This may hurt but you need to hear this: You’re probably overspending a fortune on very avoidable expenses.
You probably don’t even realize the impact of overspending. Fully grasping the damage spending too much requires looking the problem throughout the course of a year.
For example, overspending $100 per liquor order may not sound like much, especially if a bar is selling over $20,000 per week. Compared to $20,000, $100 in sales is only 0.5 percent.
But over 52 weeks that $100 becomes $5,200. That’s a number that every operator will pay attention to regardless of how small it is when expressed as a percentage against sales. If you take this same mentality to all categories of spending, and shave off a dollar per week here, another dollar per week there, and then spread that out over the course of the year, it’s easy to find a massive paycheck within your business.
Where is this overspending typically found? Here are the four main areas where you’re probably spending more than necessary.
1. Food and Alcohol
Implementing regular variance reports and enforcing inventory controls is the fastest way to increase profit without needing to increase sales. Without regular variance reports, you’re likely losing anywhere from five to ten percent of your potential profit.
This is because variance happens for a multitude of reasons, which include but are not limited to: theft, overpouring, spills, inefficient draft beer systems, delivery and shipping errors, and problems with the POS.
Sometimes, the culprits aren’t malicious. I once heard of a breakfast restaurant that had food cost issues. The operator was perplexed as to why they couldn’t turn a profit despite having consistent sales. When a food inventory auditor from Sculpture Hospitality was brought in to examine their operation, he discovered the ladle used to scoop eggs from a big bucket (where they were pre-scrambled) was too big, sending portions out that were far above the theoretical cost. Every time a guest ordered eggs, it was estimated that they were receiving 1.5 to two eggs more than what they paid for. As you can imagine, at a busy breakfast restaurant that amounts to a huge number of eggs over the course of the year.
Before you ask yourself what you’re losing on, ask yourself this: What are we not keeping an active count of at all times? Wherever you aren’t keeping count and running variance reports is where variances are happening without your knowledge.
You can’t stop variance from happening. The one thing you can do is detect it when it occurs, and correct mistakes before they become full-blown fiascos. How do you know what you’re actually missing from week to week if you don’t keep an active count and then make a comparison to sales? Many operators make the mistake of simply conducting a costed inventory, using their percentage of purchases against sales as an indicator of whether or not they’re operating at an acceptable percentage.
Thirty to 35 percent for food and liquor cost are typical expense rates at which you see most bars and restaurants operating. But what if a bar or restaurant’s costs could be 28 to 29 percent? What is that extra percent worth over the course of a year?
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If a bar spends $6,000 a week in liquor orders, and saves one percent of that total cost simply by eliminating theft, that amounts to $60 a week, or $3,120 a year. To add more insult to injury, since actual cost of goods sold would remain the same in this scenario, that $3,120 if sold at retail would be worth $10,400 in potential revenue.
A wise operator once told me, “Small hinges open big doors.” In the case of inventory control, small improvements in efficiency add up to huge amounts of money at the end of the year.
2. Blindspots in Technology
There are repetitive, brainless tasks that recent innovations in technology can help you do more efficiently with less cost. Improvements in the software used for bookkeeping, for example, have made it much less time consuming to keep track of payables and invoices. Although these improvements haven’t completely eliminated the need for people, they have definitely lessened the total amount of labor hours needed for keeping up to date on this task.
This is happening in many other areas of business as well. For example: CRM and marketing automation software like Infusionsoft and Salesforce literally remove the need to keep staff member on hand to handle mundane tasks like confirming reservations and following up after visits.
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Additionally, time management software has removed much of the organizational duties that personal assistants used to handle. When was the last time you did a thorough audit of your operation and found areas that could use an improvement in technology? What about your infrastructure? Are critical systems like HVAC, plumbing, electrical and kitchen equipment overdue for upgrade? New equipment is more energy efficient, and therefore reduces electrical expenses.
Every business has areas where investments in modern technology can help reduce costs.
3. Manager Salaries
I once worked at a restaurant that had four managers on the floor on busy nights. By my estimation, two managers and one entry-level staff member could have easily handled the workload. The extra two managers were basically in support staff roles during the dinner rush.
If a food runner, server, bartender or hostess started to fall behind, they would jump in and be the glue that kept everything together. Ask yourself: What do your managers do, exactly, that makes them managers? Is it scheduling, cash outs, bookkeeping, marketing, liquor orders, food orders, paying the bills, or making bank deposits? All those tasks can easily be taught to existing staff that would like to earn extra money.
For example, a good server or bartender can take on the responsibility of dealing with guest complaints for a small increase in pay and still be effective in their current position. After all, no manager spends every moment of a shift dealing with guest complaints—it’s just one of myriad tasks that’s done only when required. Many companies have learned that instead of paying a full-time manager a salary to handle “managerial-level tasks,” they can task trusted servers or bartenders with those tasks for much less expense.
Check this out: Trouble Keeping Employees? Work on Manager Retention
The same thing is true of the bar manager position. Why employ salaried bar managers when, generally speaking, the most important things a bar manager does are counting inventory and placing orders? There are inventory management systems now that make it simple for staff to manage inventory—you don’t need a dedicated manager to do it. The same thing can be said about scheduling, which is typically a huge headache. Online scheduling tools make it easy for people to post their availability, pick up shifts, and drop shifts.
If a computer can handle these things, why have your general manager handle scheduling?
Jamal’s Take: I don’t believe in managers because most of management is babysitting. How long does it take to do a cash out, scheduling, and handle guest complaints? All you really need is a shift leader who everyone understands is the central authority during their shifts. This gives you much more flexibility when things get slow.
As an example, I had an employee who could handle multiple positions. They were a competent barista (for shisha), bartender, and server, and also knew how to answer the phone and greet guests. When the slow season arrived, this employee would work the entire floor by themselves. Keeping a manager on the floor plus this employee at the same time would’ve more than doubled my labor cost with no real benefit.
Additionally, because no one is really busy when the bar is overstaffed, what happens is people start standing around getting bored. While every bar and restaurant needs a general manager, many mid-level managers are completely unnecessary if all they are is a “glue guy.” This is becoming more and more common in the industry, particularly with the ever-increasing costs of minimum wage. Part-time shift leaders are replacing full-time managers and saving bar operators a fortune in labor costs. If there are more managers on staff than necessary, you must reorganize your team.
You can negotiate everything you’re paying with your vendors if you try. When was the last time you called your reps and asked for a rate reduction?
Look at every dollar you spend with vendors and call everyone you can to express your anxiety about their bills. As long as your requests are reasonable, most vendors will be flexible with terms and payment. After all, they’re business people with expenses too, and they know your pain.
Check this out: How Training Reduces Costs and Grows Revenue
You won’t be able to get every vendor to agree to a reduction in rates, but a handful will work with you. And as already demonstrated in the above examples, every dollar you shave off your monthly expenditures makes a huge difference over the course of the year.
When you’re in cost-cutting mode, you have to look at every dollar you spend to run your business. Since vendors are one of those costs, you might as well make some calls and see who is willing to give you a break.
Kevin is an operations consultant with over a decade of experience working directly with bar, restaurant and nightclub owners on all points of the spectrum: from family-owned single bar operations to large companies with locations on an international scale. Kevin works with them all and understands the unique challenges each kind of company faces.
He is the author of a book entitled Night Club Marketing Systems – How to Get Customers for Your Bar. He is also a regular writer for Nightclub & Bar, providing information high-level operators seek to get the extra edge in their marketing, sales and operations.
Kevin continues to write today, providing specialized information directly to nightclub, bar and restaurant owners from his workshops, newsletters and magazine articles. He is also active in the field, operating an inventory auditing practice with Sculpture Hospitality.