Most of us think of a budget as an ultimately limiting factor in how we run our life or business from month to month. But a regular, comprehensive budgeting practice not only keeps our expenditures in check, but also allows us to predict trends in the bar and restaurant industry and plan for the future -- whether we anticipate feast or famine.
Budgeting begins as a financial framework for decision making within your realm of control, and becomes a security net to help you remain stable and successful when things stretch beyond your power.
Much of budgeting is estimation and wild guesswork combined with a lot of math, paperwork, and piles on piles of food and beverage inventory and product cost spreadsheets. Budgeting, among other food and beverage inventory management tasks, can feel tedious in the moment. But it is a vital practice for bars and restaurants of all sizes.
So let’s talk about how to make a simple budget that works well for your establishment.
What goes into a food and beverage budget
Your overall budget should take into account every aspect of your business expenses, from rent and utilities, to napkins, solo cups and hand soap. Rent and utilities should be factored into a budget first, as they represent fixed costs which exist largely outside of your control.
With consumables and edibles, you have a little more flexibility and can leverage these categories to really stretch your budget.
Your edible inventory, e.g. wine, beer, liquor, meat, fruits, veggies, etc. (the things your guests are coming in for) is going to be one of the larger and more critical expenses you need to think about when making your monthly budget. But this expense also remains largely within your control as you have greater choice around the amount of each item you buy, at what price point you are buying, and how much you will be selling the end product for.
If it’s a tight month, you don’t always have to spring for restocking the top-shelf whiskey. A talented mixologist will be able to make an interesting signature with cheaper ingredients that, priced right, will foot the bill for a splurgier time in the future.
Food and beverage cost control formulas
To create an exhaustive budget, you need to start by getting a handle on your food & beverage costs and pricing. In the short term, this will help you figure out a dollar amount you can safely spend on new inventory for the month. And over the long term, you can forecast revenue, plan menus, and even begin budgeting for seasons ahead.
Here are a few examples of food costing and pricing formulas that will help you get started on your budget.
- Whole inventory food costing
Get a general idea of how much of your revenue you’re spending on inventory with this formula:
Food cost percentage = (value of current inventory + new purchases - ending inventory)/overall sales.
Example: food cost percentage = ($9,000 + 850 - 2,000)/3,500 = 2.25 percent.
You can complete this formula using amounts over varying time periods, including daily, weekly, monthly and even annually.
- Itemized food costing
You can understand the food cost of specific items individually with the following formula:
Cost percentage = cost of item/selling price.
Example: cost percentage = $3/$8 = 37 percent.
- Itemized food pricing
Most bars and restaurants try to keep their food cost percentages between 28 and 35 percent of revenue. With this in mind, you can project an ideal selling price for individual items using this formula:
Selling price = cost per portion/food cost percentage.
Example: selling price = $5/.28 = $17.85
How to create an operating budget for your bar or restaurant
Here are a few steps you can take to easily create an effective budget.
- Implement an accounting process.
To better keep track of your actual revenue, it’s a good idea to utilize a mobile POS that will accurately track sales and may integrate with a comprehensive accounting solution. Purpose-made software can be found that will perform many budget-related calculations for you and work around human error. If this isn’t for you, consider working with a trained accountant.
You should also define your accounting periods to keep consistent track of your expenditure and revenue.
- Create targets.
Work with past budgets, historical costs and revenue, and information from your POS to get an idea of your real-world expenditure and use that information to help you create a practical goal for your budget during the upcoming accounting period.
If you’re just starting out, you can try looking at averages from other establishments like yours or the industry in general to estimate your own percentages. Check out current food and beverage industry average ratios to set targets now, and compare them to food and beverage industry average ratios 2019 and 2020 to better understand how budgets may shift over time and through interruptions to the business.
- Understand expenses.
Take a look at everything you buy in an average accounting period and write down costs. This will include:
- Fixed costs like rent and insurance.
- Semi-fixed costs like employee salary, utilities, and consumables.
- Variable costs like unexpected maintenance and tax expenses.
If you need to estimate the cost of something you don’t have an exact amount for, make sure you round up to give yourself as much wiggle room as possible in the final budget.
- Predict revenue.
Based on trends for your establishment from the past year, more recent POS information, upcoming events and reservations, and industry and public changes, estimate your expected revenue for the month ahead.
It can be helpful to compare month-to-month or the same month between years to understand if you are able to comfortably forecast an increase in sales.
- Set budget.
Now, put it all together and create your budget. If your expenditure is more than your projected sales for the period, this can be an indication you may need to adjust your buying habits or kick up the price tags on some of your menu items. If your profits outweigh your expenses, congrats! You can calculate your point-of-profit using the following formula:
Sales - (fixed + semi-fixed + variable costs) = break-even.
Provi makes budgeting easy.
Provi is an all-in-one alcohol inventory management solution that keeps your purchase history in a single space for easy tracking and budgeting. With us, you even get custom pricing and will know the total cost well ahead of time so you can better plan your month. Join free today for a seamless and worry-free inventory experience.