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Your business invests lots of money in inventory. For the hospitality industry, it’s often the largest ongoing investment. That’s money not spent just to acquire inventory, but to store it for resale.
Bar inventory management directly impacts your cash flow, which in turn impacts how much money you can reinvest in your business. And how much and how quickly your business grows.
To find out if you’re effectively managing your inventory, look at your inventory turnover ratio. Inventory turnover measures how often inventory is sold or used during a set time period. If your stock isn’t moving, your money isn’t moving, and your business is stagnating.
What Is Inventory Usage?
Inventory usage is how much inventory a business has used over a specific time frame. It’s similar to COGS, but it speaks to the number of units sold and not their monetary value. It's also called inventory consumption.
If you want to know how many bottles of vodka you used over the course of three months, you’ll have to determine vodka's inventory usage over time. That’s called the inventory usage rate.
How to Calculate Inventory Usage and Inventory Consumption
Inventory usage and COGS use the same formula. The difference is that inventory usage measures units used (4 bottles, 10 kegs, etc.) and COGS measures the monetary value of the inventory used. That's, of course, where draft beer inventory comes in handy.
Here’s the inventory usage formula:
Inventory Usage = Starting Inventory + Received Product Inventory – Ending Inventory
To find COGS, use the monetary value of each inventory, and not the number of units, in the formula. You can also use a Google sheets inventory template to help with tracking and calculations.
Inventory Usage Over Time
Calculating inventory usage is, by necessity, calculating inventory usage over time. That’s because a set time period is required to have starting, received, and ending inventories.
But some businesses will calculate annual inventory usage, then further calculate inventory usage over time per day, week, month, or quarter. All that requires is dividing the total inventory usage number by the units of time you’d like an inventory rate for.
For example, if you have annual inventory usage and want monthly, divide by 12. If you want weekly, divide by 52. And so on.
An Example of Using the Inventory Usage Formula
Let’s consider a bar’s inventory usage of vodka bottles over a quarter. They start with 10 bottles of vodka. Over the four months, they receive 50 bottles of vodka. And at the end of the quarter, they’re left with 12 bottles of vodka.
Inventory Usage = Starting Inventory + Received Product Inventory – Ending Inventory
Inventory Usage = 10 + 50 – 12
Over the quarter, there were 48 bottles of vodka used.
Now let’s say we want to find out monthly inventory usage over time. To calculate the monthly inventory usage rate, we’d take the total inventory usage and divide by the number of months.
Inventory Usage = 48
Monthly Inventory Usage = 48/4
Monthly Inventory Usage = 12
Over the quarter, there were about 12 bottles used per month. Obviously, bars and restaurants can get more accurate numbers if they calculate inventory usage specifically for that month instead of deriving monthly figures from quarterly ones. But sometimes businesses don’t have that bandwidth and drawing inferences is acceptable.
While this seems quite easy and simple to do, keep in mind that you must repeat the process of taking liquor inventory or wine inventory for every product in your bar or warehousing by category, brand, item type, and sometimes even by the supplier. Keep a clean record of all the wholesale products you buy, if any, so inventory is easier when the time comes.
Even if you know the formula by heart and have all the numbers you need, calculating your inventory usage manually can still waste lots of time and be error-prone. You don't want to find out the hard way if wine can go bad or what happens when alcohol expires.
Get a Hold of Your Inventory Usage
There are two common ways businesses drop the ball on bar inventory management:
- They hold on to too much inventory, which ties up too much cash, and requires the ongoing cost of maintaining that surplus inventory in a sales-ready condition. There is the added risk of inventory spoiling, too, for hospitality businesses.
- They don’t have enough inventory, run out of stock, miss current and future sales, and cause long-term damage to customer relationships. (Having enough safety stock and maintaining par level inventory helps avoid this.)
Both of these mistakes will show up in your usage rate numbers. Liquor inventory software like BinWise Pro automates the process of taking and analyzing inventory. Using it saves time, saves money, and eliminates counting errors or excess inventory. You can also use a bar inventory app or barcode scanner app for inventory to make it easier to access on the go!
Book a demo to learn more about all the heavy lifting BinWise Pro does to keep bars and restaurants across the country running clean and profitable inventories. It calculates inventory usage rates, liquor variance levels, and liquor cost, and can even help you place strategic and cost-effective alcohol orders.
Frequently Asked Questions about Calculating Inventory
Do you have any additional questions about calculating inventory? If you do, this section is for you. Below, we have answered a few of the most frequently asked questions on the topic.
What Methods Are Commonly Used for Calculating Inventory?
Common methods used to calculate inventory include the FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average cost methods. These methods determine the value of inventory by accounting for the cost of goods sold and the quantity of inventory on hand.
How Do I Calculate Inventory Turnover Ratio?
Inventory turnover ratio is calculated by dividing the cost of goods sold (COGS) by the average inventory value. The formula is: Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory. This ratio measures how efficiently inventory is being managed and sold within a specific period.
What Are the Benefits of Using Inventory Management Software for Calculation?
Inventory management software automates the calculation of inventory levels, values, and turnover ratios, saving time and reducing errors associated with manual calculations. It also provides real-time visibility into inventory data, enabling better decision-making and inventory optimization.