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What is Inventory Variance and Why is it Important?

Variance in your inventory is a completely normal part of running a bar or restaurant. We’ve all accidentally dropped food on the floor or spilled something in the heat of the moment, thus leading to a bit of loss. Things happen and you shouldn’t sweat the small stuff, but keeping a close eye on your inventory is essential to preventing inventory disasters later on. It can become a slippery slope of profit loss when you aren’t paying attention to your inventory variance. 

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What is Inventory Variance?

Inventory variance is the amount leftover when you subtract the amount of product you’ve sold from the amount of product you’ve used in a determined period of time. It’s normal to have some inventory variance and attempting to achieve no inventory variance isn’t realistic. You should expect a certain amount to be lost each month (or whatever timeframe you’re calculating your inventory variance for). On the off chance something does start to go wrong, however, you’ll notice it immediately and avoid losing big chunks of profit from it.

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How to Calculate Inventory Variance

Taking inventory is the first step to learning about your inventory variance. Make sure you’re choosing how often you’d like to calculate your inventory variance, monthly or even biweekly are common options. You should already have an established inventory system, whether it’s spreadsheets or inventory software. Make sure you have an inventory tracking system set up that’s both accurate and easy to use to avoid any mistakes with your inventory. 

Next, we’ll have to figure out your COGS, or cost of goods sold, for the designated timeframe. This equation tells you how much your drinks ended up costing to make and looks like this:

Opening Inventory Costs + Purchases - Closing Inventory Costs = COGS. Finally, you’ll need to determine your usage. Unlike COGS, this calculation tells you how much product you’ve used for the designated timeframe. 

Opening Inventory Count + Purchase Count - Closing Inventory Count = Usage Rate. When you’re done calculating your COGS and your usage rate, then you can figure out your inventory variance. It seems like a lot of hoops to jump through, but your inventory variance shouldn’t be ignored. You can complete the final calculation like this:

(COGS) - (Usage Rate)  Inventory Variance. There you have it, now you know your inventory variance. A good range to look for is 1-2% of your sales, but even slightly higher could just be an off month. If you notice it’s higher than 3% you should get to the bottom of things quickly to prevent profit loss.

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Why are Inventory Variance and Inventory Shrinkage Important?

Inventory variance and shrinkage tell a story about what’s going on with your business. If you’re not keeping track of that gap between your sales and inventory, you risk hemorrhaging money and potentially becoming a pushover when it comes to how you run your business. There’s no downside to tracking your inventory variance so there’s no excuse not to.

Using Provi to Track Theoretical Inventory vs Physical Inventory

Provi’s inventory tracking and ordering system gives you all-in-one inventory management, allowing you to see past orders, track your inventory, and order more when you need to. You can stay organized without having to balance different programs and manage contacts from multiple distributors. You can use Provi to set pars and order faster than ever, giving you more time to focus on running your business. If you’re interested in switching up your inventory and ordering method to something you can do in minutes, make an account with Provi today. The best part is, Provi is free. 

What Causes Inventory Variance?

We know inventory variance happens, but how? It’s surprisingly easy to cause inventory variance. 

  • Overpouring and theft. In this instance, it could be a small amount of loss or a big amount. Overpouring can lead to a small amount of variance and could be an indication that you should do a pour test with your bartenders. This is a way to audit your staff and is by no means a punishment, it should be treated like a training refresher of sorts. Theft, on the other hand, is a little more obvious on the inventory variance end of things. The variance itself can’t tell you who exactly is committing the theft, but it can imply that it’s time for a team meeting to get to the bottom of things and the need for a watchful eye.
  • Spills and accidents. In general, this is where most of your inventory variance should be coming from. Spills and accidents are part of the job. It could be from getting bumped into by a patron, moving just a little too quickly behind the bar, or the occasional drink mix-up. Big mistakes can happen too, a bottle might shatter or a batched cocktail was made incorrectly. As long as there’s communication for the bigger stuff, spills and accidents should rarely be of concern.
  • Incorrectly logging inventory. This can especially happen when you have new people doing inventory. If you notice a huge difference or something is incredibly wrong, it could be an indication that a zero was missing somewhere or something to that effect. If there’s a substantial inventory variance, make sure you double-check that your inventory was counted correctly. 
  • Ringing items into your POS system incorrectly. This is another example of variance that can occur from new bartenders at your establishment. Ringing things in takes a little bit of time to get used to, especially with specific requests and add-ons. Don’t let this go unnoticed, make sure you’re pointing this out as people are learning the ropes. This can also be an indication of theft, so be wary. 

Training Your Staff to Avoid Inventory Variance

Auditing staff once every 3 months or so is a good way to check that everyone is on the same page regarding what’s expected. You can do pour tests and retrain your staff as needed with things like inventory logging and using the POS system you have. Logging waste is a great way to identify which portions of your inventory shrinkage are due to accidents too, allowing you to see exactly where product is moving. 

Regardless of how many sales you do and what amount of profits are lost from shrinkage, it’s always important to keep a tab on your inventory variance. You’ll learn a lot about where your product is going and be able to remedy the situation before it gets worse. Think of it as a regular check-up for your profits. If you do it regularly, you can fix a serious problem before it happens.

Ryan Philemon


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