Forecasting Waste

The Office of the Pubs Code Adjudicator, the government body that is responsible for enforcing the statutory Pubs Code, recently issued guidance in relation to pub-owning business’ statutory obligations around accounting accurately.

The particular aspect they seek to clarify revolves around Pubs Code, Schedule 2 forecast profit and loss statements for the volume of alcohol on which duty has been paid and the volume of draught product waste which is unsaleable. 

What does this mean to a tied pub tenant (TPT)? Before we answer this question let’s look how the stock-take produces a variance known as a deficit or surplus, and what this has to do with allowable wastage.

The Stock-take deficit

• On Monday you have 9 gallons of Ale in the cellar, during the week you buy 9 gallons and the following Monday you have 5 gallons left, you have consumed 13 gallons. (9+9-5).
• Convert the gallons to pints as you don’t sell your ale by the gallon, so 13 gallons equals 104 pints (8x13)
• Now convert to pints to cash sales by multiplying the pints sold by £4 per pint producing expected sales for the week of £416. (104x£4)
• Your till reading is showing only £388 sales so why the difference?
• As advised by your stock-taker you kept a written record of how much Ale you threw away after the pipe-clean which was 3 pints (operational wastage). So, you couldn’t have sold that so we will deduct £12 (3x£4) from your expected sales figure leaving a revised expected sale of £404 (416-£12), but we are still short?
• You were also left with 3 pints in the belly of your firkin of Ale that could not be sold (sediment wastage) so let’s deduct another £12 (3x£4) leaving £392 expected sales of Ale this week.
• So, you have explained two reasons for the difference, and the remaining difference is known as an unexplained deficit, in this example of (£4)

Maybe you gave a free pint to a customer following a complaint but didn’t keep a record or were training staff and the drip trays were used far more than your usual acceptable level. There are plenty of other reasons but none of these can practically be forecasted, can they? It’s impossible to work out how many complaints you may get or how much will end up in drip trays or on the floor, but can we forecast operational wastage, and even sediment waste?

The Pub owning Business forecast

So why has The Office of the Pubs Code Adjudicator (PCA) issued guidance to the POB on how they should forecast sales when letting a new site or at rent review stage. The POB uses a sales estimate based on the number of barrels of each product they believe the site should purchase over a period (usually one year), using a fair maintainable trade (sales expected from a reasonable efficient operator). They then review the selling price of each product and convert this to an expected sales figure per product and they then deduct an amount to allow for operational and sediment wastage. Let’s work through this stage using an example using just one Ale.

1. Looking at the history of the site, the POB believe this site should purchase 10 barrels of this product.
2. Converting this to gallons we multiply this by 36 which equals 360 gallons.
3. Converting this to pints we multiply this by 8 which equals 2880 pints
4. Converting this to expected sales before waste we multiply by £4 per pint equals £11,520 per year.
5. Applying 3% for wastage, the POB will then deduct a wastage allowance of £345.60

Initially you may think 3% is a fair estimate but let’s revisit our stocktake example above. We expected sales of £416 and wasted 3 pints on operational wastage when cleaning the pipes and 3 pints left in the bottom of the firkin. Total “unsaleable pints” equals £24 (6x£4). This represents 5.8% (£24/£416).

Okay so let’s be fair, you wouldn’t get any sediment in a keg of lager, would you? You would still have operational wastage though. Assuming all other facts are identical, you would still expect £416 sales, but operational wastage would now be £12 (3x£4). This represents 2.9% (£12/£416).

What if the length of the pipe was only 2 pints or was actual 5 pints? The wastage % would vary wouldn’t it?

Acceptable Wastage

So, your pubs saleable pint should be after taking account of your operational waste, caused by cleaning the pipes and sediment waste thrown away from your cask conditioned product. Therefore, a pub with 20 x 4pint lines, 6 of which used to sell real ales would generate far more wastage than a pub with 20 x 3 pint lines selling no real ale, due to sediment waste from real ales and operational waste differences due to length of the pipe. Therefore, the PCA have now issued guidelines that all wastage should be measured relative to the specific pubs offering based on how many lines, how many real ales etc and the POB should no longer just use a percentage for their allowance.

What about the drip trays?

As a qualified stock-taker, I am always asked the question, especially from managed houses, what about drip tray wastage?

 Some customers are happy with a 5% head on their Guinness or maybe 3% head on their lager. When serving these customers, you have gained 5% and 3% respectively. Those customers that want little or no head on their pint will receive their justified 100% pint they paid for, and you will need to use your drip tray to collect the over spill. Why should the POB allow for this waste in their forecasts though, they can’t allow for the surplus gained on serving a customer with a head on their pint either. Saying this, you should always record this wastage in your wastage book for your stock-taker, especially if the drip tray wastage is excessive due to staff training or the cellar was not cooling correctly, as this could be used when looking at the unexplained deficit we mentioned during our stocktake example. If you’re running a managed house, you would be expected to provide further proof such as a picture of the cellar’s thermometer and staff training records. You should also keep bottle necks from breakages, as these would also back up your reasons for the deficit.

Forecasting waste

It’s important to remember why we forecast sales in the first place, and there are several reasons. The initial Business Plan is one and is only as good as the comparisons you then make versus actual performance in the future. The Business Plan should then be reviewed and adjusted (flexed) once you start to build a better understanding of your business and your sales mix ratio.

When completing a Business Plan, you should be careful using historical purchases to build your sales forecast, as your business model could be completely different. If the previous tenant has failed, you would be looking to steer your new venture towards a more profitable future, thereby changing the sales mix and volumes. You may be introducing an evening menu and look to capitalise on the higher GP% achievable on wine for example, compared to the previous tenant who sold lots of tied real ales.

Another reason for forecasting is at rent review stage, and here you could use historical purchasing information to build your forecast assuming the history is yours of course, and you are not planning any change of trading style. The POB will produce a “shadow” profit and loss and you will need to compare like for like. As you will be building your forecast from purchases up, you will now need to add acceptable waste. You have been recording this religiously for your stock-taker, who has been including this in his reports, so you have something to check back on. As per the PCA, the POB now must include operational wastage based on number of lines cleaned per week by the length and diameter of the pipes. Or they could ask your stock-taker for the number of pints per line, as he/she would have already measured this with you. They then need to work out an acceptable sediment wastage per container (Firkin, Kilderkin etc) which they can also get from your stock-taker if acceptable to them.

On another note the POB will base their forecast on a “reasonably efficient operator” (REO) so they will not be forecasting drip tray wastage for reasons mentioned earlier. They will also apply sales prices that may differ from yours, and more importantly, different sales mix ratios, all of which you will need to negotiate. However, you may be an excellent operator who doubled the turnover due to personal investment in the kitchen. Therefore, you could equally apply a reduced barrelage assumption based on REO achieving less than you could.

Forecast Presentation

So, where does wastage go on the P&L forecast? Is it an overhead or cost of sale? Can we just forecast actual saleable pints after waste has been deducted?

Before debating if operational waste or sediment waster are a cost of sale or an overhead, let’s see what The Association of Chartered Certified Accountants. (ACCA) say. They describe a cost of sale as “All the expenditure incurred in bringing the product or service to its present location and condition”. Overheads are all the other costs of the business that you would incur even if you didn’t sell any product.

So, would you get sediment waste if you shut your pub for a month while you carried out a refurbishment? No, you wouldn’t so sediment waste is a cost of sale, right? What about operational waste then? Operational costs are the total of all the costs of the business including cost of goods sold and overhead costs. So, by using the word operational to describe pipe cleaning, where does this waste sit?

In my opinion it is still a cost of selling a pint, as if you were a cocktail bar for example, and only sold packaged beers and lagers, you wouldn’t have any pipes to clean.

Summary

If the TPT and the POB should both forecast their P&L with the same format we can compare like for like. However, the POB must present their P&L illustrating to the TBT that they have allowed for wastage. (The PCA guidance now suggests a better way of calculating this). The only way to do this is to start with an impossible sales figure, which includes unsaleable and saleable pints, then show a deduction for operational and sediment waste. Then after deducting purchases, they should end up with the same GP and GP% as the TBT.

As always, the best way to complete a business plan and to prepare your FMT forecast at rent reviews is to seek professional advice from a licensed trade specific accountant form The BII Marketplace partners.