending inventory = $3,000

(Considering the figures from the above example)

To calculate liquor cost for the bar during the month of May, we can use the formula:

Liquor cost = (Beginning inventory + Purchases - Ending inventory) ÷ Total sales * 100

The COGS for May is $3000, and suppose the total sales in the month of May is $15000. So, let’s put the figures into action and find out how to calculate the liquor cost percentage.

Liquor cost percentage = (COGS ÷ Total sales) * 100

Liquor cost percentage = ($3,000 ÷ $15,000) * 100

Liquor cost percentage = 20%

Conjuring this above example, the liquor cost percentage for the bar in May is 20%, which falls within the average pour cost percentage range of 18% to 24%. It suggests that the bar is managing its liquor inventory efficiently, as they are spending an appropriate amount on liquor relative to its sales.

If your number doesn’t fit into this bracelet, then you need to take proactive actions to manage it.

Analyzing Liquor Cost

After calculating, we have come to the analyzing part. We will be conjuring end-to-end analysis for the liquor cost, which includes factors affecting the liquor cost, some of the standard guidelines you should follow while deciding the pricing, and the most important part - how to use this analysis for making business decisions. Keep reading to know more about this.

1. Factors Affecting the Liquor Cost

There are so many factors that affect the liquor cost, and you should consider the price correctly.

Check out the following factors:

• Purchase Price: The first and most important factor influencing liquor prices is the purchase price, which encompasses the cost of the bottle, any other add-ons, shipping fees, and any taxes or tariffs that may apply.
• Theft: Theft and fraud are sad realities that must be addressed in order to identify any disparities that may suggest theft or fraud.
• Profit Margins: Profitability can also be affected by the markup and pricing strategy used for each drink. It is critical to set competitive prices with other businesses in the area while maintaining a sufficient profit margin.
• Pour Size: The amount of liquor used in each drink is also important to consider. It is critical to verify that each pour has the same consistency and that bartenders are not over or under-pouring, as this might have an impact on the total cost.
• Wastage: Another key aspect is waste and spillage. Therefore, keeping these things in check is crucial because they might add up and raise the entire cost.

2. Industry Standards & Benchmarks for Calculating Liquor Cost

The industry norms and benchmarks for assessing liquor costs can vary based on the kind of facility, location, and client base.

And, if you are unaware of the same - check out the following general principles:

• Determine the selling price, which is the cost the customer will pay for the beverage at your restaurant. The ideal pouring price for spirits ought to be about 20–25%, and for beer and wine, it must be around 15–20%.
• Find out about the serving size, which differs based on the kind of drink and the quantity of alcohol delivered to the consumer in each drink.
• Calculate the price of the alcohol, taking into account the product's price, the taxes that apply, and shipping costs (if you are providing delivery).
• Do the math to determine the pour cost, which is the cost of the alcohol divided by the selling price.

Here's the bonus tip:

Make sure to regularly assess the cost of alcohol and make adjustments to prices and Inventory as necessary to maintain profitability.

3. How to Put Out Liquor Cost Analysis in Making Business Decisions?

With the end-to-end liquor cost assessment, you can make well-informed company choices that can assist in boosting your company's efficiency and profitability.

Here are some instances of how you can utilize liquor cost estimation to make better business decisions:

• Robust Pricing Strategy: A liquor cost analysis will assist you in determining the best pricing for your product or service at a restaurant and see if your prices are too high or too low. You may offer competitive prices and improved client satisfaction by altering your prices in accordance with liquor cost research.
• Effective Cost-Cutting Measures: Liquor cost analysis can assist you in identifying places where you can save money. For example, if your liquor costs are high, you may need to look for measures that minimize waste, such as enhancing portion control or instructing employees to pour precisely. Reducing costs in these areas can increase your profit margins and remain competitive in the market.
• End-to-End Inventory Management: Liquor cost analysis can also assist you in better managing your Inventory. You can detect which varieties of alcohol are selling well and which are not by checking the amount of Inventory and liquor consumption.

It can assist you in making better-informed judgments regarding which types of alcohol to keep in stock and how much of each to order, resulting in reduced waste, fewer stockouts, and improved cash flow.

Best Practices for Managing Liquor Cost

We have determined the liquor cost, but it is important to adopt the best ways to manage it and reduce it (whichever way we can). To reduce it, we will add some of the best practices, such as controlling pour sizes and minimizing wastage.

Then comes the tips to maximize profitability by optimizing the menu and pricing.

At last, coping with technology to simplify your business operations and streamline everything on the go. To know more about how you can do it, keep reading.

1. Reduce the Cost by Adopting Best Tips!

Pouring can soon mount up and cost you hundreds of dollars in lost income. To avoid this loss, you must train your bartenders so that they comprehend and stick to your establishment's proper pouring standards.

Instruct your bartenders to utilize the best bar tools, such as jiggers and ball pourers, to avoid over-pouring. You can avoid over-pouring and ensure your drinks' consistent quality and taste by utilizing the right instruments.

Overpouring isn't the only thing that raises your beverage expenditures; spilled beverages, unused Inventory, and complimentary drinks to regular customers all add up. As a result, you must check all of these items on a regular basis to ensure less waste and better results.

With proper processes in place, whether for over-pouring, limiting waste, or providing free drinks to loyal customers, you can expect significant savings and an increase in income.

2. Incorporate Strategies for Improving Profitability

Creating a recipe pricing card for each of your bar drinks (and any food you sell) is one of the tactics for boosting profitability and management. These cards would feature every detail about each liquor, right down to the single garnish pieces.

Making these cards and teaching your employees how to utilize them reduces waste and over-pouring. It also serves as an excellent training tool for new bartenders and other personnel that lack expertise.

Aside from maintaining the cards, ensure that you manage your menu based on the data analytics and information gathered. You must concentrate on two categories of items. One that your customers adore and another with a bigger profit margin.

Aside from managing recipes and menus, you have to handle your pricing strategy. Increasing liquor prices abruptly and disproportionately will have an adverse effect on the standing of your bar, which will help you obtain poor ratings, which will be terrible for your bar's reputation. Make moderate, incremental pricing increases instead to have a long-term positive impact on your restaurant business.

3. Adding up the Right Technology for Liquor Cost Management

In this tech-driven environment, technology plays a crucial role in the better management of almost every business. The ideal technology not only makes your business management efficient but also lowers your expenses and wastage while maximizing revenues and profits.

There are so many software and tools you can use for a variety of activities such as mixing drinks correctly, managing accounts, staff management, your bar or restaurant's day-to-day operations, Inventory, and other things around.

A point-of-sale system (POS) is the most popular technology used in pubs and restaurants. Your liquor store POS system can be used for sales tracking, inventory management, real-time notifications, end-to-end data analytics, managing staff members, etc.

Go ahead a step further and install a POS system for your restaurant operations and integrate it with other useful tools in your space. To know more about it, you can reach out to OVVI, and our experts will guide you.

Another approach to employing smart technology is to install security cameras. Video surveillance not only protects your customers and employees, but it also reduces employee theft. When your employees are aware that they are being observed, they are less inclined to steal.

Conclusion

We sincerely hope that this information has been helpful in setting your liquor price. The important thing to remember is how much you paid for the liquor and how much you are receiving in return.

One of the most common reasons for the failure of the liquor business is the inability to manage expenditures. When they can't keep their drink and food prices under control, they wind up losing a lot of money. Keeping track of your expenses and income is essential for developing the optimal pricing strategy that will lead to your company's success.

Not only should you examine hard numbers when pricing your liquor, but you should also consider the intangibles.

The intangibles of your liquor businesses include the location, competition, customer demographics, customer experience, and other things around to prepare a successful pricing strategy.

To manage your expenses, Inventory, customer data, and other details in one place and make the pricing strategy accordingly, opt for the best-in-class POS system at your liquor business and leverage its benefits.

To know more about the benefits of our POS system for your liquor business and to book a demo, reach out to our experts at OVVI now!

Frequently Asked Questions(FAQs)