Are you losing money on every plate and drink you serve without even knowing it?
Many bar owners struggle with calculating their true costs, leading to menu items that actually lose money despite appearing profitable.
In today's episode:
- Learn the simple formulas for accurate cost calculation
- Discover how to track and reduce waste
- Master the basics of profitable pricing.
Press play now to learn the essential math that will protect your profits.
Learn More:
Email Chris
Schedule a Strategy Session
Bar Business Nation Facebook Group
The Bar Business Podcast Website
Chris' Book 'How to Make Top-Shelf Profits in the Bar Business'
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A podcast for bar, pub, tavern, nightclub, and restaurant owners, managers, and hospitality professionals, covering essential topics like bar inventory, marketing strategies, restaurant financials, and hospitality profits to help increase b...
Chris Schneider (00:01.336)
Today, master the basic formulas for calculating your true poor costs. Learn how to quickly track and account for waste in your calculations and discover the difference between theoretical and actual costs. Today, we're breaking down the essential calculations every bar owner needs to know for accurate food and beverage costing. The challenge many bars face is not understanding the difference between theoretical and actual costs. Theoretical costs being what you should
have as a margin. An actual cost being what you actually have as a margin.
If you don't understand that difference, this leads to pricing that doesn't actually account for your real world factors like waste and spillage and will cause you to have a lower profit margin than you anticipate. So by mastering the simple calculations we're going to talk about today, you can ensure every item on your menu contributes properly to your bottom line. So as we're talking about basic cost calculations, the first thing we have to do is understand them.
So when we talk food or beverage cost, and I've said this before, but it's very important to understand, we're talking about just as a percentage, the cost of the item divided by what you charge. So if you have a cocktail and it costs you $2.50, the ingredients and everything in that cocktail cost you $2.50, and the drink itself you sell for $10, your cost is 25%. Now, part of
Understanding the basic calculations is you have to use ingredients and portions for every item. Now when it comes to portions in food and for a lot of your size, that means weigh them, measure them, have some way that it's actually getting measured every time you do it. So the exact same amount of food is going on every single plate for the same order.
Chris Schneider (02:02.474)
And the example I always like to use here is french fries. Most bars serve french fries by their bar or their cook pours them into the fryer basket or grabs a handful and that's a servant. Everyone's hands a different size. If I pour them all into a basket, there's no control. I actually have always had for my bars and every every place I've ever been associated with. We weigh out the fries, we bag them, and then you grab a bag out of the freezer. That is your portion.
So you need to make sure your portions are measured and accurate, and then make sure you have the correct cost associated with that portion.
With ingredients, have to make sure you're including everything and that includes accounting for your garnishes and accompaniments. Anything that's going on the plate, anything that's going to go into that cocktail. Frequently, what I see is somebody says, yeah, I my poor cost seems higher. My costs are out of whack and it's because they forgot to include the juice that's going into that cocktail or they forgot to include.
The garnishes, all those limes and lemons and oranges you're going through add up in cost. And finally, if you're a bar that is, say, an outdoor bar or you're in an area where you're not giving people glasses, you're using plastic glasses. So, for example, I have a client down in Texas who has a bar that's mostly outside. Why? Because it's Texas and it's warm most of the time. So you can be outside most of the time.
All his outside bars use not real glassware, but plastic. Why? Because it's an outside bar. And because of that, that plastic cup cost needs to be calculated into the drink cost so that you charge the right price to hit the right margins. Now, the second thing to really consider here, once you get past the basic calculations and including all of that, is understanding actual and theoretical.
Chris Schneider (04:07.756)
So theoretical pricing is, like I said at the top, going to be what your exact cost should be, or theoretical cost rather, is going to be what your exact cost should be on paper. If everything was done perfectly every time, that drink would always cost $1.87 to prepare. Actual is saying, okay, I've done my inventory. This is that reconciliation step of inventory that we've talked about before.
But I've done my inventory, I know exactly what my actual costs are. How does that compare to my theoretical? And what we're always looking for here is a variance. And that variance, normally, is going to be one of two things. If you're actual and theoretical, well, one of three things. If you're actual and theoretical are over 2 % in variance, that's kind of my red flag when I'm working with people. But if...
They're always under 2%. You can look at 1 % variances. There's nothing to say you don't need to look at those, but 2 % I find to be a decent indicator between, oh, my actual and theoretical are close enough and my actual and theoretical, I have a real legitimate problem here. And the reason why your actual and your theoretical are not lining up. Your staff isn't trained and they're making drinks inconsistently. There is theft.
or there is waste and spillage you are not accounting for. So to understand that actual and theoretical, those are the three places I look for first when I'm seeing a variance over 2 % between those two numbers. Now, the third thing I want to talk about today is how, if you have that variance, how do we fix it? Well, we look at those three reasons. And so,
Our three main ways to control our beverage costs when we see a difference between actual and theoretical are standardizing our recipes and portions, training our staff on proper measuring, and then implementing waste logs. Because if everything that's wasted is logged, your staff is properly trained, and everything is standardized, there should be very little variance between actual and theoretical.
Chris Schneider (06:24.48)
Unless someone stealing right? That's the one thing we're not accounting for here, but assuming no one is stealing, those should not vary. Now in order to make sure that those cost controls that your standardized recipes, your staff training and your waste logs are actually working. You have to monitor your poor cost weekly, which means you have to do inventory re weekly and then run it through and actually reconcile your actual usage against your theoretical usage. It's the only way you'll understand whether or not you have a problem.
Understanding and implementing proper cost calculations is fundamental to bar profitability. By tracking both theoretical and actual costs and maintaining strong controls, you can ensure that your pricing structure supports a healthy bottom line.
