Operations Tip: Comparing Ideal, Actual and Purchased Costs to Sales

Guest Post by Chuck Deibel, Senior Partner at BEVINCO 

Often Bar operators will calculate what their costs should be by dividing their purchases by their sales. This is a flawed method. This paper provides the actual numbers for purchases, sales and costs used for 3 weeks to show how this doesn’t provide accurate information.

As you might recall the calculation for each is as follows”

Actual Pour Cost percentage (APC) is arrived at by dividing the cost of the inventory used by the sales. The cost of the inventory used is arrived at by adding the purchases to the previous inventory and then subtracting the ending inventory from that sum. So it’s Beginning Inventory, plus purchases subtract ending inventory.

Ideal Pour Cost percentage (IPC) is arrived at by dividing the cost of the inventory sold by the sales. The cost of the inventory sold is arrived at by adding the cost of the inventory sold, plus the cost of any comps or spills.

Purchased Pour Cost percentage (PPC) is arrived at by dividing the cost of the purchases by the sales. The cost of the purchases used can be either for the week of the sales or for the week after the week of the sales; since some people would believe this week’s purchases are being done to replace the inventory used from the prior week as they “order to par”. (NWPPC)

Here are the actual results for two different bars for three weeks in a row.

Week 1                  Bar A                                    Bar B

IPC                   3504/15001 = 23.4%         6672/24699 = 27.0%
APC                  3518/15001 = 23.5%         7133/24699 = 28.9%
PPC                  3481/15001 = 23.2%         8832/24699 = 35.7%
NWPPC           1954/15001 = 13.0%         12954/24699 = 52.4%

Week 2

IPC                   2587/11014 = 23.5%         12095/45162 = 26.8%
APC                  2703/11014 = 24.5%         12782/45162 = 28.3%
PPC                  1954/11014 = 17.7%         12953/45162 = 28.7%
NWPPC           3276/11014 = 29.7%         5965/45162 = 13.2%

Week 3

IPC                   3442/14737 = 23.4%         7231/25601 = 28.2%
APC                  3450/14737 = 23.4%         7569/25601 = 29.6%
PPC                  3276/14737 = 22.2%         5965/25601 = 23.3%

As you can see, none of the numbers are really the same, so using or replacing the use of the actual or ideal cost percentage with the Purchased cost percentage or the Next Weeks Purchased Cost percentage is and will be misleading, if you are trying to gauge how profitable your operations are being managed.

There is simply no reasonable replacement for calculating both your actual percentage as accurately as possible and comparing that to the calculation of the ideal percentage for the same time period, in your effort to determine your efficiency in profitability. The ratio of that calculation is the Bevinco Rating.

Bar A Is achieving at or above a 99% Bevinco rating as the ideal and actual percentages are about the same.

By making a judgment based solely on the Purchased Pour Cost Percentage, you will likely not be reacting when you should be or reacting when you shouldn’t be reacting with the staff and management team.