Tracking Inventory: A Profit Paper Trail
To be financially successful, you need to know what inventory you have, how much you paid for it and exactly where it is at any point in time. Tracking products throughout your operation doesn’t necessitate purchasing high-priced software. Instead, it requires implementing a series of overlapping internal systems that in concert track every product through the inventory cycle. In bookkeeping jargon, it’s referred to as “cradle-to-grave” accounting. While uncomplicated, the key to the system is ensuring that all of the components are in place and being used properly.
The paper trail begins with a purchase order, which is used to record the specifics of each transaction with your distributors. When the delivery arrives, the purchase order provides a means of verifying the legitimacy of the shipment. Deliveries should be scheduled for the same day of each week to best ensure the person responsible for receiving deliveries is present.
Each product in the delivery should be physically inspected for damage and to verify the seals are intact. Only after the delivery has been determined to be complete should the invoice be signed, thus formally accepting the merchandise. For security reasons, the delivered products should be stocked immediately in the liquor storeroom.
After the products have been received, a perpetual inventory system is used to track the flow of inventory in and out of the liquor storeroom. In many respects it’s the lynchpin of the system. At any point in time, the perpetual inventory system will indicate the exact quantity on hand for every product stocked.
The system works like the register in a checking account. Each product is given its own page in the perpetual book. When products are purchased and stocked on the storeroom shelves, the quantity is added to the running total. When bottles are requisitioned to the bar and taken off the shelves, their numbers are subtracted from the quantity-on-hand column. The last entry on the perpetual inventory sheet should correspond to the actual amount of product on the storeroom shelf.
The perpetual inventory system also greatly assists in detecting theft. Should the amount of any one product be less that the quantity shown on the perpetual inventory, there are only a few explanations. It could be the result of a math error or perhaps the product was requisitioned to the bar without being entered into the perpetual book. If the discrepancy cannot be resolved, the likely explanation is the bottle was stolen.
The third element of the system, a requisition form, is used to record the transfer of inventory from the storeroom to a specific bar. Bartenders use the requisition form to record what bottles were emptied (i.e., breakage) during the course of a shift. Afterward, the manager issues replacement bottles for what was depleted and makes note of each transfer in the perpetual inventory system.
To avoid making bookkeeping errors, the manager should first make the appropriate entry in the perpetual inventory system before pulling the individual products off of the storeroom shelves. The form should allow the bartenders to identify the exact product name, size and quantity being requisitioned.
Closing the Circuit
Every brand behind the bar needs to be stocked in sufficient quantity to meet demand. A bar par form is used to indicate how much of each product should be stocked — both open and as backups. Maintaining bar par levels also is effective in preventing theft. Any product missing from the shelves or backups can be detected quickly.
Depletion allowance sheets are used to record information about items depleted from inventory without a corresponding sale. There are three legitimate ways that can happen: Product can be transferred to another outlet or department, spilled or given out in a complimentary drink. It‘s important to track the cost of inventory depleted because it will affect the bar’s cost of goods sold or pour cost.
Completing the cycle is the physical inventory form, which is used at the end of each accounting period to record the results of a physical audit. The intent is to determine the dollar value of the inventory on hand at that point in time.
Physical audits are strictly a management function. No hourly personnel should be involved. Likewise, the results of the physical audit must be as accurate as possible. Care must be taken not to overlook any products or count some items twice.
Running a bar requires making a significant investment in inventory — liquid assets that can disappear at an alarming rate. In fact, inventory levels change with every flick of the bartenders’ wrists. Protecting that working capital and ensuring that you’re realizing the necessary return on that investment is a function of control.