Accounting, Inventory and Pour Cost

A while back one of my heroes (Jeffrey Morganthaler) posted a spreadsheet that helped bartenders and program managers calculate pour cost for drinks.

The sheet was great but the ensuing comment thread showed me exactly how much of a gap there is in the business world between functional knowledge and practical knowledge.

Specifically the first thing you need to know about your bar is how you account for inventory.  In some cases it won’t matter as much.  In some control States such as Oregon the price you pay for your liquor isn’t likely to change as often or as much as it would through a distributor.

Inventory can be accounted for in one of three ways,  First in last out, first in first out, and weighted average.

For FILO the bottle you bought first is the one you use last,  think of it like a shelf where that first bottle is always at the back and new product is placed in front.  This isn’t a method you’ll want to use if you don’t ever run out of things.  Because when prices change the current stuff is always what determines the cost rather than the potentially more expensive bottle from last year at the back.

For FIFO think of the shelf like the beer freezer at the convenience store.  It is stocked from the rear so the customer is always buying the oldest product first.  This has the benefit of always keeping your costs current but relies on always having a rotating stock in play.

Since some bottles move quickly where others might languish until a shot or two are poured the best method to figure out your costs is called weighted average.

In this system you need to do a bit more tracking and you need to pick one.

The reason for this is that pour cost is better used not as an after the fact accounting but as a method for determining how your pricing works for individual drinks.

Pour cost incorporates all of the costs involved in putting a drink on the table from overhead to labor.  The percentage you get from the above calculation only tells you if the percentage of  the cost that accounts for alcohol is in keeping with the pricing of your drinks.