Category Archives: Operating a Bar

How to Run a Profitable Bar

Profit = Sales – Costs

This is because a company’s profit is calculated by subtracting its costs from the sales. In other words, Profit equals Sales minus Costs. Hence, to generate a profit, your sales revenue needs to be higher than the costs incurred by the business. And to generate higher profits, you need to increase sales and/or decrease costs.

Evidently, there is a direct relationship between profits, sales and costs. Cash inflows from sales is vital to all bars and the majority of owners put most of their resources towards this goal, but cost control is also extremely important and far too many people give this insufficient attention.

Operational Expenses vs Cost of Sales

In fact, there are two types of costs in any trading related business like a bar – the cost of goods sold (or the direct cost of the sales generated) and the fixed operational costs (commonly known as overheads).

Although they are both outflows for the business that must be controlled, each of these costs should be treated and managed with different strategies.

It is essential to keep the monthly operating expenses as low as possible by managing payroll tightly, ensuring that you’re not overpaying for rental, and keeping a lid on unnecessary staff, marketing and administration costs. By watching these operational costs closely, a bar will have a lower breakeven sales level, be profitable more easily and produce higher profits each month.

Profit from Lower Inventory Costs

The purchase cost of beverages and other goods sold is vital in determining the profitability and price competitiveness of a bar. Basically, you’ll be able to make a higher profit on each sale if you can source your products as cheaply as possible. In the same way, if you overpay for your inventory, your profit margin will be less, assuming that you’re selling the product at the same price.

Inexperienced bar owners often pay a little more than they should because they feel that there’s not much difference between paying $2.40 for a product vs trying to get it for 40 cents cheaper at $2. Although in absolute terms, 40 cents is not much on a single unit, if you’re purchasing 5,000 units per month, that’s an additional cost of $2000 that has to be paid. So, try to buy your bar’s stock for the lowest possible price, as every dollar saved will be added directly towards your monthly profit.

Sales Revenue = Price x Volume Sold

Once you’ve got your costs as tight as possible, the key to high profits is through solid revenues from sales in the bar or via any other income streams.

There are normally 2 main components that produce the monthly sales in a bar – the price of drinks sold and the number of drinks sold. For example, if you sell 1,000 bottles of beer at a price of $8 each, you’ll generate $8,000 sales revenue from that product.

Clearly, both the unit price and volume sold both affect the sales produced, but in reality, a bar can’t change its pricing often, so the main determinant of sales on a month-to-month basis tends to be the volume of drinks sold. This is where the sales and marketing plan for the bar is crucial in attracting and retaining lots of customers.

Drinks Pricing Strategy

Even though it can’t be changed on a regular basis, the pricing strategy for drinks in a bar is absolutely vital in affecting its profit levels. It’s obvious how the selling price is directly related to how much profit is generated per unit sold, but pricing also has a huge impact on the total volume of products sold. This is because it’s harder to sell huge quantities of highly priced drinks, since customers are generally quite price sensitive. In the same way, if you price your drinks lower, you’ll be able to sell more volume but each sale will generate a lower profit.

As you can see, pricing has a very significant impact on potential profits and it is essential for new bar owners to get this right from the start. There’s a fine line between trying to price as high as possible, and knowing your target customers’ thresholds and price sensitivities.

At the end of the day, your pricing plan should suit your bar’s brand offerings and market positioning, If you’re a no-frills watering hole for the layman, then make sure you serve affordable booze, but if you’re an up-market bar for high-rollers, you should have your Cristal priced appropriately.

In summary, to run a profitable bar, you need to know how to generate as much sales as possible, as well as be aware of all costs and keep them under control. Ultimately, you will need to understand the basics of accounting too and work closely with your accountant to constantly review the Income Statement and fully incorporate all the administration, finance, taxation and other costs into the calculation of your operation’s profit figure.

The Business Model for Bars and Clubs

Revenue Model

In essence, the majority of bars and nightclub businesses make money by selling drinks. In addition, some also generate revenue by charging patrons to enter the establishment through ticket sales that may or may not include a first drink.

As such, there are a couple of revenue streams, each with a differing profit margin. In the case of drinks, the profitability will depend on the pricing and purchase cost of each product type. For front door charges that do not include a drink, the gross profit margin is technically a 100% unless there are any direct commissions given to sales agents. If the entry charge includes a first drink, then the margin will depend on the type of drink that is provided with the entry fee.

Direct Costs

There may also be special occasions when the club hires a famous DJ or performer to play for the night, paying thousands of dollars in fees to the celebrity and any other agents, as well as incurring additional marketing and advertising costs to promote the event. As a result, the tickets for these events will be significantly more than the usual entry fee, as it needs to make up for the artist’s professional fees and all the other costs involved. However, sponsors will often cover some of the expenses and the heftily priced tickets may generate a huge profit for the club owners.

The bulk of a club’s income is derived from selling drinks, where there is usually an average margin of about 50% to 80%, depending on the pricing, type of bar and purchasing power. Having said that, it is worth noting that the margin for some items could be well over 100% a lot of the time. For example, a beer that is sold for $10 may cost $6 to buy. In this case, the profit is $4 and the profit margin is $4 divided by $6, which comes to 66.66%. This should not to be confused with the Cost of Goods Sold (COGS) or Cost of Sale, which is $6 divided by $10 or 60%.

The revenue model for a club or bar is made up of the income streams that we’ve just looked at, and together, they produce the gross sales for the business. When we deduct the direct costs related to generating these sales, such as the purchase price of the beverage items, we are left with the Gross Profit.

Operating Costs

Next, comes the fixed expenses or operating overheads that need to be incurred even if there are no sales at all. These include the property’s rental, staff costs, utility bills and other expenditures required to run the club.

Profit Before Tax

This Operating Expense (or OPEX) needs to be deducted from the Gross Profit to arrive at the Net Profit (before taxation). To calculate the real profits that are made each month, you have to further deduct the tax that is payable on the profits to work out how much is left.

In a nutshell, this is the basic financial model for almost every bar and club all around the world.

Is it Profitable to Own & Operate a Bar

2 Replies

Can bars make money for their shareholders? This is the question that almost all budding bar owners are trying to figure out before they take the plunge to open their own dream bar.

Unfortunately, there is no simple yes or no answer because it really depends on a number of factors that vary for different companies and ventures.

Can it vs Will it Make Profits

So if you want to know if you CAN make a profit by running a bar, the answer is yes, of course you can, since there wouldn’t be so many bars in existence if it wasn’t profitable for the people who own them.

However, if you’d like to know whether you WILL make lots of money by setting up the bar you have in mind, then the answer is that it is certainly possible, as long as you have all the knowledge, experience and a fair bit of luck on your side.

Profitable Cash based Business

The bottom line is that bars can be extremely profitable cash businesses that have very few bad debts from customers who owe them money, assuming you’re not foolish enough to give credit to your regulars.

It is one of those businesses where customers pay up front for a product even before it is consumed, and credit doesn’t have to be given, which means no collection problems. At the same time, if you play your cards right, your suppliers may give you 30 to 60 day (or more) payment terms to settle your purchases, so you’ve got the best of both worlds.

Possible to Consistently Make Money

If you have the right formula, location and team, it is possible to earn a lot of money every week, especially during the initial months when you’re the new and hip place in town. Even after this honeymoon period, if you know what you’re doing, you could be cash flow positive for a good few years or more, and end up making a huge return on the initial capital invested.

Unfortunately, while it is certainly possible to generate extraordinary amounts of profits from a bar, the majority of businesses end up loosing money. The ones that are successful tend to be owned and run by experienced operators who have normally been in the industry for many years and have learned the tricks of the trade from their past failures.

Therefore, the question that aspiring bar investors should be asking is, what does it take to own a profitable bar, or, how can new entrepreneurs set up and operate a bar that consistently makes profits.

A Guide to Owning and Operating a Bar

Owning A Bar

How to Own and Operate a Bar Business