The first thing to do when you want to be profitable in a bar or any other business is to understand the basics of how profits are generated.

Some people think that the path to huge profits is to have lots of sales. Although this is partly true, it is not necessarily so as there are plenty of bars that are packed with customers and generate sizeable turnovers, but end up loosing money at the end of the month. If you’re inexperienced in business, you make be asking, how is this possible?

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.