The ever-changing dynamics of customer preferences, seasonal ingredient availability, and unexpected supply chain disruptions are some of the reasons why managing a restaurant’s inventory is a complex and ongoing task. But maintaining strong control over one’s inventory and ensuring a good turnover rate of stock is essential to operating a profitable business, and both are closely linked.
This article covers all about the inventory turnover ratio, including what it is, how to calculate it, and how to optimize it. This key metric is used by most restaurant operators to measure the level of control they have over their inventory.
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Cost of Goods Sold (COGS) is the total cost of the inventory that a business has sold during a specific period. It includes the cost of purchasing or producing the items sold, but it excludes operating expenses like salaries, rent, and utilities.
Average Inventory Value (AIV) is the addition of the value of inventory at the start of a period and the value of inventory at the end of the period, divided by 2.
A typical case would look like this, for the month of October :
Starting Inventory : $35,000
Ending Inventory : $15,000
The Average Inventory Value would be equal to : (35,000 + 15,000) / 2 = $25,000
The Inventory Turnover Ratio would be equal to : $100,000 / $25,000 = 4
This means that the restaurant sold out its entire inventory 4 times during the month of October.
But, is selling out your inventory 4 times a month a good sign ?
According to Optimum Control, the average Restaurant Inventory Turnover Ratio usually stands between 4 and 8.
A high restaurant inventory turnover ratio generally indicates that inventory is moving quickly, which is often considered positive. It’s usually a sign that you’re making sales and that you’re using fresh ingredients. It shows that you’re running an inventory that is managed in such a way that spoilage and waste are avoided.
But if it is too high, it may mean that you’re not keeping enough stock in your inventory, which means you should consider increasing the ordering quantities to avoid shortage.
A low restaurant inventory ratio may be a sign of overstocking or over-ordering of ingredients, or that sales are slow. Typically, if that is the case for your restaurant business, it would be wise to review the performance of your menu or come up with promotions on the items not selling.
Keep in mind however that the ideal inventory turnover rate can vary depending on the type of restaurant and cuisine :
It is therefore important to interpret the inventory turnover ratio in the context of your restaurant business.
Once you start calculating your restaurant inventory turnover rate on a regular basis, you’ll realize that it is a reliable indicator of your usage and sales.
Several factors can affect the inventory turnover rate of a restaurant :
Ultimately, restaurant owners and operators can maintain a solid inventory turnover rate by establishing strong controls over their restaurant inventory.
Recommended Read : Restaurant Inventory Management : The 8 Tips You Need To Know About
In conclusion, effective restaurant inventory management is essential for profitability. The inventory turnover ratio, calculated by dividing COGS by AIV, measures efficiency in controlling inventory.
An ideal turnover ratio typically falls between 4 and 8, but this can vary by restaurant type. High turnover suggests efficient inventory control but if it’s too high, it could lead to shortages. A low ratio may indicate overstocking or slow sales, necessitating adjustments.
Understanding your unique context, including menu, pricing, storage space, ingredient shelf life, and traceability, is crucial. Implementing strategies like seasonal menu adjustments, pricing revisions, and efficient storage can improve inventory turnover.
Regularly calculating the ratio provides insight into usage and sales, helping you make informed decisions to enhance your restaurant’s performance and profitability. It remains best practice to opt for a restaurant inventory management software to help you automate many of these tasks
In today’s culinary world, precision and efficiency are more vital than ever, making Supy’s restaurant inventory management system indispensable.
Supy, a tailored restaurant inventory management software, offers an intuitive interface that transforms inventory tracking from a chore to a breeze, suitable for both seasoned managers and newcomers. Its real-time analytics shine a spotlight on inventory statuses and sales trends, empowering timely, data-driven decisions.
Beyond tracking, Supy enhances supplier interactions, from ordering to delivery monitoring all whilst ensuring optimal restaurant inventory management. Its predictive analytics stand out, helping forecast ingredient needs and reducing wastage. And with cloud integration, every stakeholder stays connected to the inventory data, anywhere and anytime.
Supy’s adaptability, offering reports from daily stock views to yearly analyses, signifies it’s not just another system, but a cornerstone for modern restaurant inventory management, promoting profitability with sustainability.