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2. Chapter 14 Planning for Profit
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3. This Chapter Will Help You
Establish a profit goal for a bar business.
Prepare a budget.
Price drinks on the basis of beverage cost.
Use an income statement.
Forecast cashflow.
Calculate a break-even point.
Standardize drink size, recipes, and glassware.
Establish a control system.
Use par stock as a control tool.
Establish a system of sales records and cash control.
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Managing the Numbers
The bar’s ability to prosper depends on
Cashflow is the month-by-month total of all of the receipts coming into the bar, minus all of the sums being paid out.
Net profit or pretax profit is the total monthly revenue, minus all of the monthly expenses incurred.
Debt level is a comparison of your assets and your liabilities.
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Managing the Numbers
Assets include cash, inventory, real estate, equipment, and amounts that others owe you.
Liabilities are everything that you owe to others: bank loans, a mortgage, payroll, and accounts payable (what you owe your vendors.)
When you subtract the total value of the liabilities from the total value of the assets, the result is the net worth of your business.
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A Pre-Opening Budget
Six types of expenses to consider:
Construction and/or remodeling costs
Professional services
Organizational and development costs
Equipment and finish-out expenses
Pre-opening expenses
Contingency and working capital
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Budgeting for Profit
A budget is a financial plan for a given period of time that coordinates anticipated income and expenditures to ensure solvency and yield a profit.
The budget is a continuing two-phase process
The planning phase
The control phase
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The Planning Process
Expenses are usually grouped into two categories: fixed and variable.
Fixed expenses are those that are not related in any way to sales volume but are fixed by contract or simply by being in business.
Variable expenses are those that move up and down with sales volume.
Unallocable expenses are listed separately; they consist of general expenses that are neither fixed or tied to sales.
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The Planning Process
Calculation of each individual expense item as a percentage of your expected sales for the year is known as the percent-of-sales figure.
It is referred to in the industry as percentage cost, cost percentage, or cost/sales ratio.
(also as shown in Figure 14.2)
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Longer-Term Planning
Financial statements that depict future period activity are called pro forma statements or pro forma reports.
Figure 14.3 shows a budget form.
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Break-Even Point
A break-even point is the level of operation at which total costs equal total sales.
Calculating a daily break-even point
Start with all of your fixed costs for one month.
Add a month’s wages and salaries for a skeleton crew, which is the fewest number of workers you can have.
Divide this total by the number of days in the month that you will be open.
Add the cost of a day’s liquor supply and any extra staff needed to serve it.
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Forecasting Cashflow
A cashflow forecast, or cash budget is a short-term forecast of cash flowing into the bank and cash flowing out.
Figure 14.4 shows a detailed guide for setting up a cashflow forecast.
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The Control Phase
The control process consists of three steps:
Compare performance to the plan.
Analyze operations.
Act promptly to solve problems.
A budget deviation analysis (BDA)
Takes a second look at the month’s budget to see if the actual figures deviated from budget.
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Controllability
Three successive profit levels:
The first level is the gross profit or contribution margin, or the profit from beverage sales less beverage costs.
The second level is the gross operating profit, or the gross profit less the operating expenses.
The third level is the net income, or the operating profit less the fixed overhead expenses.
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Data Analysis
The income statement is a form of data analysis.
It arranges data in ways that show measurable relationships.
The two major categories of operating expenses, beverage cost and payroll expense, are called prime costs.
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Pricing for Profit
The essence of profitable pricing is to set individual prices that produce the maximum difference between total sales and total costs.
Pricing works best when you choose and stick to a standard system.
Whatever the pricing policy, the goal should be to set prices that will maximize the gross profit or contribution margin (the sales less the product cost).
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17. The Cost/Price Relationship
The cost percentage of the price pays for the ingredients in the drink.
The remaining percentage of the price (gross margin) goes to pay that drink’s share of all of your other costs and your profit.
To find the price, divide the cost of the ingredients by the cost percentage.
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18. The Cost/Price Relationship
When you price mixed drinks, the simplest version of this cost/price formula is to use the cost of the beverage alone.
This is known as the beverage-cost method.
A truly accurate cost/price relationship must be based on the costs of all of the ingredients.
The technique of determining total cost is based on the drink’s recipe and is known as costing the recipe.
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19. The Cost/Price Relationship
The prime ingredient method:
The selling price is based on the cost of the prime ingredient, the base liquor—instead of the actual recipe cost, and adding a percentage for the extra ingredients.
The gross-profit method:
Divide the amount of gross profit by the sales price of the drink.
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20. The Demand/Price Relationship
Increasing the price of a drink increases the margin per drink sold since cost remains the same, but sales volume is typically sensitive to changes in prices.
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21. Coordinating Prices To Maximize Profits
All pricing decisions involve interdependent relationships among drinks and drink prices.
The price you charge for one kind of drink can affect the demand for others.
Keep potential interrelationships in mind in order to arrive at a combination that maximizes the sum total of all drink profits.
This is known as total business pricing.
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22. Free and Discounted Drinks
Accounting professionals suggest that discounts (reduced fee) and comps (no payment made) be accounted for in one of two ways.
The Gross Sales Method
The Net Sales Method
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Pricing Wines
Some restaurateurs use a system that varies the markup with the type of wine.
Another wine-pricing strategy is to establish a limited number of selling prices or price points, and “force” wines of similar cost into a few distinct price categories.
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24. The Pour-Cost Analysis
Analyze pouring costs:
Pouring costs are figured by dividing the cost of the depleted inventory (cost of goods sold) by the gross sales earned over a given time period.
The sales mix at the bar will also affect pouring cost.
Sales mix” is the percentages of total bar sales that are beer, wine, and spirits.
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25. Establishing Product Controls
The term drink size refers to the amount of the prime ingredient used per drink poured.
A recipe that specifies exactly how a given drink is made at a given bar is known as a standardized recipe.
Each standard drink should be served in a standard glass, a glass of specified size and shape.
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26. Establishing Beverage Controls
The most effective way to ensure the honesty of your workforce is to remove the opportunity for theft or shrinkage.
A product no longer available for sale.
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27. The Cost-Percentage Method
The first technique of measurement compares the cost of liquor used during a given period to the sales of the same period.
Then, the resulting percentage figure is compared to the standard-cost percentage.
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The Ounce Method
The second measurement technique compares the ounces of liquor used with the ounces of liquor sold.
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29. The Potential Sales-Value Method
The third method of measurement compares the actual dollar sales with potential sales value.
Each bottle you buy represents potential dollars in the register.
Determine potential sales value by using standard drink sizes, standard drink selling prices, and the number of drinks that can be served from each bottle.
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30. The Potential Sales-Value Method
Most bars have more than one drink size and price. The potential sales value of each bottle must be adjusted for these variations.
One method of doing this, the weighted average method, is based on averages of drink sizes and prices for drinks actually sold over a period of time.
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Technology at the Bar
Historically, bars have used two types of sales-capture and cash-control devices:
The computerized point-of-sale (POS) system
Almost every facet of management—inventory, purchasing, sales, payroll, and accounting functions, can be tracked by POS.
The electronic cash register (ECR)
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Skimming
Bars and restaurants are traditionally places where a guest and their credit card are parted, servers take the card to run it through the payment authorization system.
An illegal device is used to skim, or surreptitiously read, the stored data on the magnetic strip on a credit card.
Then counterfeit cards can be made using the same data and are used promptly.
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Summing Up
A budget is the financial plan for your business; it is a measurement of actual performance and forecast your anticipated performance.
Since profit is the margin of sales over costs, the profit plan sets up a two-pronged effort: to maximize sales and to minimize costs.
Pricing is of strategic importance in maximizing profit per drink without inhibiting demand and reducing volume.
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